A Second Hand Conjecture

Greg Mankiw has a post today look at the real world studies of spending and tax multipliers. Keynesians might be surprised to learn that the tax multiplier appears to be much larger than the spending one. Studies put the Government spending multiplier at or around 1-1.4 while other studies have the tax cut multiplier at or around 3. This means that for ever dollar cut in taxes, we get a 3 dollar increase in GDP.

He ends with some good advise to President Elect Obama:

My advice to Team Obama: Do not be intellectually bound by the textbook Keynesian model. Be prepared to recognize that the world is vastly more complicated than the one we describe in ec 10. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.

I have a feeling we’re definitely going to see a spending increase though, so I’m not sure whether to hope for a tax cut or not.

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If you support the Paulson bailout plan that is. The New York Times has coverage.

The Senate proposal would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power.

The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms.

In a delicious bit of soon to be civics geek trivia, the Senate worked around the Constitutional restrictions against voting on tax legislation not already considered by the House by attaching the bailout plan along with a tax extender bill to the Mental Health & Addiction Act (which passed the House several months ago).

You gotta love our government.

In addition to the Paulson plan details, various tax cuts and dealing with the AMT it includes a very helpful proposal, increasing government insurance on bank deposits from 100k to 250k.

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