Just in time for the end of term, the new Journal of Economic Perspectives is here, the new Journal of Economic Perspectives is here. And this quarter’s issue is chock full o’ articles* about the state of macroeconomics after the financial crisis, so that should be fun to peruse.
The new JEP also has an article titled “Activist Fiscal Policy” by Alan Auerbach and colleagues, which has been a continuing source of consternation inside and outside of the profession (see here for our previous post on this topic). Here’s the abstract:
During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.
It’s interesting to look through the article, if for no other reason to look at the variances in estimated multiplier effects for different policy levers. For example, direct government purchases have a range of 1.0 to 2.5, whereas the extension of the homebuyer credit seems to be self-defeating, ranging from 0.2 to 1.0. Federal transfers to state and local governments vary depending on whether the spending targets infrastructure, and transfers to individuals range from 0.8 to 2.2.
Wow, we really don’t have a very good idea about how this works.
*Yes, Chock Full O’ Nuts is really a coffee brand. As we saw in class, it has a lower price elasticity than brands such as Folgers and Maxwell House.