Sunday, December 13, 2009

Mankiw on tax cuts versus spending

Here is Greg's column for today's New York Times.

It is interesting that Greg assumes the "success" of the stimulus package from earlier this year based essentially on a before-after comparison. My sense is that back in the day when the federal government was small, recessions ended without any stimulus packages, which suggests that before-after comparisons are problematic in this context. At the same time, some stimulus was likely necessary if only because a lot of market actors believed that one was needed. My guess is that the dose was much larger than required to meet that psychological need.

Neglected in Greg's column is the fact that the policy in question is not tax cuts per se but rather current tax cuts plus either tax increases or spending cuts in the future. The same point applies to those arguing for a second stimulus; they should always and everywhere be mentioning the second part of the policy, which is future spending cuts or tax increases.

Thought question for the day: compare and contrast climate science and macroeconomics.

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