Arnold Kling  

One Estimate of Multipliers

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Alberto Alesina and Silvia Ardagna write,


Our results suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Based upon these correlations we would argue that the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts. For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.

If you want to grow the economy, cut taxes. If you want to balance the budget, cut spending.

Of course, it is my view that this sort of econometrics changes no one's mind (if the results had gone the other way, I doubt that I would have changed my mind). If somebody on the Left embraces the results, I'll have to eat my words.


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COMMENTS (6 to date)
Michael Rulle writes:

Arnold,
Why don't these studies change people's minds? The answer to that seems important. When Einstein's solar eclipse studies were completed, they changed people's minds. If economics studies cannot change people's minds it implies economists really don't believe they have a science. Yet its language is scientific--"do X and Y will happen". This is very disturbing. I realize this is not a new insight and you have commented on such matters in other ways. But your direct statement here is very damning on the field. Sort of like "sound and fury" signifying nothing.

guthrie writes:

Or it could mean that most people irrationally cling to their ideologies in spite of the evidence. Most people won't give up their religion without a personal revelation or a fight, and it would seem to be the same with politics and policies. Unfortunately, studies such as this rarely make it to the level of 'revelation' for most folks. Sometimes people have to figure it out for themselves.

Steve Roth writes:

Okay, get out your knife and fork.

I'm a dyed-in-the-wool liberal, and this analysis definitely swings my thinking regarding the effects of short-term stimulus. (They're analyzing one- and two-year lags.)

But it has no effect at all on my big-picture thinking, because it says little or nothing about how policies implemented today will affect my children and grandchildren.

We know pretty unequivocally that in prosperous, developed countries, tax levels have little or no correlation with long-term growth. (If anything the correlation is slightly positive.)

http://www.asymptosis.com/an-open-letter-to-robert-barro.html

http://www.asymptosis.com/europe-vs-us-who%e2%80%99s-winning.html

So tax cuts--alluring as they may be for short-term stimulus--serve only to increase deficits (with ominous impacts on our future) without promoting long-term prosperity, stability, or well-being.

Daniel Kuehn writes:

I think you've got to think about why nobody changes their mind immediately. I don't think it's because we cling to ideology. Some empirical studies show a small effect, some show a bigger effect. Why would you expect someone to change their mind based on one study?

The identification problem associated with estimating multipliers is so rife with methodological concerns that every study will have something to criticize. In that sense, people don't just look to see what the broad body of empirical work says - they'll look to see if it makes sense in light of convincing theory. And ultimately you are unconvinced by theory that other people find highly unconvincing, and vice versa.

The good news is I think this means that it's not as easy to say that ideology taints people's views on the multiplier. People who believe in big and small multipliers generally make a good faith pursuit of the truth - and insofar as ideology does creep into science, it creeps in equally for both.

The bad news is estimating these impacts is so challenging that a consensus seems unlikely.

Steve Roth writes:

I find that Barro And Redlick have a new bit on this, which supports what I said above:

"a one percentage point decrease in the first lag of the average marginal tax rate produces a 0.6% increase in the annual growth rate of real per capita GDP. Unfortunately, this effect is harder to pin down in longer samples"

Which is just what decades of econometric work has been telling us.

http://www.voxeu.org/index.php?q=node/4144

Bo Zimmerman writes:

Maybe this is obvious to everyone -- ignore this if its so, but perhaps they change noone mind because very few people are devout utilitarians, or if they are, they aren't convinced all "utils" are being counted by the study.

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