Economics 302 (Sec (Sec.

001) Intermediate Macroeconomic Th Theory and dP Policy li
(Spring 2012)
(corrected 2.7.2012)

Prof. Menzie Chinn
Lecture 5 Wednesday February 6 Wednesday, 6, 2012

Outline • • • • Sources of analysis Current events: Stimulus package (ARRA) B d t implications Budget i li ti of f fi fiscal l policy li Full employment budget balance .

Non-partisan p and Partisan Analyses y • The CBO is the Congress’s nonpartisan economic/budget i /b d t analytical l ti l arm • Other agencies include General A Accountability t bilit Office Offi (GAO) and d Congressional Research Service (CRS) • Mirrors Mi th the E Executive ti B Branch’s h’ Offi Office of f Management and Budget (OMB) and Council of Economic Advisers (CEA) in White House • Always think about who’s who s writing what you read .

Did the Stimulus “Work” Work • What does “work” work mean? • We’ll interpret “work” to mean increase aggregate demand. employment • One has to be careful about over what period i d one talks t lk about b t“ “working” ki ” • Uncertainty pervades all these analyses (real world vs. demand output output. textbook) .

18. 2010) http://www.Estimates of the Impact of ARRA Source: CEA.gov/sites/default/files/cea_5th_arra_report.pdf . Fifth Quarterly Report on the Economic Impact of ARRA (Nov.whitehouse.

compare to GDP • Annualize to get growth rates • Caveat: Have to account for time dimension (impact takes time) . how much transfers have increased • Figure Fi out t how h much h government t spending di on goods and services • Apply multipliers.How Did They Estimate This Effect? • Use the multiplier model we have learned • Figure Fi out t how h much ht tax payments t have h been b reduced. multipliers then add up effects effects.

whitehouse. 18. 2010) http://www. Fifth Quarterly Report on the Economic Impact of ARRA (Nov.Quantities (Cumulative) ( ) Source: CEA.gov/sites/default/files/cea_5th_arra_report.pdf .

4 bn × 0 • AMT relief: $ $7.2 2 bn × 0.4 bn × 1 (28.4 ×0)+(7.5 05 • Aid to directly impacted: $9.8×1)+(7.2×0.9×0)+(28.5)+(9.2×0)+(10.4×1) ) ( ) ( ) ( ) ( ) ( ) =( = $31.Apply Multipliers (for ‘09Q2) IMPACT MULTIPLIERS (within the quarter) • Tax cuts: $28.8 bn × 1 • Govt.3 bn . Tax incentives: $10.9 bn × 0 • State fiscal relief: $28 $28.0 bn × 0 • Bus. investment outlays: $7.

57 Ch.0362 Impact on growth: (1.Deflate calculate q/q impact Deflate.47 Impact 2009Q2: 28.00894) )4 = 1. annualized) ) .00894 Annualize impact: p ( (1.10 = 28.57/3195.47 = 0.555 555 ≈ 110 $31.3 bn/1.45-28.88/4 = 3195.6 ppts (q/q.2005$ ‘09Q2 real l GDP SAAR SAAR: 12810.88 12810 45 28 57 12781 88 ‘09Q2 real GDP: 12781.57=12781. • • • • • • • GDP deflator in 2009Q2: 109 109. (q q.0362-1)×100%= 3.

p . impact is different from cumulative long run • In 2009Q3. ppts • Impact vs. Complications p • Impact of 3 3. dynamic multipliers • In I our math. some of the tax cuts in 2009Q2 will have an impact: p how much? . vs CEA 2 2.Comparisons.6 6 ppts vs.8 8 ppts. th we assume everything thi happens with “a period” • In reality.

Budget udge Implications p ca o s o of Fiscal sca Policy o cy • What happens if (lump sum) taxes are increased? • Does the budget surplus increase dollarfor-dollar with tax increases? • Can the budget balance improve with tax cuts? .

A (Lump Sum) Tax Increase set _ m1 = 0 BuS ≡ T − G T = t 0 + t1Y BuS = (t 0 + t1Y ) − GO 0 ΔBuS = Δt 0 + t1ΔY − ΔGO Y0 = γ Λ 0 ΔY = γ ΔΛ .

Tax Increase (cont (cont’d) d) Λ 0 ≡ (c0 − c1t0 + b0 + GO0 + x0 − m0 ) ΔΛ = (Δc0 − c1Δt0 + Δb0 + ΔGO + Δx0 − m0 ) h here ΔΛ = −c1Δt0 ⇒ ΔY = γ (−c1Δt0 ) ΔBuS = Δt0 + t1ΔY − ΔGO ΔBuS B S = Δt0 + t1 (−γ c1Δt0 ) ΔBuS ΔBuS = Δt0 (1 − γ c1t1 ) ⇒ = (1 − γ c1t1 ) < 1 Δt0 .

• Assume A t1 = 0. γ = 1 /(1 − c1 ) Y0 = γ [c0 − c1 (t0 ) + b0 + GOo + x0 − m0 ] ΔY = γ [Δc0 − c1 (Δt0 ) + Δb0 + ΔGO + Δx0 − Δm0 ] ΔY = γ [−c1 (Δt0 ) + ΔGO] ==> ΔY = γ [ −c1ΔGO + ΔGO ] ΔY = γ [1 − c1 ]ΔGO Δt0 = ΔGO ΔY / ΔGO = γ [1 − c1 ] = 1 for balanced budget multiplier .Balanced Budget g Multiplier p • Suppose one needs to keep budget balanced. m1 = 0.

Full Employment p y Budget g Balance Budget Balance B S ≡T −G BuS T = t0 + t1Y BuS = (t0 + t1Y ) − GO0 Full-Employment Budget Balance BuS n ≡ Tn − G Tn = t0 + t1Yn BuS n = (t0 + t1Yn ) − GO0 .

.04 .Full Employment and Actual BuS . April 2011.04 -.02 02 .00 -.08 -.10 70 75 80 85 90 95 00 Federal budget balance Cyclically adjusted BuS/GDP BuS/GDP 05 10 Cyclically adjusted BuS to Potential GDP Source: CBO.02 -.06 -. The Effects of Automatic Stabilizers on the Federal Budget.