Abstract
The American Recovery and Reinvestment Act of 2009 is the biggest, boldest countercyclical fiscal stimulus in American history. What is its likely impact? Current econometric models indicate that a tax cut is likely to have a multiplier of about 1.0 and that spending has a multiplier of about 1.6 after about 18 months. Even the most sophisticated econometric analysis, however, suffers from “omitted variable” bias. In trying to take account of this, David Romer and I have found that the tax multiplier is more likely to be around two to three; and we suspect that the spending multiplier is correspondingly higher than the conventional estimates. Of course, every recession is different. The unique factors of this recession are analyzed to determine whether the multipliers are likely to deviate from historical averages.
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Notes
We used the vast array of narrative evidence that exists on the motivation for tax actions. We read Congressional reports, Presidential speeches, the Economic Reports of the President, and other documents to identify tax changes that were not motivated by other factors likely to be related to the current or prospective state of the economy. To give you a sense of how we classify changes, the 1975 tax cut, which was passed to try to mitigate a recession that was expected to continue in the absence of policy actions, is inherently endogenous with respect to output and so is not an appropriate observation to consider. The Reagan tax cuts, on the other hand, which were motivated by views about the appropriate size of government and the adverse incentive effects of high marginal tax rates, are relatively exogenous and so are appropriate to use. We then looked at what happened to output following the relatively exogenous tax changes.
Here troughs are dated by the troughs in real GDP, not the NBER troughs.
References
Romer, Christina D., and Romer, David H. 2008. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, www.econ.berkeley.edu/~cromer/draft1108.pdf, forthcoming in the American Economic Review.
Additional information
Presented at the National Association for Business Economics 25th\CF1 Annual Washington Economic Policy Conference, March 3, 2009.
*Christina Romer is Chair of the President's Council of Economic Advisers. Prior to her appointment, she was the Class of 1957-Garff B. Wilson Professor of Economics at the University of California at Berkeley. Before her appointment to the Council, she was co-director of the Program in Monetary Economics at the National Bureau of Economic Research and served as Vice President of the American Economic Association, where she was also a member of the executive committee. She is also a fellow of the American Academy of Arts and Sciences. Romer is known for her research on the causes and recovery of the Great Depression and on the role that fiscal and monetary policy played in the country's economic recovery. Her most recent work, authored with David Romer, shows the impact of tax policy on government and economic activity. Romer is the recipient of a John Simon Guggenheim Memorial Foundation Fellowship, an Alfred P. Sloan Research Fellowship, the National Science Foundation Presidential Young Investigator Award, and the Distinguished Teaching Award at Berkeley. Romer received her Ph.D. from the Massachusetts Institute of Technology in 1985.
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Romer, C. Fiscal Policy and Economic Recovery. Bus Econ 44, 132–135 (2009). https://doi.org/10.1057/be.2009.14
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DOI: https://doi.org/10.1057/be.2009.14