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Wednesday, January 05, 2011

Macroeconomic Effects from Government Purchases and Taxes

Macroeconomic Effects from Government Purchases and Taxes

Here's the abstract:
For U.S. annual data that include WWII, the estimated multiplier for defense spending is 0.6-0.7
at the median unemployment rate. There is some evidence that this multiplier rises with the
extent of economic slack and reaches 1.0 when the unemployment rate is around 12%.
Multipliers for non-defense purchases cannot be reliably estimated from U.S. macroeconomic
time series because of the lack of good instruments. Since the defense-spending multiplier is
typically less than one, greater spending tends to crowd out other components of GDP. The
largest effects are on private investment, but non-defense purchases and net exports tend also to
fall. The response of private consumer expenditure differs insignificantly from zero. For
samples that begin in 1950, increases in average marginal income-tax rates (measured by a
newly constructed time series) have a significantly negative effect on real GDP. We lack reliable
statistical evidence on how this response divides up between substitution effects from changes in
tax rates versus income effects from changes in government revenue.

In other words, the fiscal stimulus of the past couple years is unlikely to have had the impact the current crop of politicians claim. Barro's study would predict that $1.7 trillion spent would yield nothing discernible in terms of jobs, increased GDP, etc. On the surface it seems that his historical analysis might be consistent with our recent experience. Interesting reading and we know that the real answer to the question of the current stimulus plan's impact won't be forthcoming for a number of years.

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