But regardless of all its faults, I remain proud of the work I put into it, and the final message and primordial issue that it contains still remain relevant. So here it is, the first post(!):
In a December 2009 Op-Ed piece in The New York Times, economist Gregory Mankiw purports that so far the Obama administration’s Recovery Act (a.k.a. the “stimulus package”) has failed to sufficiently cure the economy of its ills. The package that passed relied heavily on government spending to revive the economy, based on the conventional Keynesian theory that government spending more effectively stimulates the economy than tax cuts. But Mankiw, former Chairman of the Council Economic Advisors under President Bush from 2003 to 2005 and a current Harvard professor and author of a popular blog, writes in the piece that “various recent studies suggest that conventional wisdom is backward” and that tax cuts may be the most curative salve.
The problem is that at least two of the studies Mankiw cites explicitly state their results say otherwise. And the other two hardly — if at all — build a foundation for Mankiw’s case.
[A simplified explanation of the usual theory behind a stimulus plan goes as follows:
Both tax cuts and government spending increase the economy’s overall income: tax cuts let people or businesses keep more of their money, and government spending on “stuff” becomes someone’s income. Whichever way they come by it, people spend their increased income, which other people then spend on something else, and then others, and so on, thus stimulating the economy. Both methods have their advantages: on the one hand, tax cuts are easier to initiate than government spending, which takes time to devise, organize, and start, while tax cut can be legislated quickly; on the other hand, the government can use its spending to build and renovate its nation’s infrastructure, making it more productive. But the weakness of tax cuts lies in that people may not spend all the money they receive from the cuts on new goods — they might use it to, perhaps, pay off debt. The government, however, will spend a higher percentage — 100% — of its money, thus making it more effective stimulus. (For a more in-depth explanation, you can read Mankiw’s own textbook, Macroeconomics; this stuff is covered in chapter 10 in the 7th edition.) Yet in his piece, Mankiw argues against this last point.]
Mankiw first cites and links to a paper by Christina Romer, the current holder of his former post of Chairperson of the Council of Economic Advisors, and her husband David. Mankiw writes that the numerical values of the effectiveness of tax cuts in the Romers’ piece are, oddly, far greater than those in a report put out by the Obama administration’s economic team last January, which Romer helped produce just months after the release of her and her husband’s paper. And, more to Mankiw’s overall point, the numerical value of tax cuts’ effectiveness are even greater than what the administration reported as the expected effectiveness of government purchases.
And Mankiw isn’t lying: the numbers in the Romer study are greater than both of those in the administration’s report. But, in the conclusion of the paper, the Romers explain that economists should not compare their findings to other studies’ like Mankiw does and explicitly state that their findings do not support Mankiw’s argument at all. They write:
“Our results do not speak to the issue of whether taxes are a more powerful tool of fiscal policy than government purchases. The fact that our estimates of tax changes are larger than conventional estimates of the effects of changes in purchases is clearly not relevant: conventional estimates of the effects of purchases, like conventional estimates of the effects of taxes, almost surely suffer from omitted variable bias.”
There is a similar dissonance between Mankiw’s argument and what the next piece he cites argues. While the paper, written by economists Andrew Mountford and Harald Uhlig, does say, as Mankiw points out that “deficit-financed tax cuts work best among [deficit-financed spending, deficit-financed tax cuts and tax-financed spending] to improve G.D.P.,” the introductory abstract of the piece states that they despite the result, they do not necessarily recommend tax cuts, saying:
“Although the best fiscal policy for stimulating the economy appears to be deficit-financed tax cuts, we wish to point out that this should not be read as endorsing them. This paper only points out that unanticipated deficit-financed tax cuts work as a (short-lived) stimulus to the economy, not that they are sensible.”
In a change of pace, the third source Mankiw uses does discuss the current U.S. economic crisis in its conclusion and the authors, fellow shades of Crimson Alberto Alesina and Silvia Ardaga, explicitly agree with Mankiw that the stimulus package relied too heavily on government spending. But their final insight into the current fiscal struggle expands beyond the narrow snippet Mankiw included in his piece, and argues so without his erudite vigor.
Mankiw points out how the study’s results were that “Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending,” (implying that the administration’s package falls into the latter “failed stimulus” category) and the authors do write that:
“According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.”
And:
“… one could have though[t] of tax cuts that stimulate investment.”
But Mankiw’s argument pushes onward from those points, having taken what he needed to support his claim, and in doing so he ignores that the two authors themselves backtrack a little, writing:
“An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption.”
And:
“A relatively high unemployment [rate] for a couple of more years will require spending on subsidies.”
Fourth and finally, Mankiw prefaces the last study he cites with “All these findings suggest that conventional models leave something out.” He evidences this by quoting the paper, which says, “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.” But the whole government-spending-increases-interest-rates-which-crowds-out-investment thing is included in Keynesian theory as a negative side-effect of using government spending as fiscal medicine (as explained in chapter 11 of Mankiw’s textbook). This point, however, does bring Mankiw to his commonsensical speck of analytical gold in his pile of Pyrite: that tax credits that incite investment are valuable fiscal remedies.
The point of all this is not simply to parse through Mankiw’s abuse of sources, or what may have been extensive oversight, all in support of an erroneous claim. Nor is the point necessarily akin to the political overtones of Mankiw’s argument (Mankiw’s coy use of Christina Romer’s own paper to contradict the work of the administration she is a part of; how Mankiw was Chairman of the CEA when Round 2 the infamous Bush tax cuts were passed). The point is that, however and for whatever reason he so poorly used sources to make his claim, Mankiw’s article was a syringe filled with misinformation and delusion.
The economy will not be cured of its sickness and frailty if misinformed, misguided, or mal-intended people skew its diagnosis with ill-founded assertions.
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