UNIVERSITY OF CALIFORNIA Economics 134 DEPARTMENT OF ECONOMICS Spring 2018 Professor Christina Romer LECTURE 16 FISCAL POLICY IN THE GREAT RECESSION MARCH 19, 2018 I. OVERVIEW II. ECONOMIC STIMULUS ACT OF 2008 A. Why passed so quickly? B. Expected effects C. Taylor s Evidence D. Parker, Souleles, Johnson, and McClelland E. Could more aggressive stimulus have prevented the crisis? III. AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 A. Background B. Practical issues involved in designing a fiscal stimulus C. Cross-country evidence of effects D. Evidence from a natural experiment E. Evaluation of the Recovery Act IV. FISCAL DEVELOPMENTS AFTER 2010 A. What was happening in the economy? B. What was done and why wasn t there another stimulus? C. Fiscal contraction after 2012
Economics 134 Spring 2018 Christina Romer David Romer LECTURE 16 Fiscal Policy in the Great Recession March 19, 2018
I. OVERVIEW OF FISCAL POLICY IN THE GREAT RECESSION
Fiscal Policy in the Great Recession What was done and why? How well did it work? Discuss history, practical considerations, and more empirical evidence on the effects of fiscal policy.
Fiscal Policy Actions Economic Stimulus Act of 2008 American Recovery and Reinvestment Act of 2009 Various extensions of certain pieces of the ARRA Contractionary policy after 2012
High-Employment Budget Surplus 4 2 0 Percent of GDP -2-4 -6-8 -10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
II. ECONOMIC STIMULUS ACT OF 2008
Economic Stimulus Act of 2008 February 2008 $152 billion Tax rebate of up to $1200 per family Business investment tax incentives
Case-Shiller House Price Index 250 April 2006 200 150 100 50 0 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Index, January 2000=100
Change in Employment
Fiscal Policy Multiplier Multiplier shows how much real GDP rises in response to $1 of stimulus. For example, $1 of public investment raises GDP by about $1.50.
What would we expect the impact to be?
2001 tax rebate was part of the Economic Growth and Tax Relief Reconciliation Act of 2001, passed 6/7/01. 2008 tax rebate was part of the Economic Stimulus Act of 2008, passed 2/13/08.
Taylor s Key Graph
Taylor s Regression Evidence
Potential Problems with Taylor s Regression Specification Variables included Omitted variable bias Outliers
Disposable Income and House Prices 2007-2008 11600 230.00 11400 225.00 Disposable Income 11200 11000 10800 10600 10400 10200 10000 House Price Index Disposable Personal Income 220.00 215.00 210.00 205.00 200.00 195.00 9800 190.00 9600 185.00 Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 Jan 2008 Feb 2008 Mar 2008 Apr 2008 May 2008 Jun 2008 Jul 2008 Aug 2008 Sep 2008 Oct 2008 Nov 2008 Dec 2008 FHFA House Price Index
Stock Prices, 1993-2010 8.0 7.5 August 2000 October 2007 7.0 6.5 6.0 5.5 Dec 1993 Sep 1994 Jun 1995 Mar 1996 Dec 1996 Sep 1997 Jun 1998 Mar 1999 Dec 1999 Sep 2000 Jun 2001 Mar 2002 Dec 2002 Sep 2003 Jun 2004 Mar 2005 Dec 2005 Sep 2006 Jun 2007 Mar 2008 Dec 2008 Sep 2009 Jun 2010
Real Personal Consumption Expenditures 2000-2002 8100 8000 7900 August 2001 7800 7700 7600 7500 7400 2000-Jul 2000-Aug 2000-Sep 2000-Oct 2000-Nov 2000-Dec 2001-Jan 2001-Feb 2001-Mar 2001-Apr 2001-May 2001-Jun 2001-Jul 2001-Aug 2001-Sep 2001-Oct 2001-Nov 2001-Dec 2002-Jan 2002-Feb 2002-Mar 2002-Apr 2002-May 2002-Jun September 11 th is a large outlier that may be obscuring the effect of the rebate.
Parker, Souleles, Johnson, and McClelland Empirical Strategy When households received their 2008 tax rebate was random. Why is this important? Question was added to the Consumer Expenditure Survey about whether the household got a stimulus payment that month (and if so, how much). Compare spending of households that did and did not get a stimulus payment to see if the payment affected spending.
PSJM Regression Specification
Contemporaneous Response of Expenditures to ESP Receipt among All Households
Evaluation of PSJM Very nicely done; good identification. Not enough explanation of the data and how they use the timing. Some of the material could safely have been put in an online appendix. Only shows the first-round effect of the rebate; it is not the full multiplier.
The Longer-Run Response of Expenditures to ESP Receipt
The Propensity to Spend across Different Households
The Propensity to Spend on Subcategories of Expenditures
Broader Implications of PSJM Fiscal stimulus affects behavior in the expected direction. Consumer behavior is not fully explained by the permanent income hypothesis. Consumers respond to temporary changes in income.
Could more aggressive fiscal stimulus in early 2008 have prevented the crisis?
III. AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009
Percent Change in Real GDP
Practical Issues in Designing a Fiscal Stimulus How big does it need to be? Needed size is not independent of composition. Timing? What else is the government trying to accomplish with the stimulus?
American Recovery and Reinvestment Act of 2009 February 2009 $787 billion (5½ % of GDP) Tax credit of up to $800 per family Business investment tax incentives Aid to state and local governments Aid to unemployed Government spending on infrastructure and other investments
Estimates from Cross-Country Evidence CEA, First Quarterly Report, July 2010
CEA, First Quarterly Report, July 2010
Strengths and Weaknesses of this Approach: Doesn t use history; it uses the cross-section variation. Clever way of controlling for the fact that countries have very different normal rates of growth. May still have omitted variable bias.
Estimates from a Natural Experiment CEA, First Quarterly Report, July 2010
Estimates from a Natural Experiment CEA, First Quarterly Report, July 2010
Employment growth is higher in states getting more formula-based Medicaid funding. Source: Chodorow-Reich, Feiveson, Liscow, and Woolston (Forthcoming)
Strengths and Weaknesses of this Approach: Very clever experiment. Focuses on a type of spending we had little evidence on before. Worry about chance correlation. Focuses on effects at the state level, but our interest is in national effects. Are the effects too large to be believable?
Estimates from a Natural Experiment Source: Chodorow-Reich, Feiveson, Liscow, and Woolston (2013).
What is the bottom line on the design and effectiveness of the Recovery Act?
IV. FISCAL DEVELOPMENTS AFTER 2010
Change in Employment
High-Employment Budget Surplus 4 2 0 Percent of GDP -2-4 -6-8 -10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Subsequent Stimulus Measures Various measures related to Unemployment Insurance (UI): Continued extended unemployment insurance Payroll tax cut: Reduction in Social Security tax rate of 2 percentage points in 2011 and 2012 Various other measures: Extra state fiscal relief.
Why No Large Second (or Third) Stimulus?
Moves to Fiscal Contraction after 2012 End of Social Security tax cut Winding down of Recovery Act Tax increases related to the Affordable Care Act Tax increases passed as part of the fiscal cliff agreement at the beginning of 2013 Spending cuts