Monday, December 27, 2010

The Balanced Budget Multiplier: Shiller

A nice article on the balanced budget multiplier from Shiller.

"Researchers haven’t pinned down the deficit-spending multiplier either, even though that has been the focus of their efforts. In fact, a recent survey article on the effects of government stimulus by Alan Auerbach at the University of California, Berkeley, and two of his colleagues has found that “the range of mainstream estimates for multiplier effects is almost embarrassingly large.” Last month, a Congressional Budget Office study revealed similar uncertainty. The trouble comes in estimating how people will react in generating those subsequent rounds of spending.

But the balanced-budget multiplier is simpler to judge: If the government spends the money directly on goods and services, that activity goes directly into national income. And with a balanced budget, there is no clear reason to expect further repercussions. People have jobs again: end of story."

This seems to pick up the benefits of balanced-budget government spending in a nutshell. Government spending creates jobs- period. We can argue to the ends of the earth about whether the multiplier is .6 or 1 or 1.5, but at the end of the day when the government spends money in a depressed economy people who otherwise wouldn't have jobs will have jobs.

Another good point Shiller picks up on is that the problems of economic recovery are primarily political at this point in time:

"AT present, however, political problems could make it hard to use the balanced-budget multiplier to reduce unemployment. People are bound to notice that the benefits of the plan go disproportionately to the minority who are unemployed, while most of the costs are borne by the majority who are working. There is also exaggerated sensitivity to “earmarks,” government expenditures that benefit one group more than another.

Another problem is that pursuing balanced-budget stimulus requires raising taxes. And, as we all know, today’s voters are extremely sensitive to the very words “tax increase.”

But voters are likely to accept higher taxes eventually, as they have done repeatedly in the past. It would be a mistake to consider the present atmosphere as unchangeable. It’s conceivable that an effective case will be made in the future for a new stimulus package, if more people come to understand that a few years of higher taxes and government expenditures could fix our weak economy and provide benefits like better highways and schools — without increasing the national debt."

I think this political case is quite compelling and simple. The corporate and rentier sector of the US economy has done incredibly well out of the last decade at least. Corporate profits have rebounded exceedingly quickly from the crisis, but unemployment is still stuck at 9.8%- this is telling us that we have a political and moral problem rather than a purely economic problem. Those who benefited from driving the real economy off a cliff are now profiting from the aftermath. If now isn't the time for more progressive taxation arrangements and greater direct government investment in infrastructure and human capital in the US I don't know when is.


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