Sunday, January 11, 2009

Mankiw: what has to considered when evaluating fiscal stimulus

This is an editorial in the NYT written by Prof. Mankiw of Harvard. Prof. Mankiw is not so sure the fiscal stimulus plan (expansionary fiscal policy: increasing government spending G and/or lowering taxes T) that the Obama team is pushing for will do the trick. He raises some questions that any IB economics candidate should have in mind when evaluating expansionary fiscal policy.

The issues he raises include:
1. What is the size of the expenditure multiplier? Is it perhaps too small?
2. What will the Government spend on? We've mentioned in class that capital spending is the obvious choice but is 'a brigde to nowhere?' a good idea?
3. The tax multiplier is according to theory smaller (because part or all of the extra euro in our pockets following the tax cut may be saved and never spent). Empirical work though by Christina Romer (the new chief of the Council of Economic Advisors of President-elect Obama; Mankiw also held the position under Pres. Bush) finds otherwise...So, maybe tax cuts (the question is for whom?) should be also considered (and, they are)
4. Will this renewed interest in Keynesian interventionism lead us into other types of problems? This is the old question of what is the right balance between markets and the government...

The article is written in Mankiw's elegant and simple style (otherwise his principles textbook wouldn't have been as popular as it is and sell at over $200.00) and he is a (very) top notch economist.

For IB economics purposes just following Mankiw's and Krugman's blogs may be the best Macro preparation for the May exams.

The article's title is Is Government Spending Too Easy an Answer?. Read it. (please?)

PS: Check out this comment on Mankiw by Mark Thomas which includes reference to the latest paper/reply by Romer herself which became available only yesterday.

1 comment:

Laura Harrison said...

Three comments on Gregory Mankiw's article.

1. Is this the same Greg Mankiw who in November 2008 wrote: "IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront." (See NY Times, November 28, 2008.)

2. In his NY Times article today, Greg Mankiw quotes Samuelson on World War 2 emerging from the Great Depression. This captures a really important but generally neglected aspect of Keynes's thinking - that there were important economic causes of war and economic means of promoting peace. (See Markwell's book on Keynes and international relations, and "economic paths to war and peace".)

3. Why isn't more attention being paid to the need for international coordination of economic stimulus - a global response to the global crisis? Again, this was an important aspect of Keynes's thinking. (Markwell's book covers this also.)