WSJ falsely claims Romer's research showed "superiority" of tax cuts over spending for stimulus

››› ››› JOCELYN FONG

A Wall Street Journal editorial claimed that "current White House chief economist Christina Romer has done economic research showing the superiority of tax cutting over spending as fiscal stimulus," presumably referring to a March 2007 paper by Christina and David Romer, who found that "tax changes have very large effects on output." However, contrary to the Journal's claim, the Romers' paper did not compare the impact of tax changes on output to the impact of spending.

WSJ claimed Romer's research showed "the superiority of tax cutting over spending as fiscal stimulus."

From a January 27 Wall Street Journal editorial:

You don't have to be a supply-sider to wonder about the wisdom of raising taxes amid a fragile economy, and once upon a time even Keynesians favored tax cuts as economic stimulus. Walter Heller helped to write JFK's tax cuts, and current White House chief economist Christina Romer has done economic research showing the superiority of tax cutting over spending as fiscal stimulus. That was before she sat in the White House mess.

In fact, Romer research did not compare tax cuts and spending as fiscal stimulus

Mankiw: The Romers' research "does not address the effects of increases in government spending." Economist and former Bush adviser Gregory Mankiw, who cited the Romers' 2007 paper in a January 10, 2009, New York Times column, noted in a subsequent blog post that "[t]he Romer research is about the effects of tax cuts. It does not address the effects of increases in government spending."

DeLong: Romers' study does not show "that tax cuts are uniquely effective." Responding to Mankiw's Times column, economist Brad DeLong wrote on January 12, 2009, that "[t]he error is the association of Christina Romer with the proposition that the tax multiplier -- the effect on GDP of a tax cut -- is twice the spending multiplier. The Romers' article does not distinguish between the two, referring only to the 'substantial multiplier... due to the procyclical behavior of investment.' " DeLong further wrote, "What Romer and Romer's study (and their earlier work on monetary policy) shows is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for policy changes leads to underestimates of the effects of all types of stimulus."

Justin Fox: Romers' paper made "no attempt to compare the impact of government spending with tax cuts." Financial writer Justin Fox wrote on January 14, 2009, that "the Romers identified a bigger-than-generally-assumed economic impact from tax changes, but didn't have much to say about precisely the kind of tax change being contemplated now [for stimulus during recession], and didn't have anything at all to say about the relative efficacy of tax changes vs. spending changes." Fox further noted that the paper "focused on exogenous tax changes" -- that is, "any tax change not motivated by a desiret to return output growth to normal" -- and wrote that the Romers made "no attempt to compare the impact of government spending with tax cuts."

More recent analysis by Romer assumed lower multiplier for tax cuts in a stimulus plan. Christina Romer and Jared Bernstein, chief economist to Vice President Biden, wrote in a January 9, 2009, estimate of the job impact of a "prototypical" recovery plan, that based on "multipliers for increases in government spending and tax cuts from a leading private forecasting firm and the Federal Reserve's FRB/US model," their analysis assumed that government spending has a larger impact on output than tax cuts.

Romer research previously distorted by House GOP, Karl Rove

GOP, Rove claimed Romer model showed Republican stimulus plan produced more jobs for lower cost. On the March 1, 2009, edition of This Week, Karl Rove, who contributes to The Wall Street Journal, echoed House Republicans' distortion of research by Christina Romer in claiming that their alternative stimulus bill "produced 50 percent more jobs at half the cost" of President Obama's economic recovery plan. In fact, according to the White House, "Romer's view is that the House analysis is absolutely incorrect" and "the plan the President supports would result in substantially greater job creation than the House Republican plan."

Posted In
Economy, Taxes
Network/Outlet
Wall Street Journal
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