White House Talking Points
The sentence I put in red is, let's say, a bit of political gaming in itself. (The word "suggests" is a tell.) The Romer research is about the effects of tax cuts. It does not address the effects of increases in government spending. It is consistent with the hypothesis that "all types of fiscal stimulus, both spending and tax cuts, might well have a larger impact than is typically assumed and is assumed in the CEA's analysis." It is also consistent with the hypothesis that tax changes are more potent than spending changes.
CEA Director Romer’s view is that the House analysis is absolutely incorrect. The CEA estimates that the Republican plan would create only 1.7 million jobs, compared to 4.2 million for the Democratic plan.
Question: The House claims that based on the research of CEA Chair Christy Romer, their plan would create 6.2 million jobs. Isn’t that a more effective way of jumpstarting the economy?
Answer: The Republican House analysis is flat wrong in its claim that the House Republican stimulus is more effective. No matter what your analytical assumptions, as long as they are consistent the plan the President supports would result in substantially greater job creation than the House Republican plan.
Independent groups that have analyzed the President’s plan -- from Macroeconomic Advisors to former McCain advisor Mark Zandi -- have confirmed that the President’s plan will create between 3 - 4 million jobs--twice the number of the House plan. The President supports takes a broad, comprehensive approach. It includes substantial tax cuts – many of which mirror the provisions in the House Republican plan. But it also includes new spending programs that many economists across the spectrum believe will help create jobs and give our economy a kickstart right now.
Question: But doesn’t Dr. Romer’s research show that the economic impact of tax cuts is higher than even the Administration is assuming?
Answer: Dr. Romer’s research suggests that all types of fiscal stimulus, both spending and tax cuts, might well have a larger impact than is typically assumed and is assumed in the CEA's analysis. It would be great if that were so. It would mean more job creation and more economic activity -- which is exactly what we need right now. The Administration has based its analyses on more modest assumptions that are in line with those several independent forecasters – Republican and Democrat alike.
We should have an open discussion about these analytical issues.
We cannot afford to play political games with apples-to-oranges comparisons. Such political games distract our attention from the magnitude of the substantive task at hand.
How would you sort out which of these two hypotheses is correct?
One way, apparently favored by the White House, is an appeal to theory. If you are sure the basic Keynesian model is correct, then you believe that spending multipliers must be bigger than tax multipliers. So when the Romer research indicates larger tax multipliers than is commonly believed, you must raise your estimate of the spending multiplier as well.
A second way to judge to validity of the two hypotheses is to take a more empirical approach. One possibility is to find an estimate of the spending multiplier. In my NY Times column, I compared Romer's estimate of the tax multiplier to Valerie Ramey's estimate of the government purchases multiplier. (It was actually one of the Obama economists who directed me to the Ramey study.) To some degree, however, that is comparing apples and oranges. An alternative approach is to look at empirical studies that compare tax and spending multipliers. But recent research along those lines is also not consistent with the basic Keynesian story. These empirical studies do not settle the matter: As I pointed out in my Times piece, "whether these results based on historical data apply to our current extraordinary circumstances is open to debate." But these studies should make us wary about applying the simplest textbook model when formulating policy.
What about those independent groups, such as Macro Advisors, that the White House refers to? I have great respect for Macro Advisors. They are very good at what they do, but testing the Keynesian model against alternatives is not what they do. In fact, they do not really have empirical estimates of multipliers that can be used to address this issue. What they have is an empirically calibrated Keynesian model. The structure of the model, which is largely imposed a priori based on conventional Keynesian theory, pretty much ensures the conclusion for the question at hand.
The White House view that government spending is a potent way to get out of a recession is, in essence, a bet on a theory. The theory might be right, but it is certainly one about which many economists have doubts.
Addendum: Oddly, I could not find these talking points at the CEA website. If the new CEA is going to take public positions like this, I would recommend using the official CEA website rather than Brad's blog as the means of distribution. The CEA website should also post a notice about CEA internships, as we had during my tenure as CEA chair, so students can find out how to apply. Right now, the CEA website is uninformative in the extreme.