A Tale of Two Multipliers

CRDaily

Dr. Greg Mankiw, a self-described Keynesian and author of one of the most popular textbooks on Intermediate Economics, questioned the prevailing dogma that government spending is the most effective way to moderate the effects of a recession or even lead us down the path to prosperity in a blogpost in December of last year.  He cites research done by Christina Romer (currently President Obama’s Chair of the Council of Economic Advisors) and David Romer that “a dollar of tax cuts raises GDP by about three dollars.”  Earlier, he cites research done by Bob Hall, Susan Woodward, and Valerie Ramey that give a figure of either a multiplier of one or 1.4.  (Currently, Christina Romer is claiming the Obama Administration’s stimulus package will have a multiplier of 1.5, which is under heavy criticism by some economists as being baseless.)

What does he conclude? He advises the Obama Administration: “Do not be intellectually bound by the textbook Keynesian model.”  Tax cuts are more effective.

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