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Tuesday, March 30, 2010

The Fraser Institute takes on Harpernomics

I posted last Saturday a criticism of the Harper government’s attack on the findings of the Fraser Institute. The Fraser Institute released a study that showed that the government’s stimulus plan has had little effect on the economy. The government responded by attacking the motives of the Fraser Institute and accusing them of being ‘sloppy.’ Yesterday the Fraser Institute responded:

The International Monetary Fund (IMF), which Prime Minister Harper has cited as an authority, recently surveyed fiscal stimulus initiatives in advanced and emerging economies and concluded that the average effect of discretionary fiscal policy “does not provide strong evidence of countercyclical effects.” Simply put, the IMF concluded that fiscal stimulus is generally not an effective way to combat recessions.

Unfortunately, the Prime Minister’s Office and Department of Finance are not aware, or worse still, chose to ignore these and dozens of other reputable studies that contradict their rhetoric.

Instead, the Conservative government continues to highlight its internally generated estimates of the impact of its Economic Action Plan. These “estimates” assume that an extra dollar of government spending increases economic output (GDP) by $1.50. In econ-speak, the government uses a “multiplier” of 1.5.

Put differently, the folks that called our study “ideologically” motivated assume that if the government takes a dollar out of your pocket or borrows it and then spends it on somebody else, it generates an extra $1.50 in economic activity (GDP).

How did Minister Flaherty and the Department of Finance derive its 1.5 spending multiplier estimate?

Well, it certainly does not come from “reputable” studies, as the Prime Minister has suggested. The estimate is actually from a political document co-authored by Christina Romer, chair of U.S. President Barack Obama’s Council of Economic Advisers. That political document dubiously assumes a government spending multiplier of 1.57.

Many internationally renowned economists have directly criticized Romer’s spending multiplier, including Stanford University professor John Cogan and his colleagues, who in a 2010 study, accused Romer of making “highly questionable” assumptions to arrive at a multiplier of 1.57.

Under more realistic assumptions, professor Cogan and his co-authors found that the spending multiplier is substantially smaller and that it likely lies between 0.5 and 0.6. In other words, if government spending increases by one dollar, GDP increases by only 50 to 60 cents.

Read the rest of it here.

Posted by Hugh MacIntyre on March 30, 2010 | Permalink

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