Spending and Tax Multipliers (Gastos e Multiplicadores dos Impostos)

O post abaixo, retirado hoje do blog do Prof. Greg Mankiw, reflete uma discussão eminentemente de economistas.  Mas vale a pena para os economic policy makers do Brasil, principalmente se eles estiverem pensando em como enfrentar a crise financeira internacional, seja aumentando os gastos do governo (como muitos ditos keynesianos, bastardos ou não, acham que deve ser) ou cortando impostos (como muitos deveriam estar propondo, mas não o fazem!).

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Thursday, December 11, 2008

Spending and Tax Multipliers

A key issue facing the new Obama administration is to what extent the economic stimulus should take the form of spending increases versus tax cuts. One way to think about the issue is the size of the fiscal policy multipliers. The multipliers measure bang for the buck–the amount of short-run GDP expansion one gets from a dollar of spending increases or tax cuts.

So what are these multipliers? In their new blog, Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey’s research suggest a government spending multiplier of about 1.4. (Valerie does not present her results in multiplier form, but she emails me this translation: “The right column of figure 5A of my paper shows that for a log change of government spending of 1, log GDP rises by 0.28, implying an elasticity of 0.28. To back out the implied multiplier, we can use the fact that government spending averages around 20% of GDP. This implies a multiplier of 1.4.”)

By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raise GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers.

How can these empirical results be reconciled? One hypothesis is that that tax cuts produce a bigger boost in investment demand than do government spending increases. This might work through changing relative prices in a direction favorable to capital investment–a mechanism absent in the textbook Keynesian model.

Suppose, for example, that tax cuts are not lump-sum but instead take the form of cuts in payroll taxes (as suggested by Bils and Klenow). This tax cut would reduce the cost of labor and, if labor and capital are complements, increase the demand for capital goods. Thus, the tax cut stimulates demand not only by increasing disposable income and consumption spending (the textbook Keynesian channel) but also by incentivizing more investment spending. A similar result might obtain if the tax cut included, say, an investment tax credit.

This hypothesized channel seems consistent with the empirical findings of Blanchard and Perotti, Mountford and Uhlig, Alesina and Ardagna, and Alesina, Ardagna, Perotti, and Schiantarelli. The results of all of these authors suggest you need to go beyond the standard Keynesian model to understand the short-run effects of fiscal policy.

My advise to Team Obama: Do not be intellectually bound by the textbook Keynesian model. Be prepared to recognize that the world is vastly more complicated than the one we teach in ec 10. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for your buck with tax cuts than spending increases.

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4 Respostas to “Spending and Tax Multipliers (Gastos e Multiplicadores dos Impostos)”

  1. Mark Mawhinney Says:

    I will read the Ramey paper with interest and appreciate your note here in respect of government and tax relief multipliers.

    While not a professional economist or investor, I have a keen personal interest. The world’s seeming infatuation with returning to Keynes (Y=G+C+I+NX) concerns me. Does the US citizen not understand that the $1 trillion budget deficit and increased debt will have to be paid down at some point?

  2. José Carlos Cavalcanti Says:

    Dear Mark Mawhhinney,

    You are right; it seems that the US average citizen is unaware of the budget deficit. Despite this, most of the keynesian economists are keen to advocate the very old formula of fiscal stimulus, which implies increasing the public budget!
    JCC

  3. Not a plagiarizer Says:

    Why did you plagiarize Mankiw’s blog post?

  4. jccavalcanti Says:

    I am sorry if you do not speak portuguese. If you could, I could realize that I reproduced Markiw´s post, rather than plagiarize it!
    Try to learn another language!
    JCC

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