Here is Christina Romers’ (Obama economic advisor in the early years of his White House) take on whether this Administration had used too much of the stimulus: “Now, it would take another bold move—probably substantially larger than the $450 billion program President Obama has proposed—to really create a lot of jobs. But the evidence says it would work.” So much for giving up. A true Keynesian, say you? Listen to her: “When I was in the White House, I used to bristle when people would say I was a Keynesian economist. They acted as if I believed that fiscal stimulus mattered because of some theoretical book written in 1936, or because of what I was taught in graduate school. I used to say that I am not a Keynesian economist, I am an empirical economist. I believe what I do because of the empirical evidence.”
She then dwells as to whether tax rebates work better than public spending increases: “one of the questions we still don’t have a good answer for is which fiscal policy tool, tax changes or spending changes, is more effective. Basic accounting predicts spending increases should have a larger impact. Some of a tax cut will likely be saved, whereas all of a spending increase gets into the system.” Indeed, she mentions the Making Work Pay tax credit, which gave a typical family about $800 extra dollars in both 2009 and 2010: “Claudia Sahm and her coauthors worked with the Michigan Survey of Consumer Sentiment to ask respondents if they knew about the tax cut and if they planned to spend it. They find that as of July 2009, a majority of respondents said that their tax withholding had not gone down or they didn’t know if it had been reduced. They also find that only 13% of respondents planned to spend their tax cut. Most thought they would save it or use it to pay down debt. These results could suggest that the Making Work Pay tax credit was less effective at raising spending than other portions of the Recovery Act.”
But tomorrow – bear with me I am waited by a scrumptious Lebanese dinner, sorry guys! – we will discuss of matters that are even more life threatening for our economies according to Prof. Romer.