Amerikansk genopretning og dansk finanspolitik

During the financial crisis, president Obama adopted a fiscal package easing called the “American Recovery and Reinvestment Act” often also referred to as ARRA. The fiscal package included approx. $830 billion which was to be spend on the US economy to ease the financial crisis. The most important items in the fiscal easing package were the following:

Fiscal Intervention

Multipliers

Purchase of goods and services

2.5

Grants to states for infrastructure

2.2

Transfers to poor persons (homeless etc.)

2.1

Cash check to elderly

1.0

Tax reductions for low incomes

1.5

Tax reductions for high incomes

0.6

Tax reductions for businesses

0.4

(Source US Congressional Budget Office, Feb. 2015, Estimated Impact of the

ARRA on Employment and Economic Output.)

The table above shows the multipliers for each actions taken by the president for the important items in the fiscal easing package.

What are the reasons for the differences between the different multipliers? And why are multipliers generally much larger than Danish multipliers?

The multipliers above are the output multipliers and is the cumulative impact on GDP over quarters for each dollar spent or reduction in tax revenues. Each multiplier in the table above illustrate the estimation of the indirect and direct effects on the US’s output of a given policy. The direct effects have an immediate effect on a country’s economic activity. So a government purchase of goods and services will have a direct effect on economic activity and has a direct dollar for dollar impact on the output. The tax reductions, transfers to poor persons can have different impact of direct effect on output. This is due to the behavior of the recipients. If a recipient gets one dollar but decides to decides to spend 30 cents and save the remaining 70 cents, then production will decrease over time as demand falls. Though if the recipient decides to spend the 70 cents and save the remaining 30 cents, then the production will increase over time as demand increases over time and the country will have an output of 70 cents. Reduction in taxes will lead to an increase in disposable income which would presumably increase the purchase power, especially for low-income households. Reduction in corporate taxes have generally smaller impact on output as tax rate cuts will not boost the economy. When the economy is strong and booming the multiplier would predominantly be close to 1. However, when the economy is not strong and is in recession with many unemployed persons and unused capital, then the multiplier is predominantly around 2. This can be seen in the table above where the multipliers for: Purchase of goods and services, grants to states for infrastructure and transfers to poor persons (homeless etc.) are around 2 and 2.5. E.g. if the government increase $200 of government spending then that amount of money will turn into approx. $400 of total spending due to the multiplier effect of 2x. which may send some persons back to work. The multipliers for tax reductions have a multiplier of 1 or lower. Which makes sense in the fact that tax multipliers have one less ripple effect in the economy because it’s not as strong as the spending multiplier. And because one can’t be sure if the recipient is going to save the money or spend it. Moreover, tax reductions are usually lower because they more often than not benefit those with higher income, who most times save than spend any additional income to their payroll. These are the reasons on why there’s a difference between some of the multipliers.