Blogging on political economy and philosophy from the prospective of a Hayekian classical liberal. All pieces by Zachary Woodman, student of Economics at Hillsdale College.
|Posted by Zachary Woodman on March 9, 2014 at 5:10 PM||comments (0)|
The Financial Engineer has a great infographic illustrating this recovery compared to ten previous post-World War II recessions. As you can tell from the graphic, average growth of recoveries of all previous recessions was 13%, this one only seven. Here's the image:
|Posted by Zachary Woodman on March 3, 2014 at 4:20 PM||comments (0)|
Krugman has consistently been claiming lately that there is a fiscal multiplier of 1.5; of course, the basis for this claim is silly. In fact, other analysts have shown that even Krugman’s own data set shows a fiscal multiplier of zero when monetary offset is taken into account.
Still, I decided it would be worthwhile to make a post summarizing a few studies in the past few years that have yielded interesting results that should make the hardline Keynesians who continually emphasize fiscal multipliers nervous.
Exhibit A: an IMF study in 2011 entitled “How big (small?) are Fiscal Multipliers?,” which found a fiscal multiplier of zero in countries with debt levels above 60% GDP (which includes the US):
We have found that the effect of government consumption is very small on impact, with estimates clustered close to zero. This supports the notion that fiscal policy (particularly on the expenditure side) may be rather slow in impacting economic activity, which raises questions as to the usefulness of discretionary fiscal policy for short-run stabilization purposes. . . . Further, fiscal stimulus may be counterproductive in highly-indebted countries; in countries with debt levels as low as 60 percent of GDP, government consumption shocks may have strong negative effects on output. . . . Moreover, fiscal stimuli are likely to become even weaker; and potentially yield even negative multipliers, in the near future, because of the high debt ratios observed in countries, particularly in the industrialized world. (26)
Robert Barro’s 2009 study for the NBER, of course, is highly relevant. He focuses on the fiscal multipliers for defense spending, which are unsurprisingly less than 1 in every instance, and above one and negative for higher tax rates, meaning balanced-budget multipliers for defense spending are negative. From the study’s abstract:
For U.S. annual data that include WWII, the estimated multiplier for temporary defense spending is 0.4-0.5 contemporaneously and 0.6-0.7 over two years. If the change in defense spending is “permanent” (gauged by Ramey’s defense-news variable), the multipliers are higher by 0.1-0.2. The estimated multipliers are all significantly less than one and apply for given average marginal income-tax rates. We cannot estimate reliable multipliers for non-defense purchases because of the lack of good instruments. Since the defense-spending multipliers are less than one, greater spending crowds out other components of GDP, mainly investment, but also non-defense government purchases and net exports. …In a post-1950 sample, increases in average marginal income-tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. …with revenue held constant, increases in marginal tax rates still have a statistically significant negative effect on GDP. Therefore, tax changes seem to affect GDP mainly through substitution effects, rather than wealth effects. The combination of the estimated spending and tax multipliers implies that balanced-budget multipliers for defense spending are negative.
Barro in 2010 applied these numbers to the American Reinvestment and Recovery Act and found:
The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.
Finally, consider this 2013 study from the St. Louis Federal Reserve, which found that even in periods where resources are idle, when Keynesian economics predicts the fiscal multiplier to be its largest, the US Fiscal Multiplier is less than 1:
We have investigated the proposition that multipliers are greater during periods of slack using newly constructed historical data for the U.S. and Canada. Using Jorda’s (2005) local projection method, a threshold model based on the level of the unemployment rate, shocks to military news, and definitions of variables that obviate the need for ad hoc conversion factors, we find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010. In all states, multipliers appear to be between 0.7 and 0.9.
I’m not entirely sure how one can continue to extol the economic virtues of government spending when all the empirical evidence is saying otherwise.
Correction: Accidentally misstated some of the dates. The St. Louis Fed study was published in 2013, not 2009, and the IMF study was published in 2011, not 2012.
|Posted by Zachary Woodman on February 20, 2014 at 11:30 PM||comments (0)|
Earlier this week I mentioned the Gadfly Group, a student group which seeks to "agitate Hillsdale College’s regnant conservative ethos which too often limits and even prevents true understanding of the appeal and arguments of modern liberalism." One of the things we (I say we as I'm the group's treasurer-to-be) do with the Gadfly Group is have professors give lectures in which they advocate liberal arguments. Hillsdale economics professor Dr. Charles Steele (who also happens to be my adviser) gave a talk tonight for the group in which he claimed "Freedom is Obsolete."
In this talk, Steele argues various changes in technology and the structure of the economy have made it necessary to have a "progressive authoritarian state." He lays out three main reasons for this: government needs to regulate because technology has made externalities more dire, technology has increased income inequality and thus a redistributionist state as laid out by James Yunker in Socialism Revised and Modernized, and technology has made crimes such as bio-terrorism much easier to commit necessitating a systemic violation of property rights.
For those not familiar with Dr. Steele nor Hillsdale's economics department and the Gadfly Group, it is worth noting that Steele himself is an Austrian economist and a libertarian. He's playing devil's advocate, which is kind of the nature of Gadfly events, in this lecture.
Here's an audio recording of Dr. Steele's lecture: