Economics 302 (Sec. 001)Intermediate Macroeconomic Theory and Policy(Spring 2011)Theory and Policy (Spring 2011)1/31/2011 2/7/2011(revised 2/7/2011)Instructor: Prof. Menzie ChinnInstructor: Prof. Menzie ChinnUW MadisonOutlineOutline•Sources of analysisSources of analysis• Current events: Stimulus package (ARRA)B d t i li ti f fi l li•Budget implications of fiscal policy• Full employment budget balanceNon-partisan and Partisan Analysespy• The CBO is the Congress’s nonpartisan i/bd t lti leconomic/budget analytical arm• Other agencies include General A t bilit Offi (GAO) dAccountability Office (GAO) and Congressional Research Service (CRS)Mi th E ti B h’ Offi f•Mirrors the Executive Branch’s Office of Management and Budget (OMB) and Council of Economic Advisers (CEA) inCouncil of Economic Advisers (CEA) in White House•Always think about who’s writing what you•Always think about who s writing what you readDid the Stimulus“Work”Did the Stimulus Work•What does“work”mean?What does work mean?• We’ll interpret “work” to mean increase aggregate demand output employmentaggregate demand, output, employment• One has to be careful about over what id tlk b t“ ki ”period one talks about “working”• Uncertainty pervades all these analyses (real world vs. textbook)Estimates of the Impact of ARRASource: CEA, Fifth Quarterly Report on the Economic Impact of ARRA (Nov. 18, 2010)http://www.whitehouse.gov/sites/default/files/cea_5th_arra_report.pdfHow Did They Estimate This Effect?• Use the multiplier model we have learnedFi t h h t t h b•Figure out how much tax payments have been reduced, how much transfers have increasedFi t h h t di•Figure out how much government spending on goods and services•Apply multipliers then add up effects compare•Apply multipliers, then add up effects, compare to GDP•Annualize to get growth rates•Annualize to get growth rates• Caveat: Have to account for time dimension (impact takes time)(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.pdfApply 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 2bn×05•State fiscal relief: $28.2 bn×0.5• 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 bnDeflate calculate q/q impactDeflate, calculate q/q impact•GDP deflator in 2009Q2: 109 555≈110•GDP deflator in 2009Q2: 109.555 ≈ 110• $31.3 bn/1.10 = 28.57 Ch.2005$‘09Q2 l GDP SAAR12810 4528 5712781 88•‘09Q2 real GDP SAAR: 12810.45-28.57=12781.88• ‘09Q2 real GDP: 12781.88/4 = 3195.47• Impact 2009Q2: 28.57/3195.47 = 0.00894•Annualize impact: (1.00894)4 = 1.0362p( )• Impact on growth: (1.0362-1)×100%= 3.6 ppts(q/q, annualized)(q q, )Comparisons, Complicationsp,p•Impact of 3 6pptsvs CEA 2 8pptsImpact of 3.6 pptsvs. CEA 2.8 ppts.• Impact vs. dynamic multipliersIth thi•In our math, we assume everything 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: how much?pBudget Implications of Fiscal Policyudge p ca o s o sca o cy• What happens if (lump sum) taxes are increased?• Does the budget surplus increase dollar-for-dollar with tax increases?• Can the budget balance improve with tax cuts?cuts?A (Lump Sum) Tax IncreaseA (Lump Sum) Tax Increase−≡GTBuS+= YttT10−+= GOYttBuS0100)(Δ−Δ+Δ=Δ GOYttBuS10ΔΛΔΛ=γYY00ΔΛ=ΔγYTax Increase (cont’d)())(000100++−≡Λ GObtcc)(0010Δ+Δ+Δ−Δ=ΔΛhereGObtcc)(0101Δ−=Δ⇒Δ−=ΔΛ tcYtchereγ)(10ΔΔΔΔ−Δ+Δ=ΔtttBSGOYttBuS1)1()1()(0110ΔΔΔΔ−+Δ=ΔtBuSttBStcttBuSγ1)1()1(110110<−=Δ⇒−Δ=ΔtcttctBuSγγBalanced Budget Multipliergp• Suppose one needs to keep1needs to keep budget balanced.1][110001010GObtcccY ++Δ−−=balanced.• Assume t1=0][][110100101GOtcYGObtcccYΔ+Δ−=ΔΔ+Δ+Δ−Δ−=Δ][001GOtbutGOtcYΔ=ΔΔ+ΔΔ][1111GOGOccY Δ+Δ−−=Δ1]1[11/11=−−=ΔΔ ccGOYFull Employment Budget Balancepy gGTBSBudget Balance10YttTGTBuS+=−≡01010)( GOYttBuS −+=FllEmplo ment B dget BalanceGTBuSnn−≡Full-Employment Budget Balance10YttTnnnn+=010)( GOYttBuSnn−+=Full Employment and Actual BuS04.02.04Cyclically-adjusted.00yyjbudget balance/GDP-.04-.02Budget-.06Budgetbalance/GDP-.10-.08Source: CBO, The Effects of Automatic Stabilizers on the Federal Budget, May 2010..101980 1985 1990 1995 2000 2005
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