Economics 302 Sec 001 Intermediate Macroeconomic Theory and Policy Spring 2011 1 31 2011 2 7 2011 revised 2 7 2011 Instructor Prof Menzie Chinn UW Madison Outline Sources of analysis Current events Stimulus package ARRA B d t implications Budget i li ti off fifiscall 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 off 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 demand output output 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 textbook Estimates of the Impact of ARRA Source CEA Fifth Quarterly Report on the Economic Impact of ARRA Nov 18 2010 http www whitehouse gov sites default files cea 5th arra report pdf How Did They Estimate This Effect Use the multiplier model we have learned Figure Fi outt how h much h ttax payments t have h been b reduced how much transfers have increased Figure Fi outt how h much h governmentt spending di on goods and services Apply multipliers multipliers then add up effects effects compare to GDP Annualize to get growth rates Caveat Have to account for time dimension impact takes time Quantities Cumulative Source CEA Fifth Quarterly Report on the Economic Impact of ARRA Nov 18 2010 http www whitehouse gov sites default files cea 5th arra report pdf Apply Multipliers for 09Q2 IMPACT MULTIPLIERS within the quarter Tax cuts 28 4 bn 0 AMT relief 7 0 bn 0 Bus Tax incentives 10 9 bn 0 State fiscal relief 28 28 2 2 bn 0 5 05 Aid to directly impacted 9 8 bn 1 Govt investment outlays 7 4 bn 1 28 4 0 7 2 0 10 9 0 28 2 0 5 9 8 1 7 4 1 31 3 bn Deflate calculate q q impact Deflate GDP deflator in 2009Q2 109 109 555 555 110 31 3 bn 1 10 28 57 Ch 2005 09Q2 reall GDP SAAR SAAR 12810 45 28 57 12781 88 12810 45 28 57 12781 88 09Q2 real GDP 12781 88 4 3195 47 Impact 2009Q2 28 57 3195 47 0 00894 Annualize impact p 1 00894 4 1 0362 Impact on growth 1 0362 1 100 3 6 ppts q q q q annualized Comparisons p Complications p Impact of 3 3 6 6 ppts vs vs CEA 2 2 8 8 ppts ppts Impact vs dynamic multipliers In I our math th we assume everything thi happens with a period In reality impact is different from cumulative long run In 2009Q3 some of the tax cuts in 2009Q2 will have an impact p how much 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 BuS T G T t 0 t1Y BuS 0 t 0 t1Y GO 0 BuS t 0 t1 Y GO Y0 0 Y Tax Increase cont d 0 c0 c1t0 b0 GO0 c0 c1 t0 b0 GO here c1 t0 Y c1 t0 BuS t0 t1 Y GO BuS B S t0 t1 c1 t0 BuS B BuSS t0 1 c1t1 1 c1t1 1 t0 Balanced Budget g Multiplier p Suppose one needs to keep budget balanced Assume t1 0 1 Y0 c 0 c1 t 0 b0 GO 0 1 c1 1 Y c 0 c1 t 0 b0 GO 1 c1 Y c1 t 0 GO but t 0 GO 1 Y c1 GO GO 1 c1 1 Y GO 1 c1 1 1 c1 Full Employment p y Budget g Balance Budget Balance BuSS T G B T t0 t1Y BuS t0 t1Y GO0 F ll Emplo ment B Full Employment Budget dget Balance BuS n Tn G Tn t0 t1Yn BuS n t0 t1Yn GO0 Full Employment and Actual BuS 04 04 02 00 Cyclically adjusted y y j budget balance GDP 02 04 Budget balance GDP 06 08 10 10 1980 1985 1990 1995 2000 2005 Source CBO The Effects of Automatic Stabilizers on the Federal Budget May 2010 2010
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