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San Fran Fed Finds Fiscal Stimulus Has Little Impact During Periods Of Economic Growth
It has only been a week since we discussed the San Francisco Fed's research group admitted that water was wet Fed policy will be unable to impact unemployment since the cyclical changes are more structural leading to jobless recoveries as fat is removed from the system. The powerless Fed now has another well-researched problem. As Daniel Wilson of the FRBSF sheepishly admits (having spent several thousands in taxpayer cash to fund the latest Fed 'white paper') with regard to the impact of fiscal stimulus: It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to +3.
Critically he notes that the impact varies greatly on the environment in which the stimulus is injected noting, most disconcertingly for our current predicament, that the benefits of fiscal stimulus vary with the business cycle and are strongest during recessions (or empirically - thanks Japan - when monetary policy is at its lower bound). So, given that the US is decoupling and that we are not in a recession, we assume the multiplier effect of the Fed's much-desired fiscal stimulus requests will be at the lower end of the range - either negative or inconsequential?
In other words, the implication of this publicly funded research into the blindingly obvious is that for the Fed to get its desired fiscal stimulus from the government they had better engineer, using only the monetary policies up their sleeves, a recession (which somewhat humorously leaves an investing public who is so desirous of more splashy monetary easing potentially high and dry as long as Bernanke's rhetoric remains - maintain ZIRP, muddle through, and its government's turn now - though of course the ECB could change that any minute).
Government Spending: An Economic Boost?
By Daniel J. Wilson
The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.
Over the past three years, there has been a resurgence in economic research on the impacts of fiscal policy, as implemented through direct government spending and tax rates. This resurgence is due in large part to the severe global economic downturn and the massive fiscal stimulus programs put in place in many countries as a response. Now, as many countries pivot from stimulus to austerity despite uncertain recovery, the question of the economic effects of higher taxes and reductions in government spending takes on a new importance.
This Economic Letter reviews recent research on the economic effects of fiscal policy. This research makes clear that many factors can affect the size and direction of fiscal effects, suggesting that policymakers must carefully consider the specific context of fiscal policy to understand the probable effects of new spending and tax initiatives.
The fiscal multiplier?
The economic analysis of the effects of fiscal policy typically focuses on what is called the fiscal multiplier. The most common definition of it is the magnitude of the change in economic activity caused by a change in fiscal policy. For example, a GDP fiscal spending multiplier of 1.5 means that a $1 increase in government spending leads to a $1.50 increase in GDP.
The term multiplier refers to the broad effects of government spending and taxes on overall economic activity, not just on those households or businesses directly targeted by fiscal policy. For instance, increased government spending on highways may affect not only highway construction companies, but also the retailers frequented by newly employed highway workers, local asphalt providers, and nonlocal steel and equipment producers. Moreover, the current or future financing of the increased government spending may affect the savings and investment decisions of households and businesses throughout the economy. Similarly, a tax cut affects not only those who pay the tax, but also all areas of the economy that depend on the spending of those taxpayers or are influenced by future policy changes required to pay for the tax cut.
The use of the fiscal multiplier as an analytical device has helped ensure that theoretical analyses consider both the direct and indirect effects of fiscal policy. However, the concept arguably has led the economics profession down the false path of posing the misleading question, “What is the fiscal multiplier?” A central theme of recent work on fiscal policy’s impact has been that there is no single fiscal multiplier. Rather, the impact of policy varies over time and across geographic areas. How this plays out depends at a minimum on the type of fiscal policy, that is, taxes versus spending, government purchases versus transfers, government investment versus consumption; its financing; how quickly it is implemented; what monetary policy is in place; and the state of the business cycle.
Theoretical guidance
Within the economics literature, two broad frameworks are used to understand the effects of fiscal policy. The Neoclassical model emphasizes the distortionary effects of government spending. The New Keynesian framework highlights the potential role of government spending in alleviating factors that prevent the private economy from making rapid adjustments to economic shocks. In the standard Neoclassical model, changes in fiscal policy affect the economy primarily through labor supply, at least in the short run (see Ramey 2011a). Government spending is viewed as a negative wealth shock to households because they recognize that taxes must rise either now or in the future to pay for it. This induces more people to enter the labor force, increasing output. Counterintuitively, the more distortionary the tax system is, the bigger the positive impact of government spending on output. That’s because the distortions add to the negative wealth shock, prompting larger increases in labor supply. In this model, government spending is inherently wasteful. The spending has no direct effect either on the welfare of individuals or on the productivity of private businesses.
Leeper, Walker, and Yang (2010) explore the implications of three departures from this standard Neoclassical framework. First, they consider government investment spending, such as on infrastructure. Such government investment increases the productivity of private businesses, potentially altering the fiscal multiplier both in the short and long run. Second, they consider the importance of lags between when fiscal policy changes are legislated and when they go into effect. They find that such lags can greatly reduce the short-run impact of the spending. Third, they find that distortionary taxation to finance government investment can reduce its long-run impact.
New Keynesian models differ in that they generally assume some degree of stickiness, that is, that wages and prices do not adjust instantly to economic shocks. Christiano, Eichenbaum, and Rebelo (2011) develop such a model to study how the fiscal multiplier varies along a number of dimensions. Their baseline model yields a GDP fiscal spending multiplier that is constant over time and equal to about 1.0. The multiplier varies only modestly when most parameters are changed, such as the degree of price or wage stickiness. However, the multiplier varies enormously depending on how monetary policy reacts to the economy. In particular, the multiplier can be above 3 when monetary policy is fixed, such as when the central bank’s interest rate target is stuck near its lower bound of zero.
Empirical estimates
Over the past few decades, the standard approach to estimating the impact of fiscal policy has generally been to investigate correlations over time between government spending or taxes and economic performance at the national level. Beginning with the seminal paper of Blanchard and Perotti (2002), economists have increasingly used a statistical technique known as structural vector autoregression (SVAR) to estimate the relationships between government spending and other economic variables over time, while imposing certain assumptions suggested by economic theory. Blanchard and Perotti’s key assumption was that government spending responds to economic shocks with a lag. This assumption allows researchers to identify the movements in government spending that would not have been expected, given the usual way government spending responds to economic shocks, and then estimate how GDP and other economic variables react to those movements. Blanchard and Perotti and other researchers using the SVAR approach have tended to find multipliers that are near or less than one, both for government spending and for tax cuts.
More recently, a number of time-series studies have sought to avoid the strong assumptions underlying Blanchard and Perotti’s approach by building models that incorporate evidence from contemporary forecasts, news media, and government reports on unexpected changes in government spending or taxes. Using this approach, Ramey (2011b) finds that the multiplier on government defense spending is between 0.6 and 1.2 at its peak. Auerbach and Gorodnichenko (2010) provide an interesting variant on this approach. They allow the multiplier to differ in recessions and expansions. They find the long-run effect to be positive and as high as 2.5 in recessions, but as low as near –1.0 in expansions.
Several recent papers have used variations in government spending across regions, such as states or counties, to identify the effects of fiscal policy. These studies take advantage of the fact that large portions of federal spending are often allocated to regions for reasons unrelated to regional economic performance or needs. For example, federal highway grants are distributed to states based primarily on legislated formulas that rely on noneconomic factors, such as the layout of the interstate highway system. Such variations can be used to identify the effects of federal spending on a local economy. How these local effects relate to the national effects of federal spending depends on whether there are spillover effects to other regions, which could be positive or negative depending on patterns of trade and labor mobility, and the ways local governments may influence how the money is spent.
Nakamura and Steinsson (2011) exploit the fact that a given percentage change in U.S. military spending generally translates into much larger changes in such states as California and Virginia. They use this variation to identify the portion of each state’s military spending that is independent of its current economic conditions and then estimate the effect of such independent spending on state GDP. They derive a local GDP multiplier of 1.5 over two years. Fishback and Kachanovskaya (2010) estimate a GDP multiplier using variations in federal spending across states during the Great Depression. They obtain a local multiplier as high as 1.7.
Similarly, Wilson (forthcoming) looks at the local impact of federal spending from the 2009 American Recovery and Reinvestment Act (ARRA), estimating the extent to which cross-state differences in employment can be explained by differences in ARRA spending. The study exploits the fact that much ARRA funding was allocated to states based on formulas that relied on factors unrelated to state economic conditions. For example, the extent of a state’s highway infrastructure in 2006 was part of the formula determining that state’s share of ARRA highway funds in 2009. Wilson finds a strong correlation between ARRA spending based on these independent sources of variation and post-ARRA employment growth, with the effects starting around the summer of 2009 and continuing at least through the first quarter of 2011. The magnitude of this employment response is consistent with a local GDP multiplier of around 1.5.
Conclusion
What does this literature tell policymakers and others trying to assess the impact of fiscal policy changes? It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to 3. However, this range is not so much a reflection of disagreement over an underlying parameter as it is a reflection of one of the key lessons of this research—that there is no single multiplier that can be applied mechanically to all situations. The impact depends on the type of fiscal policy changes in question and the environment in which they are implemented. The effects of government investment are potentially greater than those of other types of government spending. And the effects from transfers to people without much wealth or ability to borrow are probably higher than from transfers to others. The impact depends on how policy changes affect expectations of future government spending and taxes. It also depends on how quickly the changes are implemented and whether they were anticipated before they were authorized. Moreover, the impact varies depending on whether monetary policy counteracts or complements fiscal policy. Finally, it depends on the state of the business cycle. Effects are more positive during recessions. An important lesson from the research is that it’s essential to clearly understand the context in which fiscal policy is operating, that is, the factors that may cause economic effects and the size of the multiplier to vary.
Daniel J. Wilson is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco.
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So... raise rates, stop with the papers. Enough papers already.
Here's a plan for these over-educated cum stains. Let the market determine rates, shut your fucking pie holes and go crawl back to the fucking hole from which you came.
The world doesn't need them. It doesn't need their theoretical bullshit. It doesn't need their slavery.
cum-stains and pie holes in the same paragraph, classic!
For every 10% growth in government the GDP growth rate shrinks 0.5% to 1%. The government multiplier is never positive, they just happened to spend the money when the economy was growing.
Fuck all this bull shit economist and their PhDs.
The multiplier is complete 100% bull shit. There is no multiplier, only in these overpaid assholes heads. The reason there is no multiplier is because the money comes from;
1. Taxes. Some poor bastards pays for the other rich government bastard.
2. Borrowing. Some old fart buys a bond so government asshole can pretend like they are useful.
3. Printing money. Everyone pays for government asshole in the form of inflation.
Why is Tyler printing this useless Keynesian bull shit? Fuck this shit.
Tyler is spreading lies and propaganda. Construction of the USS Paul Krugman has already generated billions of jobs across the nation. Once it sets sail for the Gulf of Oman to blow the bejeezus out of Iran, billions more jobs will be generated.
Send it to the gulf? You obviously don't understand Krugman economics.
Krugman would put it out into the ocean and sink it so they could build another one to keep stimulating the economy. Heck, we might need to start building and sinking them two or three at a time to get this economy going strong!
That's a great idea. Then we can streamline the salvage operations and build a just-in-time-sustainable-green-recycling-military-industrial-complex. I wonder if I should patent my ingenius business process?
That's Kruggybear to you plebes.
The Brown Clown doesn't give a rat's ass as long has he gets re-elected to steal all from everything not nailed down (physically held precious metals withstanding), then declare himself life appointed Dictator of America...
Whether or not he can take physically held assets is determined by his "deep reservations" against NDAA.
And with that the market indicies make another comeback from the lows of the morning. Pisani gets a boner that the dow closes at the highs of the day.
Was that "white paper" printed on Charmin or White Cloud...?
economic utility is not the basis for stimulus - political utility is the driver ....that and criminal fraud laden bankster lust for more debt....
From where I sit, the "mulitiplier" should be viewed as the "opportunity cost" of not letting the private sector doing it. Since government and bueaucracies are by design, inefficient, the multiplier is always negative. Every single dollar spent by governemnt is a burden to be bared by the productive assets of a nation and governments should keep their footprint to a minimum. A military is necessary for sovreignity but no one can argue they do it efficiently.
Old Lloyd B. doesn't mind the Fed printing like fools. His bonuses have been A-OK.
Is it too late to say "I told you so" ?
Still though, the numbers are misleading. Focus on real wealth creating projects, or it's just increasing the money supply and creating inflation.
That money actually has to produce something. A new idea, invention, more supply, something.
Instead we find that 'stimulus' going wherever, has a poor multiplier...but also this is a moot point, given that during times of high official inflation, any bad idea will look better based on the numbers. So in REALITY you are just playing a guessing game, and thus any decisions made off of this are using faulty data to influence the decision.
Credit should be created whenever there is a major wealth creating project available. Whenever there is a goal that NEEDS to be attained...like fusion. Thus the payoff of these last for many decades, and these payoffs are real and known and understood without faulty statistics that obscure the truth. It's well known that the space program has made many improvements to our lives...because we set a goal, and by achieving that goal, increased our knowledge, our ability to apply it, and made people's lives better. The same is true with a moon base or mars mission. The original space race among other things gave us inventions from Tang and microwaves. While Tang is marginal, microwaves sure weren't.
Don't focus on NUMBERS....focus on what's TANGIBLE. Or tangible, including knowledge.
How do you measure Charlemagne's investment in the improvement of Europe's waterways when many (those not shuttered because of ineptness) are still in use today! Still increasing the productivity of the area...STILL providing for an increase to the general welfare of Europe and any good floating headed anywhere that floats on top of it.
Projects like these need to be done, and you don't need to have statisticians be able to tell you WHY. I bet the statisticians don't even include Charlemagne into their idiot equations either. We can do the same types of things to increase productivity beyond the statistician's way of lower pay, lower benefits, and longer hours. So we can focus on numbers as equal, and do anything to achieve them, or we can actually go about increasing productivity without fucking someone over. That's progress. What we call increases now, is really just just monetarist bullshit.....outsourcing, forcing lower pay/benefits/etc to arrive to the same desired 'numbers', or worse like the BLS just outright manufacturing of the numbers.
It's about how you get there. Through progress or scumbaggery...monetarism and it's faulty metrics don't care. We humans, usually of the 99 percent persuasion, do.
The problem isn't the people in charge of where the money goes. The problem is there are people in charge of other people's money.
This has never happened in the history of the world
"That money actually has to produce something. A new idea, invention, more supply, something. "
Money is not the cause of wealth people are the cause of wealth. Money is a symbolic representation of the wealth created by people.
The rest of your comment is very troubling. Who cares if charlamagne created something THE ENDS DO NOT JUSTIFY THE MEANS> If you steal something and then use it to further your causes regardless of how good/bad you define the outcome, it is morally corrupt.
Easy money predates a lot more evolution than hard money does.
Why does the FED need a research group to find out what a high school student can chart within less than an hour?
The multiplier is approaching zero!
THE Most Important Chart of the CENTURY
http://economicedge.blogspot.com/2010/03/most-important-chart-of-century...
Read this FED SAV FRAN Report...!!
http://www.scribd.com/doc/80708300/Federal-Reserve-SFCO-Dollar-liquidity-Central-Bank-Swap-Arrangements-During-Global-Financial-Crisis-August-2011-PP
pp
Global Debt Crisis
The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?
http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html
---------------------------------
By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...
Authored by PANAGIOTIS TRAIANOU
Tax money that gets spent on government is as good as money flushed down a toilet, and perhaps even worse. By definition, productivity being the ratio of outputs to inputs, there can be no positive productive use of money spent on government, since the only thing governments produce is more taxes and regulations, which suck even more money from the productive sectors of the economy. The best one can hope for is a non-negative use of money. There has to be an inflection point at which the size and scope of government grows where tax and regulatory burden becomes a "black hole" that just starts sucking in anything that gets close to it.
BTW, if ever there was evidence that completely discredits Keynesianism, it is these last three years. This was supposed to be the golden opportunity for Keynes to show off his wares. All the Keynesians predicted the same th ing - spend a few trillion and things will stabilize and turn around. Not only did that *not* happen, but the opposite happened - Keynes made things worse. The Great Keynesian Experiment is over - there are no results to report. Run along now, nothing to see here...