Obama's multipliers

Like most others I take it for granted that the multiplier effect of tax cuts is weaker than that of (well-designed) increases in public spending. But the question leaves room for doubt and has not been discussed as throroughly as it should have been.

Greg Mankiw has drawn attention to an oddity in the Obama team's thinking on this. Its analysis of tax and spending multipliers, by Christina Romer (the new CEA chairman) and Jared Bernstein, comes up with numbers that reflect the consensus--but these are far less favourable to tax cuts than another recent paper by Christina Romer (with David Romer) would suggest. Much of the debate about the stimulus turns on these multipliers. Unless I've missed it, there's no reference to the discrepancy in the Romer/Bernstein paper. Also unless I've missed it, she has made no subsequent comment on the matter. It is surely worth a word of explanation from the author of the two studies.

One response suggested by others has been to say that the Romers' paper looked at "exogenous" tax changes, implying that their findings cannot be applied to a countercyclical stimulus. Greg also explains why this is an error. Looking at exogenous tax changes is a statistical technique for identifying their effect: it does not render the Romer and Romer estimates irrelevant for present purposes.

Obama's team has apparently dropped its proposed $3,000 job-creation tax break from its plan, since many Democrats found it doubly objectionable: it was a tax cut (bad) and it helped businesses (also bad). Perhaps the team should have called it a "marginal jobs subsidy" (which is what it was).  That sounds more liberal.

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