Macroeconomics

ECON 201Case Guide to Barack Obama and the Bush Tax Cuts and Q11 F19 Wednesday, November 13th

Reading: Matthew Weinzierl and Eric Werker, Barack Obama and the Bush Tax Cuts (Boston, MA: President and Fellows of Harvard College, 2011).

Questions for Presenters

1. Use AD-AS and our various theories of consumption to analyze the situations faced by George W. Bush (in 2001, 2003, and 2008) and Barack Obama (in 2009, see case part B as well) and policies pursued by each. What were their objectives and understandings about how policy should work? Why did each pursue fiscal policy? How does each compare with the Reagan tax plans and the Kennedy/Johnson tax plan (1964)? What are the risks of each policy? How well did each policy work?

2. Evaluate these plans using Stiglitz as a frame. What problems arose from each? When are deficits appropriate? Is fiscal policy a good stabilization tool? Also incorporate concepts from the various frames we have investigated.

3. What are the lessons of fiscal policy usage (draw from the entire case and other cases and be extensive here)? Analyze fiscal policy usage and effects with the usage and effects of monetary policy. How does economic context affect how fiscal policy works and the multiplier? Summarizing this experience with fiscal policy, when should expansionary fiscal policy be pursued? When should it be avoided?

4. Based on the case and question 3, and our analysis of macroeconomic history, what set of policies should Obama’s administration have implemented? How important is the size of the fiscal/expenditure multiplier (see Solow and/or Eichengreen and O’Rourke below)?

Additional Reading for Presenters:

Joseph E. Stiglitz, “A Flawed Response,” in Freefall. Available in my pickup folder under “Presentations.”

Also see Barack Obama and the Bush tax Cuts (B). Available in my pickup folder under “Presentations.”

Barry Eichengreen and Kevin O’Rourke. Gauging the Multiplier: Lesson from History.” VoxEU (October 23, 2012). https://voxeu.org/article/gauging-multiplier-lessons-history.

Robert Solow interviewed by Viv Davies. “Fiscal Policy and Growth in Light of the Crisis.” VoxEU (April 11, 2011). https://voxeu.org/vox-talks/fiscal-policy-and-growth-light-crisis.

Tools/Economic Theory to Analyze the Case

Income-Expenditures Model (Circular Flow) GDP equation

Taxes Dependent on Income Supply-side effects of a tax cut

Laffer Curve and Critique

Aggregate Supply and Aggregate Demand (oil shocks, stagflation) Twin Deficits

Phillips Curve Politics and Business Cycles

Money Market (Keynesian Liquidity Preference Model)

Keynesian, Permanent Income and Life-Cycle Hypotheses about consumption

Multiplier Crowding Out

Accelerator Budget deficit and implications

Okun’s Law Gresham’s Law

Policy coordination (monetary and fiscal policy)

Equation of exchange and quantity theory of money (including velocity)

Questions for Quiz #11 (Take home, you may work with one other person and turn in a single copy. Presenters can turn in a single copy).

1. Outline the main factors in the growth of the public debt from the 1980s through 2009, based on the case.

2. Based on the whole case (and previous cases) how does context affect the effectiveness of fiscal policy? Give two supporting examples and explain how they support your conclusion.

3. Why was there a revival of fiscal policy as a stabilization tool in 2008? What are three arguments referred to in the case against using fiscal policy to stabilize the economy? What is the case for bold fiscal action? What do you think they should have done?