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Josh Bivens: Note to Fiscal Policymakers: Multipliers are Definitely Still Large: Noted

Josh Bivens: Note to Fiscal Policymakers: Multipliers are Definitely Still Large:

In a post on Wonkblog from yesterday morning, Dylan Matthews has an excellent interview with Michael Linden [of]… the Center for American Progress. It’s definitely worth reading--not least for Linden’s correct (and therefore deeply depressing) point that in terms of discretionary spending, “We’ve already essentially adopted the Ryan budget.”… Today’s output gap is much, much closer to where it was in 2009 than zero, and, even this current output gap may well understate how much slack actually exists, since CBO has been steadily marking down potential output for reasons that may reverse if the economy recovered…. Values of the multiplier really aren’t linear like that. If the multiplier on UI benefits in an economy with an output gap (a measure of economic slack) of 7 percent is 1.5 and the multiplier on these benefits in an economy with an output gap of zero is zero, this does not imply that the multiplier on these when the output gap is 3.5 percent is 0.75…. What makes today’s fiscal multipliers so high is the combination of a large output gap and the rock-solid expectation that there will be no countervailing pressure on fiscal stimulus (or contraction) coming from changed monetary policy. Right now the Fed has signaled clearly that it will not tighten in response to fiscal stimulus (indeed, Ben Bernanke is nearly begging fiscal policymakers to try to boost the economy), and  they are hugely constrained in how much it can make monetary policy more expansionary in response to fiscal contraction. So, multipliers can actually be quite high in economies with output gaps well below (say) 5 percent…. Nitpicky point to make? Yeah, but we have had policymakers looking for excuses to not do the right thing on fiscal policy for years now, and we can’t give any false opening at all for any of them to claim that it would matter that much anyway.

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