Tuesday, January 20, 2009
Those darn lags
According to Congressional economists, the effects of the Obamaspendorama would not reach the economy "until it's already on the mend."
Meanwhile, Greg Mankiw links to a paper by Mountford and Uhlig, which finds that tax cuts provide a much larger multiplier effect than does government spending (.91 vs. 1.57). Tax cuts take olonger to work through the economy, however, perhaps too long for a Congress who has little more than six quarters before it faces re-election. David Weil:
Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent. Just one in seven dollars of a huge $18.5 billion investment in energy efficiency and renewable energy programs would be spent within a year and a half.The CBO's website appears to be down this morning. I'll update this post when I find the link.
And other pieces, such as efforts to bring broadband Internet service to rural and underserved areas won't get started in earnest for years, while just one-fourth of clean drinking water projects can be completed by October of next year.
Still, other elements of Obama's $825 billion economic recovery plan, such as $275 billion worth of tax cuts to 95 percent of filers and a huge infusion of help for state governments, will be distributed into the economy more quickly.
Meanwhile, Greg Mankiw links to a paper by Mountford and Uhlig, which finds that tax cuts provide a much larger multiplier effect than does government spending (.91 vs. 1.57). Tax cuts take olonger to work through the economy, however, perhaps too long for a Congress who has little more than six quarters before it faces re-election. David Weil:
Unfortunately, discretionary fiscal policy is rarely able to deliver on its promise. Fiscal policy is especially difficult to use for stabilization because of the �inside lag��the gap between the time when the need for fiscal policy arises and when the president and Congress implement it. If economists forecast well, then the lag would not matter because they could tell Congress the appropriate fiscal policy in advance. But economists do not forecast well. Absent accurate forecasts, attempts to use discretionary fiscal policy to counteract business cycle fluctuations are as likely to do harm as good. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policy, is far more agile than fiscal policy.
Labels: economics
