Whoops!

In my previous post about Greg Mankiw's recent article, I forgot to mention my original point. Mankiw has an extended critique of Obama's stimulus in which he seems to accept the Keynesian framework that stimulus, whether through tax cuts or government spending, will increase GDP growth. However, he argues that tax cuts are significantly more effective than government spending. Upon seeing the unemployment rate rise much higher than expected, Obama's economic team scrambled for an explanation. Mankiw writes:

To the question of why their patient — the U.S. economy — did not respond as expected, the Obama team's answer is that the patient was sicker at the beginning of 2009 than they had originally thought, not that they administered the wrong medicine. The spending-heavy fiscal stimulus, they argue, was the right approach and did some good; if the stimulus bill had not been enacted, unemployment today would be even higher. The reason the stimulus failed to cure the economy's woes is not that it was the wrong course of treatment: It simply wasn't a big enough dose. (Hence the repeated calls for a "second stimulus.")

[snip]

The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model's failure to predict events accurately by insisting that the model was nonetheless right — as Obama's economic advisors have done — is hardly the most obvious course. Careful economists should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity.

Mankiw believes that there are two problems with the starting assumptions. "Chief among these considerations is whether government can spend money both quickly and wisely." He goes on to argue that the government cannot. However, looking at the actual stimulus spending, it is clear that the government can in fact "spend money both quickly and wisely". On the spending side, the largest items are "Help states with Medicare costs" ($87.1 billion), "Help states prevent cuts to essential services like education" ($53.6 billion), "Provide money for highways and bridges" ($27.5 billion), "Health coverage under Cobra" ($25.1 billion), and "Increase food assistance" ($20.9 billion). It is difficult to argue that any of these are unwise, and only the highways and bridges money could be considered slow.

The administration's second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers.

Obama's stimulus plan assumed that the multiplier for direct spending would be 1.57, while the tax-cut multiplier should be 0.99. Mankiw does not argue with the direct spending multiplier, but claims (based on the work of Romer & Romer) that the tax-cut multiplier should be 3. Unfortunately for Mankiw, this destroys his own argument.

Throughout the article, Mankiw implies that the Obama team leaned too heavily on spending in the stimulus. Never does he inform the reader that, as of April 20, the Obama stimulus was 43% tax cut and 57% direct spending. Using the Obama administration's numbers, the overall multiplier is 1.32 (1.57 * 0.57 + 0.99 * 0.43). Using Mankiw's numbers, the overall multiplier is 2.18 (1.57 * 0.57 + 3 * 0.43). In fact, using Mankiw's preferred multiplier of 3 for the tax-cut portion of the stimulus, the direct spending multiplier could be zero and the overall multiplier would still be 1.29.

As a professor of economics at Harvard, Mankiw must know this. However, he is clearly not seeking to inform his readers about a matter of economics. He is trying to win a political argument about Obama.