Is it Possible that the President thinks Economists Agree That Spending is the Answer?

by Matt Mitchell on October 5, 2010

in Stimulus, Tax and Budget

[W]ith respect to aggregate demand, I don’t know any economist — including, I think, Martin — who would argue that we are more likely to get a bump in aggregate demand from $700 billion of borrowed money going to people like those of us around this table who I suspect if we want a flat-screen TV can afford one right now and are going out and buying one.

If we were going to spend $700 billion, it seems that we’d be wiser having that $700 billion going to folks who would spend that money right away if we were going to boost aggregate demand.

That is President Obama, responding to a question from Martin Feldstein about extending the Bush tax cuts. Note, first of all, that though the president is talking about whether or not we will allow taxes on high-income Americans to rise, he easily slips into the language of spending. In his vernacular, we are “spending $700 billion” when we choose not to raise taxes by $700 billion.

More to the point, however, the quote suggests that the president is under the impression that economists unanimously believe spending increases are wiser than tax cuts. It would be a shame if the president’s advisors gave him this impression.

In 2009, the University of Chicago’s Harold Uhlig reviewed the most-recent literature on this question. By Uhlig’s count, the following studies conclude that, in terms of boosting GDP, tax cuts have a larger impact than spending increases:

Shortly after Uhilg wrote this, Alesina and Ardagna (2009) also found that stimuli based on tax cuts tend to be more effective than stimuli based on spending increases.   

Aside from the spending boost vs. tax cut debate is the question of magnitude. On this score, the Administration’s assumptions are well-outside of the range found in the most-recent studies. According to Uhlig:

With the exception of Gali [,Lopez-Salido, and Valles] (2007), the fiscal multipliers for government spending also typically seem to be considerably more modest than the [Administration assumes].

To this list, I would add Barro and Redlick (2010).

This is not to mention work such as the recent IMF study by Freedman, Kumhof, Laxton, Muir, and Mursula (2010) that finds short-run positive effects from stimuli, but medium-term deleterious effects.

It would be one thing to know about this evidence and to dismiss it. The president, however, seems not to have heard of it.

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