Kevin "Dow 36000" Hassett's
The biggest Keynesian stimulus in U.S. history was a bust.... [...] A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn't, the study found...
Drives the mild-mannered Menzie Chinn into shrill unholy madness of a most desperate sort--perhaps because the moon is full. Menzie is, of course, 100% correct:
Chinn: I wish Dr. Hassett had quoted additional parts of the paper because a lot of subtleties were omitted in his "summary".... I'll quote....
Fiscal policy is Keynesian during recessions in closed economies, but the fiscal multiplier is quite small (i.e., it is unlikely to exceed unity).... [...] However, these conclusions do not preclude the possibility that, where the circumstances are right, fiscal expansions can be an effective response to a recession. The right circumstances would feature some or all of: excess capacity; a closed economy or an open economy with a fixed exchange rate; big government; expenditure-based fiscal policy; and an accompanying monetary expansion...
Gee, well, I'd say there's slack in the U.S. economy. [1] I'd also conjecture that the US economy is pretty closed relative to the majority of other observations in the study. I think I heard there was an expenditure (as opposed to tax reduction) component in the ARRA. [2] And finally, I believe I have heard that current monetary policy is quite expansionary. [3] Apparently, Dr. Hassett was unaware that any of these conditions applied to the United States in 2009-10.... I do wonder why Dr. Hassett had to go back to 2002 to find a study (well, actually, an out-of-context quote from a specific study). In the intervening time, the IMF has conducted many large scale, cross country analyses... a number of surveys of the size of multipliers have been conducted and published.... [I]n this case, I think I will forego Dr. Hassett's assessment, and put my faith in the assessments from private sector economists who do not have an ideological axe to grind. Below is Deutsche Bank's recent assessment of the impact of various fiscal stimulus measures on the level of GDP...
