New Aggregate Demand math from Washington DC: Sequester vs. Fiscal Cliff

Posted on February 27, 2013 by

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As we approach the impending sequestration, Mark Smith highlights the political tales of woe if it goes through (see below).  But there seems to be an inconsistency in the “We’re all Keynesians now” Washington D.C. crowd.  If you recall the fiscal cliff, President Obama proposed increased taxes that would only generate ~$80 Billion of additional revenue per year.  That was “good” for the economy, as it would show the world that we were serious about addressing our fiscal problems.  Now as we approach the sequester, spending cuts of the same magnitude are the equivalent of Armageddon.  From textbook macroeconomic theory, these two options are going to lead to similar Aggregate Demand shifts.  Yes I know that Keynesians point to a bigger multiplier with spending rather than taxes, but that is certainly debatable.   Both Valerie Ramey’s work and Alberto Alesina’s suggest this may not be the case.  In any case, spending multipliers vs. tax multipliers are not so much different that one is a really good thing and the other is a really bad thing.  So our Washington politicians should stop pretending to be even Keynesians–they are just taxers and spenders.  Any excuse will do.

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Posted in: Fiscal Policy