Posted Monday, Feb. 28, 2011, at 3:30 PM
Via Veronique de Rugy, John Taylor
makes it very well.
(He's criticizing the Goldman Sachs analysis that predicted spending cuts would deliver a 1-point blow to GDP in 2011, not Mark Zandi's own critique which sees a 0.5 hit.)
The analysis in this Goldman-Sachs report is based on the same type of "large multiplier" theory that predicted that the stimulus package of 2009 would stimulate economic growth. Research by me and my colleague John Cogan finds that more up-to-date theories, which bring important incentive and expectations effects into account, show far smaller multipliers. In these models a reduction in the growth of spending will immediately crowd in private investment. Moreover, by following the stimulus money, we found that in actuality the stimulus package of 2009 had no material positive effect on economic growth or employment. The same economic theory which said the stimulus would increase economic growth in the past two years, says that reversing that spending will reduce growth now. It was wrong in the past and it is highly likely to be wrong again.
This is a good rebuttal to Zandi's modeling, which is the basis for all of this. I'm not sure that it rebuts the specific argument that austerity is going to lead to layoffs of federal workers -- not Zandi's argument, but the argument that tripped up John Boehner last week.