Tag Archives: Keynes

Econ Rap – Keyenes vs. Hayek

It’s all over the place but I figured I had to post it because, well…, it’s good!

Keynesian Multiplier Effect: Does Stimulus Work?

A working paper from Robert  Barro and  Charles Redlick try to show that  stimulus is ineffective in jump starting GDP growth since “the explanation for much of the positive association between non-defense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.”

I don’t think that either of the world wars or the modern recessions (including the stagflation era) are comparable, making the overall assessment that although the correlation for government spending and GDP growth is lagged, governmental spending wasn’t part of the causality.  Economic demand is dynamic, and the behaviors of which are certainly different since the wars and the modern economic era.  I would certainly think that the multiplier has to be different depending on the era’s structure of the economy which most likely means a more indepth look at the system of equations evaluation of the input-ouput and how the government stands in the model.  Comparitively, I think the multipliers would show no differences, which is why they weren’t able to find evidence to the contrary.

I will definitely agree with the marginal tax cuts being a tool for economic growth (the evidence is not new) however I think that its application now isn’t relevant.  Remember the laffer curve? Marginal tax rates were stifling pre-Reagan era and now we are at the precipice of the curve.  I think we have found, give or take, the most optimal tax rates for an industrialized economy.