Christina Romer was appointed to be the head of Obama’s team of economic advisors. She is a proclaimed Keynesian while most of her work has undermined the Keynesian theories. David Henderson from the Hoover Institute via Forbes.com asks “Will the real Christina Romer please stand up?” and rightfully so. I will attempt to summarize what Henderson had to say.
Keynesian believed that in order to keep full unemployment during times of downturn the government had to increase spending or cut taxes. This would cause the government to run a budget deficit. What to do after that was unclear. This is what she found when she did the research on tax cuts:
“In their article, they find that “tax increases are highly contractionary” and that tax cuts are highly expansionary. Otherwise-careful economists Greg Mankiw of Harvard and Lawrence Lindsey of the American Enterprise Institute have run with this result, as they should, but in doing so they have seriously misstated their findings.
Therefore, it’s worth looking at what the Romers did and didn’t find. Their bottom line is that “exogenous” tax cuts–that is, tax cuts not intended to offset the business cycle–have a large positive effect on gross domestic product. Specifically, a tax cut of 1% of GDP will raise GDP by about 3%.”
This may be good news for the Republicans out there, but this was with times of recessions removed. Tax cuts, like spending increases, do not work in recessions. Part of this has to do with the fact that fiscal legislation takes way to long to have any effect. Part of this has to do with the slowness of the legislature. Gerald Ford himself tried tax rebates as a boost:
“…although the 1975 tax rebate was passed within three months of being proposed, they note that it was not proposed until 14 months into the 1973-75 recession. They could have noted that the recession ended in March 1975, the same month the rebate was proposed and three months before it was passed.”
So it is very possible that we could be passing these stimulus bills too late. In fact, we could be just creating more debt while having no real effect. Now, of course, the Obama administration when the economy does come back will take credit for the recovery. With that there will be a rebirth of the welfare state as the savior of the economy, since the New Deal. Textbooks across the land will praise Obama as a savior.
The rest of Henderson’s great article is here.