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Evaluating Fiscal Policy Effectiveness in Oregon: Insights from the Economic Forum

On October 22, 2009, Mark Thoma from the University of Oregon discussed the effectiveness of fiscal policy, exploring its components: government spending and taxes. He examined how fiscal policy impacts the economy through multiplier effects, potential pitfalls like savings from tax cuts, and the timing of stimulus packages. Thoma also analyzed employment and GDP changes to assess if additional stimulus is necessary. Despite signs of improvement, he emphasized the potential for continued economic struggles and the pressing need for more targeted fiscal interventions for recovery.

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Evaluating Fiscal Policy Effectiveness in Oregon: Insights from the Economic Forum

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  1. Fiscal Policy Oregon Economic Forum October 22, 2009 Mark Thoma Department of Economics University of Oregon Has it worked? Is more needed?

  2. What is Fiscal Policy? • A text book definition would be something like: A plan for government spending and taxes designed to achieve some goal. • So there are two components, spending (the government buying goods and services) and taxes (net of transfers).

  3. How Does Fiscal Policy Work? • Multiplier effects • Government spending and tax multipliers can differ • Speed of impact • Size of impact • Effects on economic growth • Graphs of Disposable Income and Government Spending

  4. Disposable Personal Income1990:M1 – 2009:M8, Nominal First Stimulus Package Second Stimulus Package

  5. Disposable Personal Income1990:M1 – 2009:M8, Real First Stimulus Package Second Stimulus Package

  6. Federal Government Expenditures1990:Q1-2009:Q2 Second Stimulus Package

  7. Multiplier Estimates(Romer and Bernstein, “The Job Impact of the ARRA,” May 2009)

  8. What Can Go Wrong? • Tax Cuts Saved, Not Spent • Stimulus not large enough • Bad Timing • Private Activity Crowded Out • Deficit Not Repaid when Things Improve

  9. Has it worked? • To assess whether it has worked, need a baseline (what would have happened without policy) • What is the baseline? • We don’t know, it must be estimated • Estimates are model dependent • Evidence

  10. Real GDP1990:Q1 – 2009:Q2

  11. Monthly GDP Estimates (from Macro Advisers)

  12. Tax Rebates and Consumption

  13. Other Evidence? • Countries with larger stimulus packages grew faster in 2009Q2 • States that spent more lost fewer jobs • Estimated effects • Cash for Clunkers • Incentives to purchase new homes

  14. Cross-Country Evidence

  15. States that Spent More Had a Bigger Employment Change

  16. Estimated Effects of ARRA

  17. Is More Stimulus Needed? • Things are looking better, but a double dip or very slow return to trend for GDP is not out of the question. • The recovery of employment is likely to be even slower. • More stimulus, especially if it generates jobs quickly, would likely boost the recovery. • So yes, more is needed, but we needed it six months ago. Given lags, harder to justify now. • In any case, major policy change is unlikely.

  18. FRBSF Estimates of Recovery Trajectory

  19. Unemployment Lags Output How Much Higher? Delayed Peaks

  20. Unemployment Since 1990 Unemployment hasn’t turned the corner yet Delayed Peaks in 90-91 and 2001 recessions

  21. Long-Term Unemployment High Long-Term Unemployment

  22. Employment to Population Ratio Low Employment to Population Ratio

  23. Private Employment Employment is Falling

  24. Average Weekly Hours: Private Industry Average Hours are Falling

  25. Conclude • Some evidence that fiscal policy has worked • But too early to say anything conclusive • Things look better, but not out of the woods yet • Speed of recovery and, importantly, employment would likely improve with more stimulus • Politically unlikely

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