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Tag Archives: Fiscal Policy

The lessons of Abenomics

With the recent resignation of Shinzo Abe, there have been a number of articles analyzing the record of Abenomics. There seems to be pretty general agreement on two points: 1. Japan’s economy improved after Abe took office at the beginning of 2013. Deflation came to an end, nominal GDP began rising, the public debt was brought under control, and unemployment fell to just over 2%. 2. The policy was not completely successful. Most notably, inflation continued to run...

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What do models tell us?

Josh Hendrickson has a new post that defends the use of models that might in some respects be viewed as “unrealistic”. I agree with his general point about models, and also his specific defense of models that assume perfect competition. But I have a few reservations about some of his examples: Ricardian Equivalence holds that governments should be indifferent between generating revenue from taxes or new debt issuances. This is a benchmark. The Modigliani-Miller...

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One Thing Rationally Ignorant Voters Don’t Know

A Twitter follower of mine just praised president Trump for saving money by donating his salary back to government departments: “He takes a ZERO salary from the american people. How much did americans paid for Obama, Biden, Pelosi, Schumer, etc?” Is this a significant saving for “the American people,” that is, American taxpayers? To check that, the voter must do some simple calculations. But even among those voters who can easily find the data sources and do the...

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Good News from Georgia

Start with the state’s economy, which had a relatively low jobless rate of 7.6% in July. Construction was never shut down, and schools in much of the state are opening for classroom instruction. The state expected a budget shortfall of $1 billion for the year but the actual deficit was $210 million. Mr. Kemp says sales tax revenue is rebounding and the state hasn’t exhausted its $700 million reserve fund. This is from a Wall Street Journal editorial titled “Georgia’s...

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What if the economy does not tank in August?

In late July, there were increasingly frantic claims in the media that failure to enact another massive fiscal package would hurt the economy. I’ve pointed out that disposable income growth in 2020 has been astounding, and argued that a lack of fiscal stimulus is not the problem. So what will people say if the economy does not tank in August? One prediction I can make with near 100% certainty is that a continued recovery in August would not be viewed as evidence...

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Consumption is not a part of GDP

I used to teach my students that consumption was roughly 2/3rds of GDP. Actually, consumption is not a part of GDP. Consider this analogy. You have an annual income of $100,000.  You might say: 1. Income = wages + capital income You might also say: 2. Income = consumption + saving + taxes And you can make the second equation more complex by breaking consumption down into spending on clothes, haircuts, restaurant meals, etc. It makes sense to say wages and capital...

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Will Government be Permanently Larger After the Pandemic Ends?

In his 1987 book Crisis and Leviathan, economic historian Robert Higgs argued that in the 20th century, the U.S. federal government grew mainly as a result of three crises: World War I, the Great Depression, and World War II. During those crises, the feds raised taxes, introduced more spending programs, and took on more regulatory power. While much of the added government power fell after each of the three crises ended, it never fell back to where it was before the...

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Wasted ammunition?

The second quarter of this year saw what is probably the biggest fiscal stimulus in American history, in terms of increase in the budget deficit. And today we see the results: nominal GDP fell by 34.3% at an annual rate. That means the fiscal stimulus prevented a much bigger fall in GDP—right? Well, that might be true, but how would we know? We have models, but these models certainly don’t predict that NGDP would fall at a 34.3% rate in a quarter where disposable...

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The European Union, Italy writ large

It has been called Europe’s “Hamiltonian moment.” It’s true that for the first time the EU has seen a common issuance of debt. As the Wall Street Journal summarizes: On Tuesday European Union leaders agreed to a recovery plan funded by the bloc’s first major issuance of common debt, and some are calling it a historic moment for the Continent’s political and fiscal integration. This is a significant development, but don’t hold your breath for a United States of...

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Is stimulus costly?

With the seemingly endless stimulus now coming out of Washington, it’s time to revisit the question of whether deficits matter. In recent weeks, I’ve seen lots of pundits say that government spending is virtually costless, as interest rates are close to zero. There are two flaws with this argument. Before getting into these flaws, let me acknowledge than many concerns regarding budget deficits are overstated. These big deficits are not likely to lead to high...

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