John Taylor, Standford macroeconomist, says the stimulus did not work, and according to recent findings no one should have expected it to.
Saturday, May 1, 2010
Latest Data Continue To Show Little Impact of Government Stimulus on GDP
The 3.2 percent growth rate of real GDP in the first quarter (released by BEA yesterday) [Max's Note: first quarter growth recently revised downward to 2.7%) confirms that the recovery is looking more U-shaped than V-shaped. But it also provides further evidence that the stimulus package of 2009 has had a small contribution to the recovery. Most of the recovery has been due to investmentincluding inventory investment, which was positive in the first quarter after declining for all of last yearand has little to do with discretionary stimulus packages. The two charts show the percentage contribution of investment and government purchases to real GDP growth in the first quarter and in the preceding quarters since 2007. The charts clearly indicate that the changes in real GDP growth have been mostly due to changes in investment and little to changes in government purchases. In fact, government purchases have been a drag (a negative contribution to real GDP growth) in the fourth quarter of 2009 and the first quarter of 2010. I also include similar charts for the other two components of GDP, consumption and net exports. The government purchases chart looks very similar if you exclude defense spending, as I have in previous posts on this subject.
... in the meantime these data at the least suggest that the simple Keynesian model frequently taught to beginning studentsin which government spending shifts up the aggregate spending line to counteract an investment-induced downward shift in that lineneeds to be reworked.
So why is the Obama stimulus failing?
Friday, May 21, 2010
The Administration and the IMF on the Multiplier
In a soon to be published paper, several economists at the International Monetary Fund report estimates of government spending multipliers which are much smaller than those previously reported by the U.S. Administration. In order to obtain the estimates the IMF economists use a very large complex model called the Global Integrated Monetary and Fiscal (GIMF) Model developed by Douglas Laxton and his colleagues at the IMF . The paper is quite technical, but the bottom line summary is that a one percent increase in government purchases (as a share of GDP) increases GDP by a maximum of 0.7 percent and then fades out rapidly. This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.
The IMF estimate is much less than the multiplier reported in a paper released last year by Christina Romer of the Presidents Council of Economic Advisers and Jared Bernstein of the Vice Presidents Office. The attached graph shows how huge the difference is. It shows the impact on GDP of a one percentage point permanent increase in government purchases as a share of GDP reported in the IMF paper (labeled GIMF) and in the Administration paper (labeled Romer-Bernstein).
Are old Keynesian diehards like Krugman, Romer, and Bernstien ready to give up the faith?
Liberalism is, in this case, not "progressive" but old economic myths protected by diehards.