Ray Fair on Policy Stimulus

A friend calls to my attention a paper by Yale economist Ray Fair, a well-known builder and user of large-scale macroeconometric models. Fair assesses the impact of monetary and fiscal policy during the recovery from the recent recession. An excerpt:

Had there been no tax cuts, employment would have been 2.2 percent lower by 2004:3 than it actually was; had there been no large increases in federal purchases of goods, employment would have been 1.2 percent lower; and had there been no fall in short-term interest rates, employment would have been 2.5 percent lower. These effects are roughly additive in the model (fourth experiment), and the combined estimate is that employment would have been 5.6 percent lower in 2004:3 than it actually was.

According to Fair, monetary and fiscal policy played roughly equal roles in the stimulating aggregate demand during the recovery.

Fair's conclusions seem broadly consistent with the recent Treasury report:

Treasury found that, without enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, and the Jobs and Growth Tax Relief Reconciliation Act of 2003: (1) by the second quarter of 2003, the economy would have created as many as 1.5 million fewer jobs and GDP would have been as much as 2 percent lower, and (2) by the end of 2004, the economy would have created as many as 3 million fewer jobs and real GDP would be as much as 3.5 to 4.0 percent lower.

This passage summarizes the Treasury's short-run business cycle analysis, which like Fair's model emphasizes aggregate-demand effects. The Treasury's long-term analysis appropriately emphasizes aggregate-supply effects.