Mark Thoma (Economist´s View) :
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Multipliers and the Role of Government : ...Of course, it's also possible to keep the government the same size by choosing one tool and sticking with it, T down in recession, T up in recoveries, or, alternatively, G up in recessions, G down in recoveries (and more creative combinations of changes in G and changes in T will work too), so the size of government is a policy choice.
So, for many people, I don't think the real issue is about whether government spending multipliers are bigger or smaller than tax multipliers, as I said above I think most economists and the public more generally believe both types of policies can work (if they are implemented correctly), the differences aren't that large, and nobody knows for sure which is better. The real issue is about the role of government in the economy, some think it is too big and they support tax cuts to cure recessions, others see (correctly in my view) important unmet needs for infrastructure, health care reform, environmental initiatives, and so on, and they see government spending as the key to solving both the short-run and longer run issues......
Usual arguments against this idea are government discretion and non transparency. May be I am wrong, but it seems to me that a similar policy can be obtained with a fiscal policy rule based on the structural balance concept, dealing at the same time with the above two critics. I have been suggesting this rule for the Mexican case (like in Chile). In one of my papers The Structural Budget Balance: a preliminary estimation for Mexico, Applied Economics I wrote:
“The structural balance, in particular, has several key characteristics that make it very attractive for Latin American economies in general and the Mexican in particular. It helps the government detect if a change in fiscal policy is needed in order to achieve the medium and longer term objectives: on one hand maintain fiscal sustainability and, on the other, stabilizing the economy. At the same time this indicator could help maintain the trust of international organizations, capital markets and both domestic and foreign investors. ..… A second great virtue of this indicator…..is that it can be used to establish a rule limiting the structural budget to GDP ratio, and therefore, work as an automatic stabilizer of the economy. To comply with this rule, during recessions the government must have a more expansionary fiscal policy that stimulates aggregate demand and, during expansions, a more restrictive one that contracts aggregate demand….”
Multipliers and the Role of Government : ...Of course, it's also possible to keep the government the same size by choosing one tool and sticking with it, T down in recession, T up in recoveries, or, alternatively, G up in recessions, G down in recoveries (and more creative combinations of changes in G and changes in T will work too), so the size of government is a policy choice.
So, for many people, I don't think the real issue is about whether government spending multipliers are bigger or smaller than tax multipliers, as I said above I think most economists and the public more generally believe both types of policies can work (if they are implemented correctly), the differences aren't that large, and nobody knows for sure which is better. The real issue is about the role of government in the economy, some think it is too big and they support tax cuts to cure recessions, others see (correctly in my view) important unmet needs for infrastructure, health care reform, environmental initiatives, and so on, and they see government spending as the key to solving both the short-run and longer run issues......
Usual arguments against this idea are government discretion and non transparency. May be I am wrong, but it seems to me that a similar policy can be obtained with a fiscal policy rule based on the structural balance concept, dealing at the same time with the above two critics. I have been suggesting this rule for the Mexican case (like in Chile). In one of my papers The Structural Budget Balance: a preliminary estimation for Mexico, Applied Economics I wrote:
“The structural balance, in particular, has several key characteristics that make it very attractive for Latin American economies in general and the Mexican in particular. It helps the government detect if a change in fiscal policy is needed in order to achieve the medium and longer term objectives: on one hand maintain fiscal sustainability and, on the other, stabilizing the economy. At the same time this indicator could help maintain the trust of international organizations, capital markets and both domestic and foreign investors. ..… A second great virtue of this indicator…..is that it can be used to establish a rule limiting the structural budget to GDP ratio, and therefore, work as an automatic stabilizer of the economy. To comply with this rule, during recessions the government must have a more expansionary fiscal policy that stimulates aggregate demand and, during expansions, a more restrictive one that contracts aggregate demand….”
