Thursday, January 29, 2009

The dog’s breakfast of a stimulus package

Liberal economist narrates about the stimulus packages announced by new President of US. He says that the “If the purpose of the stimulus package is to raise aggregate demand by roughly the amount it has fallen because of the financial crisis, Valerie Ramey finds that from historical US data, the multiplier for public spending is not large: $1 in public spending raises GDP by $1.4 (“Identifying Government Spending Shocks: It’s all in the timing”, UC, San Diego, June 2008). Whilst Christina and David Romer’s study of the effect of tax changes on aggregate demand found that a $1 tax cut raises GDP by $3 (“The Macroeconomic Effects of Tax Changes”, UC, Berkeley, November 2008). Though it should be added that since being nominated as Obama’s Chair of the CEA, Christina Romer seems to have changed her tune and fallen into line (see C Romer and J Bernstein: “The Job Impact of the American Recovery and Reinvestment Plan”, January 10, 2009), with the claim that the proposed package will lead to the creation of over three million jobs by the end of 2010. But as many observers have noted, “The total package is so diffuse, it costs $223,000 to create a single job” (D Brooks: “The First Test”, NYT, January 23).

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