Obamanomics: Stimuli

As the new stimulus package is debated, you will hear each side talk with certainty about how tax cuts or government spending are better fiscal policies to stimulate the economy. In fact, each side will claim that the research shows that one is better than the other.

In introductory macroeconomics classes you are taught simple supply and demand equations, with tax cuts or government spending affecting overall economic activity. Depending on whether your teacher is conservative (like my high school econ teacher) or liberal (like my college econ professors), you will see multiplier affects that show tax cuts or government spending having a greater impact (respectively). In those classes, the multiplier effect is given to you by the teacher. This is why for a couple short years after high school, I believed that supply-side was the better policy.

The truth however is that what research there is shows wide variation in results. Some research does show a greater multiplier effect for tax cuts than government spending, while others show the reverse. (This Freakonomics article talks about one reason why the research is so unclear - that not as much fiscal policy research is done as monetary policy research.) In fact, a quote from an essay Christina Romer (Obama's selection to head his Council of Economic Advisors) wrote (taken from a David Brooks column) suggests that in surveys of past recessions, fiscal policy seemed to have little effect in ending the recessions.

So what are we to make of all this uncertainty? One, fiscal stimuli are more of a political tool than an economic one. They show that the government is working to make things better (even if it is somewhat cosmetic). Obama, by including tax cuts and government spending, is hoping to please people on both sides without proclaiming that one works better than the other. Two, the stimuli should at least go to things that we need. And this is the best part about Obama's stimulus package. If it is used to improve our electricity grid - a necessity if we are to actually try to change our energy supply - to improve our roads and public transportation, and to rehab our schools and public housing, it will be money spent that can both create some temporary jobs until the recession is over but also accomplish tasks that have for too long been put off.

It may not help end the recession, but it should make the transition easier while making us stronger for when it ends.