The Romer View of Tax and Spending Multipliers Revisited

My statement:

There appears to be an error in N. Gregory Mankiw's "Economic View" column of January 11, 2009. The error is the association of Christina Romer with the proposition that the tax multiplier--the effect on GDP of a tax cut--is twice the spending multiplier. The Romers' article does not distinguish between the two, referring only to the "substantial multiplier... due to the procyclical behavior of investment" (p. 37 of the working paper version, at http://tinyurl.com/dl20090111). David Romer in conversation two years ago characterized the paper to me as "hyper-Keynesian... suggesting very large multipliers..." The Romers believe in a tax multiplier no larger than the spending multiplier, and they certainly do not believe that a balanced-budget equivalent reduction in taxes and spending provide any Keynesian stimulus at all.

Mankiw's comparison of the 1.4 estimated spending multiplier from Valerie Ramey's study with the 3.0 estimated tax multiplier from the Romers' study is inappropriate. The two studies use very different methodologies. They are not comparable. For example, the Ramey study on the effects of government spending--while a superb contribution to the literature, and one that I have assigned to my graduate students--does not fully control for the tax increases that often accompany spending increases. Thus it is very likely to understate the effects of spending increases alone: her study assesses the impact of the Korean-War military spending increase without taking account of the fact that it was accompanied by a large tax increase.

What Romer and Romer's study (and their earlier work on monetary policy) shows is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for policy changes leads to underestimates of the effects of all types of stimulus. Because these issues of omitted variable bias are likely to be as strong for spending as for tax changes, the most reasonable interpretation of their paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe.

It is somewhat puzzling that Mankiw appears to believe that the Romers do think that tax multipliers are larger than spending multipliers, as they do not, and this is something that he could have very easily checked.

Comments

[Tomas]

Sweet!

[Tomas]

Great comment, good show.

When you think about it, it is a weird column that Mankiw has written. Without the error Prof. Delong points out, what is really there? Not much. The whole "counterintuitive argument against stimulus though not-taxcuts" falls flat without it. We are left with "conservative economist worried that democratic administration might try to pass democratic policies and might be able to do it because of the crisis". OH NOES! DOG BITES MAN! At least with democrats its economic policies that are associated with an economic crisis rather than looting of the coffers associated with national security crisis as with the republicans.

[howard]

actually, it's not puzzling at all prof: what's puzzling is why you continue to believe that greg mankiw deserves your intellectual respect.

on what basis do you cling to this notion? this is just typical mankiw swill: dishonest, tendentious, and insufferable.

i'm willing to believe that he was once a good economist, but those days are over, over a long time ago. he should be shunned, not treated as a peer and colleague who made an unfortunate proofreading error.

[Steady Eddie]

What howard said (gee, I seem to think that a lot...)

Brad, haven't your many well-honed jabs at Mankiw's basic honesty and credibility come to the point where they should be aggregated into a conclusion along the lines that Howard indicated (or at least, with the possible regret due the degradation of a former peer, a somewhat more euphemistic version thereof)?

[elliottg]

Another post where Brad treats Greg Mankiw as somehting other than a right wing hack and offers constructive criticism. Brad, do you not believe in Occam's Razor?

Posted by: elliottg | September 29, 2006 at 04:40 PM

[Ken Houghton]

We currently have to assume that these posts are for those who might be delusional enough to take Mankiw's posts at face value since he, sadly but apparently with malice aforethought, moved to being the Instapundit of Economics.

[RN]

I'm daily astonished anyone takes Mankiw seriously. He's a living joke. He doesn't even ATTEMPT to be honest.

I'm terribly embarrassed he managed to con a teaching position out of my alma mater.

[Dave]

At some point, someone needs to treat economics as a science, and not as a fancy way to tell lies to the uneducated.

The tax cut multiplier is different, depending on what the tax cut is. A tax cut on equipment investment, for example, should have a different effect than a tax cut on the salary of hedge fund managers. Similarly, infrastructure spending is different from law enforcement spending.

When an economist uses the term "multiplier", without discussing methodology, it is like a scientist saying that "radiation" counteracts the greenhouse effect.

[Tucker]

Interestingly Fivethirtyeight.com got into a scuffle with Mankiw over this. Mankiw defends himself, somewhat implicitly denigrating Silver for failing to understand the research methods, and Silver agrees with you and calls him intellectually dishonest. Are conservatives allowed to use whatever studies give them the highest multiplier for tax cuts?

[pinson]

Mankiw didn't really "defend" himself as much as he sniffily denigrated Sliver's effrontery for supposing he could play economics in the first place:

I usually don't respond to blogosphere commentary on my work because, after all, time is scarce. But this critique by Nate Silver is noteworthy because the error it makes is so fundamental. It offers a teachable moment.

In other words, here's yet another opportunity for me to display my contempt for empirical fact in service to my demonstrably misguided political views.

[sglover]

"At some point, someone needs to treat economics as a science, and not as a fancy way to tell lies to the uneducated."

Why? What else IS it?

Tell me how well the "science" of economics predicted our current difficulties. Not very, eh? So why should it be a surprise that a guy like Mankiw should have his exalted position? Hell, only now are economists (e.g., the host of this site) getting over their infatuation with "Maestro" Al.