I agree with Matt Yglesias so often that sometimes it seems pointless for me to bother blogging. He’s even gotten the hang of employing St Louis Fed charts, which really cuts to my value-add.
So I enjoy these rare instances to put a bit of daylight between us.
Matt echoes Noah Smith and Paul Krugman’s criticism of John Taylor
Paul Krugman and Noah Smith both rightly critique the last sentence here. Per Smith, “Lucas, Sargent, etc. thought that government purchases wouldn’t raise GDP” which is the reverse of Taylor’s conclusion. ARRA didn’t boost GDP because a temporary boost in government purchases won’t boost GDP, and ARRA didn’t boost GDP because it didn’t lead to an increase in government purchases are incompatible positions. They’re just both criticisms of ARRA and therefore perhaps emotionally satisfying to people who dislike Barack Obama.
I actually think Taylor is making an important substantive point here. It’s that in practice fiscal stimulus doesn’t raise GDP because in practice fiscal stimulus amounts to giving money to people, who then save it – just as Lucas, Sargent etc, said they would.
Moreover, if you are using “old” models without rational expectations or Ricardian equivalence this shouldn’t happen. Matt’s basic model that if you give people more money, they will do more stuff with it should hold.
Admittedly, this is my basic model as well and Taylor’s evidence cuts against it.
If you had already accepted that its simply not possible to ramp up direct federal expenditures in a timely manner then this is an important critique. In practice fiscal stimulus means giving somebody money: tax payers, COBRA recipients, the unemployed, state and local governments, etc.
If all of these folks are simply going to save the money then fiscal stimulus doesn’t work.