Friday, February 26, 2010

Barro on the Stimulus Package

There was an op-ed by Barro in The Wall Street Journal this week.

I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. …

For taxes … the multiplier is around minus 1.1.

Christina Romer, the chair of President Obama's Council of Economic Advisers, and her husband, David, have been major contributors to research on tax multipliers. Their results, which rely on the history of U.S. tax legislation since 1945, show tax multipliers of larger magnitude than the one I found. …  By contrast, I have not seen serious scientific research by Ms. Romer on spending multipliers, so I cannot understand her rationale for assuming values well above one, as she has apparently done when evaluating the fiscal stimulus plan.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

Keep in mind that this is just one expert opinion, and no one who knows Barro would be surprised with this viewpoint.

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