I raised the issue a few weeks ago of what might happen to GDP output and public debt if the discretionary stimulus package were simply cut off in mid-stream. I argued that this would lead to higher numbers on jobless benefits and much lower corporate profits.
Could it also produce a smaller budget deficit over time, as we hear it said, mainly by Republicans in the USA and Coalition members in Australia? In theory, the increase in jobless benefits and investment could actually leave the budget deficit unchanged. Has anyone seen or done such a “counter factual” calculation?
Of course, if we went along with the Coalition that the government money is all wasted, we might end up nowhere. Why not assume a fiscal spending “multiplier” of 1.6 (as suggested by Christina Romer in times like the present)?
Because it contradicts her own research.
Romer argued in a 1994 paper that the most effective way out of economic crisis (recession)is through monetary stimulus.
Here; http://www.nytimes.com/2009/01/10/washington/10stimulus.html?hp=&pagewanted=all
There is also this:
Why cant Romer refer back to her previous work and simply say that according to her 1994 research the fed is exit door from a burning house. He she forgotten what she wrote and what great work she did?
Frankly I’m puzzled.
JC, you should look at her latest piece in Economists Review of February 27, 2009.
http://economistsview.typepad.com/economistsview/2009/02/christina-romer-answers-the-best-man-at-my-wedding-greg-mankiw-robert-barro-and-others.html
Not 1999, where the circumstances were quite different.
Thanks Fred:
So who to believe? The Christine Romer of 1994 who incidentally was more than aware of the effects of a banking crisis as she lived through one at the time (S&Ls’) or the Christine Romer that now thinks a fiscal package is more effective than monetary policy?
Incidentally the S&L crisis was actually quite similar, although the size of the problem wasn’t as large. S&L were about 7% of GDP while this one is about double.
It’s a pretty difficult fork in the road to go; from writing a pretty good study suggesting fiscal stimulus is ineffective to reaching the opposite conclusion.