Krugman Might Be Wrong On Multipliers

See On the Alesina Hypothesis by Greg Mankiw. He responded to something Krugman said about an article that Mankiw wrote in the NY Times last Sunday. First an excerpt from that article. Then the more recent post from Mankiw.

"When Barack Obama took office in 2009, the economy was in the midst of the Great Recession. President Obama’s advisers relied on standard Keynesian theory when they proposed a large increase in government spending to energize the economy. The stimulus package was the administration’s first economic policy initiative. As the economy recovered, the administration supported tax increases to shrink the budget deficit.

But even at the time, there were reasons to doubt this approach. A 2002 study of United States fiscal policy by the economists Olivier Blanchard and Roberto Perotti found that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending.” They noted that this finding is “difficult to reconcile with Keynesian theory.”

Consistent with this, a more recent study of international data by the economists Alberto Alesina and Silvia Ardagna found that “fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases.”"

Now the newer post:

"In my  recent NY Times article, I explored several hypotheses to explain slow growth. One was based on work by Alberto Alesina and Silvia Ardagna suggesting that the standard Keynesian view of tax and spending multipliers is inconsistent with the international evidence. 

Paul Krugman says the Alesina-Ardagna work has been "refuted."  Nothing could be further from the truth.  See this recent paper by Alesina, Favero, and Giovazzi on fiscal consolidations, which reports evidence consistent with the earlier work and is forthcoming in the peer-reviewed Journal of International Economics.  (By the way, this work is also consistent with the Romers' finding of large tax multipliers, much larger than the literature finds for spending multipliers.)

To be sure, these issues continue to be debated. Remember: My piece was presenting hypotheses about what has been happening in the economy, not taking a stand about which one is right. From my perspective, the Alesina work suggests a still plausible hypothesis."