The simple answer is that we do not know, but we have clear evidence that there is not agreement that it will work. This is based on research that analyzes the multiplier effect of the fiscal package using alternative model approaches. Now some will conclude that we will need even more stimulus to jump-start the economy given these results. We do not know how big an impact the package will have especially beyond the initial spending jolt in 2009-2010. This could be one reason for why Larry Summers has been calling for even more stimulus in other parts of the world. We may not be able to do enough in the US.
But let's not get ahead of the economics. We have two important studies that cause us to pause about the stimulus package. The first study was the impact analysis of the stimulus package by the CBO. Their conclusion was that the net effect would be negative because of crowding out. The impact would be positive in the short-run but the high deficits would lead to higher rates which would offset the stimulative impact of the spending.
The more striking analysis is presented in a NBER working paper (#14782) by a set of leading macroeconomic researchers. It is called "New Keynesian Versus Old Keynesian Government Spending Multipliers" The authors take the assumptions of Romer and Bernstein who looked at the impact of the stimulus package for the Administration. Romer is the head of the CEA and Bernstein works for the Office of the Vice President. Romer-Bernstein find a positive multiplier which is long lasting.
The NBER researchers use a different model but one that is consistent with state of the art thinking on Keynesian models and which has been vetted in the profession's leading journal the American Economic Review. They find a significantly lower multiplier which shows a negative impact over time. They do a good job of laying out the differences in the models and suggest that the Romer-Bernstein modeling approach represents old thinking about Keynesian economics.
We can argue about the assumptions but the conclusion from the simulations using the Romer-Bernstein assumptions suggest that the impact of the stimulus package is not robust to changes in the modeling and that there is real danger that the policies in place may have a negative impact on the long-run growth of the US economy. Most important, the crowding out effect is real and cannot be averted. The key to the New Keynesian approach is to impose rational behavior on economic agents. They will understand that spending will have to lead to future tax increases which will cause a change in behavior today.
There is strong reason to be short bonds because rates will go up under this uncertain environment.
But let's not get ahead of the economics. We have two important studies that cause us to pause about the stimulus package. The first study was the impact analysis of the stimulus package by the CBO. Their conclusion was that the net effect would be negative because of crowding out. The impact would be positive in the short-run but the high deficits would lead to higher rates which would offset the stimulative impact of the spending.
The more striking analysis is presented in a NBER working paper (#14782) by a set of leading macroeconomic researchers. It is called "New Keynesian Versus Old Keynesian Government Spending Multipliers" The authors take the assumptions of Romer and Bernstein who looked at the impact of the stimulus package for the Administration. Romer is the head of the CEA and Bernstein works for the Office of the Vice President. Romer-Bernstein find a positive multiplier which is long lasting.
The NBER researchers use a different model but one that is consistent with state of the art thinking on Keynesian models and which has been vetted in the profession's leading journal the American Economic Review. They find a significantly lower multiplier which shows a negative impact over time. They do a good job of laying out the differences in the models and suggest that the Romer-Bernstein modeling approach represents old thinking about Keynesian economics.
We can argue about the assumptions but the conclusion from the simulations using the Romer-Bernstein assumptions suggest that the impact of the stimulus package is not robust to changes in the modeling and that there is real danger that the policies in place may have a negative impact on the long-run growth of the US economy. Most important, the crowding out effect is real and cannot be averted. The key to the New Keynesian approach is to impose rational behavior on economic agents. They will understand that spending will have to lead to future tax increases which will cause a change in behavior today.
There is strong reason to be short bonds because rates will go up under this uncertain environment.
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