Reason Magazine Article Examining the Pro-Government Expenditure Bent of Many Macroeconomic Models

18 05 2011

Veronique de Rugy, from the June 2011 issue of Reason Magazine (http://reason.com/) writes an article titled “Ugly Modeling…Will spending cuts ruin or improve America’s economy?” which can be found at the following web address:
http://reason.com/archives/2011/05/10/ugly-modeling.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University (http://mercatus.org/veronique-de-rugy?id=17018).

The author touches on issue relating to Keynesian theory and assumed economic multipliers for government expenditures…

“Also, the Zandi and Phillips models are based on the Keynesian view that government spending produces recovery. According to that theory, $1 in government spending produces substantially more than $1 in growth, a phenomenon known as the “multiplier effect.” The Goldman Sachs study assumes a multiplier greater than three—i.e., more than $3 in additional GDP for each dollar of government spending. But a review of the empirical literature reveals that in most cases a dollar in government spending produces less than a dollar in economic growth. And these findings often don’t even take into account the impact of paying for that government dollar via increased taxes.”

“The Harvard economists Robert Barro and Charles Redlick estimate that the multiplier for stimulus spending is between 0.4 and 0.7. In another study, the Stanford economists John Taylor and John Cogan concluded that the stimulus package couldn’t have had a multiplier much greater than zero. Even the multipliers used by Christina Romer, the former chairwoman of the White House Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Joseph Biden, in their January 2009 paper “The Job Impact of the American Recovery and Reinvestment Plan,” ranged from 1.05 to 1.55 for the output effect of government purchases. More recently, the Dartmouth economists James Feyrer and Bruce Sacerdote, who supported the stimulus, acknowledged that it didn’t boost the economy nearly as much as the administration models claimed it would.”

The author’s final thoughts and prescriptions for the economy are as follows…

“Now what? Many economists and many members of the business community argue that recent policy changes have hampered investment, making a bad situation worse. The prospect of endless future deficits and accumulating debt raises the threats of increased taxes and of government borrowing crowding out capital markets, diverting resources that could be used more productively. As a result, U.S. companies are less likely to build new plants, conduct research, and hire people.”

We have tried spending a lot of money to jump-start the economy, and it has failed. Now we need to cut spending and lift the uncertainty paralyzing economic activity. That approach will not just be more fiscally responsible. It will also empower individuals and entrepreneurs. And they are the only ones who can bring on a real recovery.”

In economics there is much debate and division into camps of thought regarding which schools of economic thought and theory best represent the functioning and processes involved in macro-economies.  It is difficult to change one’s mind about a school of economic theory that we have invested time, blood, sweat, tears, and even our careers in.  Yet, the Keynesian models are failing to accurately represent the stimulative impact of government expenditures upon the U.S. economy.  To keep following these failed theories will lead to long term economic damage for the U.S. and World economy.


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