Canada's Opposition Parties Vow to Bring Down Government, 1 month into its term...

[KrazyHorse]

Originally posted by Victor Galis


I can't seem to find the link to the paper anymore (was it in a different thread?), but the data is from 2005. Can you recognize that macro-economic conditions are vastly different? In particular, consumer confidence is much lower, which suggests that increasing government spending might be more effective than it was in that latest time period.

The time period covered was 1980-2001. Which, as I've already stated included 2 recessions and 1 slowdown.

And this is not a question of "more effective". Government spending REDUCED GDP!

[Victor Galis]

Originally posted by KrazyHorse


The time period covered was 1980-2001. Which, as I've already stated included 2 recessions and 1 slowdown.

And this is not a question of "more effective". Government spending REDUCED GDP!

Can you link the paper again?

[KrazyHorse]

If you have some DATA which would imply that increased spending in Canada would be more effective in reducing any (hypothetical) output gap than it was from 1980-2001 or if you have any comments on the usefulness of structured vector auto-regression as used in the 2005 paper I referenced then you should feel free to bring it up. Otherwise, it looks like you're simply spouting the all-too-common oversimplification of Keynsian theory.

[CrONoS]

Originally posted by Victor Galis


Can you link the paper again?

Good luck

http://www.iies.su.se/seminars/papers/fpoecd-oct15-2004%5B1%5D.pdf

[KrazyHorse]

This is the only ungated version I could find. Looks to be a few months out of date from final product.

http://www.iies.su.se/seminars/papers/fpoecd-oct15-2004%5B1%5D.pdf

[KrazyHorse]

Goddamnit, cronos. Beat me to the punch again.

[Victor Galis]

Let's look at the paper's claims:

2) There is no evidence that tax cuts work fasteror more effectively than spending increases.

3) The effects of government spendingshocks and tax cuts on GDP and its components have become substantially weakerover time; in the post-1980 period these effects are mostly negative, particularly onprivate investment

Take those two things together, and the paper seems to imply that the best policy to stimulate the economy would be for the government to raise taxes then keep the money.

I'm going to have to look closer at the methodology and assumptions that leads to that conclusion.

[CrONoS]

Look at table 5 & 8.

Compare 12 months/S2 for Canada for T5 and for T8. And under Cumulative GDP response.

S1: Represent 1960-1980
S2: Represent 1980-2001

[KrazyHorse]

Originally posted by Victor Galis
Let's look at the paper's claims:




Take those two things together, and the paper seems to imply that the best policy to stimulate the economy would be for the government to raise taxes then keep the money.

I'm going to have to look closer at the methodology and assumptions that leads to that conclusion.

Those claims are based on OECD AVERAGES.

If you actually look at what the paper finds in terms of effectiveness IN CANADA it is quite different.

That is what I've been harping on for this entire discussion, dude. Pay attention.

[KrazyHorse]

Canada is exceptional in terms of the effect of tax reductions over the 1980-2001 period. It has not behaved like the other OECD countries for quite a while now.

A few hours ago you were busy criticising the use of this paper because its measurements were 7 years out of date (while not providing any newer measurements). Now you're busy quoting its conclusions AS THEY APPLY TO TOTALLY DIFFERENT ECONOMIES.

[Victor Galis]

Or maybe I could do something that hurts my brain less and admit that I know little about the Canadian economy.

edit: Ok, I'm seeing the numbers you're pointing to now. I'm not sure I accept the validity of the findings in the current situation, but I concede that I have no better or newer data to dispute them. I don't even know to what extent Canadian credit markets are or are not frozen (I suspect less so than the US ones).

[Victor Galis]

Originally posted by KrazyHorse
Now you're busy quoting its conclusions AS THEY APPLY TO TOTALLY DIFFERENT ECONOMIES.

You have to admit though that that particular combination of conclusions should raise some sort of red flag, unless the implication is that the OECD average country is so heavily indebted that the best stimulus for its economy would be to pay down its debt.

I'm wishing I'd taken econometrics right about now.

[KrazyHorse]

unless the implication is that the OECD average country is so heavily indebted that the best stimulus for its economy would be to pay down its debt

No, it could simply mean that people are rational actors (i.e. they understand Ricardian equivalence). Or that economies have become more intertwined (so national fiscal stimulus is less effective). That second reason would go a long way to explaining why the Canadian case is different. As I have previously posted, the Canadian economy seems to have become detached from that of the US (despite greater integration).

[Victor Galis]

Originally posted by KrazyHorse

unless the implication is that the OECD average country is so heavily indebted that the best stimulus for its economy would be to pay down its debt

No, it could simply mean that people are rational actors (i.e. they understand Ricardian equivalence).

But if tax cuts lead to smaller GDP, and higher spending lead to smaller GDP, does that mean that governments have found the perfect balance of taxation of spending? It doesn't make much sense to have both types of fiscal stimuli not work.

Or that economies have become more intertwined (so national fiscal stimulus is less effective).

But the conclusion doesn't suggest that the stimulus is ineffective, it suggests that it is counter-productive. I'd be willing to accept the conclusion that both types are ineffective, the conclusion that bother are counter-productive is well... odd.

That second reason would go a long way to explaining why the Canadian case is different. As I have previously posted, the Canadian economy seems to have become detached from that of the US (despite greater integration).

I would think a higher tax burden might be a good reason why tax cuts are still effective.

One thing that just occurred to me is that not all cuts in net taxes are equal. There's a huge difference in the stimulating effect of cutting lower and middle-class taxes and cutting say, the inheritance tax. I wonder to what extent the nature of the tax cuts that were tried in these countries affect those findings. (I suspect a similar argument could be made about the spending.) I don't know enough about fiscal policy of the 80s and 90s to speculate how significant this is, but maybe that's the solution to this puzzle. Maybe tax cuts would work if they were the right ones, rather than political give-aways to powerful lobbies.

[KrazyHorse]

But if tax cuts lead to smaller GDP, and higher spending lead to smaller GDP, does that mean that governments have found the perfect balance of taxation of spending?

No. Why would you think that?

It doesn't make much sense to have both types of fiscal stimuli not work.

It makes perfect sense.

I don't understand your objection.