Crowding Out Fiscal Stimulus (eBook)

John J. Heim is Visiting Professor at University of Albany-SUNY, and retired Clinical Professor of Economics at Rensselaer Polytechnic Institute, both in New York, USA.

Executive Summary 6
Preface 10
Acknowledgements 12
Contents 13
List of Tables 17
About the Author 19
Chapter 1: Introduction 20
Chapter 2: Theory of Crowd Out 23
2.1 Traditional (No-Crowd Out) Keynesian Stimulus Theory 23
2.1.1 The Theory 23
2.1.2 Empirical Problems with Traditional Theory 24
2.2 Keynesian Stimulus Theory with Crowd out 26
Chapter 3: Literature Review 29
3.1 Popular Press 29
3.2 Professional Literature 30
3.2.1 General, Including Gale and Orszag 30
3.2.1.1 Positive or Negative Stimulus Effects for Tax Cuts? 33
3.2.1.2 Gale and Orszag´s Euler Equation Model 36
3.2.2 VAR Models 36
3.2.3 DSGE Models 43
3.2.4 Structural Models 46
3.2.4.1 Estimation Issues 47
3.2.5 Limitations of VAR, DSGE and Structural Models 49
3.3 Real Government Deficits-The Historical Record 50
Chapter 4: Methodology 51
4.1 Data Used 51
4.2 Specifics of Methods Used 53
4.3 Demand as a Function Purchasing Power, Not Just Income 58
Chapter 5: Test Results: Consumer Spending and Borrowing Models (One-Variable Deficit) 60
5.1 OLS Models 63
5.1.1 OLS Spending Model Conclusions Summarized 70
5.1.2 Do Deficit Effects Differ With the Type of Government Spending Increase, or the Level of Government Cutting Taxes? 70
5.1.3 OLS Estimates of Crowd Out Effects on Consumer Borrowing 75
5.1.4 OLS Borrowing Model Conclusions Summarized 79
5.2 2SLS Models 80
5.2.1 2SLS Spending Model Findings Summarized, Compared to OLS 92
5.2.2 2SLS Estimates of Crowd Out Effects On Consumer Borrowing 93
5.2.3 2SLS Borrowing Model Conclusions Summarized, Compared to OLS 100
5.3 OLS and 2SLS Spending and Borrowing Findings Summarized 102
5.4 Robustness of Findings To Time Period Sampled 104
5.5 Robustness Using Alternative Definition of Hausman Endogeneity 106
Chapter 6: Test Results: Investment Spending and Borrowing Models (One-Variable Deficit) 108
6.1 OLS Models 110
6.1.1 Tobin´s q and Profits Lag Specification Problem 115
6.1.2 OLS Investment Spending Model Findings Summarized 117
6.1.3 OLS Estimates of Crowd Out Effects on Business Borrowing 118
6.1.4 OLS Investment Spending and Business Borrowing Model Findings Summarized 122
6.2 2SLS Models 123
6.2.1 Borrowing and Deficit Multicollinearity With Deficit 128
6.2.2 2SLS Investment Spending Conclusions Summarized, Compared to OLS 138
6.2.3 2SLS Estimates of Crowd Out Effects on Investment Borrowing 139
6.2.4 2SLS Business Borrowing Conclusions Summarized, Compared to OLS 143
6.3 OLS and 2SLS Spending and Borrowing Findings Summarized 143
6.4 Robustness of Findings To Period Sampled 147
6.5 Expected Robustness With Future Studies 148
Chapter 7: Test Results: Consumer Spending and Borrowing Models (Two-Variable Deficit) 150
7.1 OLS and 2SLS Spending Models 151
7.1.1 2SLS Consumer Spending Conclusions Summarized, Compared to OLS (Two-Variable Deficit Models) 156
7.2 OLS and 2SLS Borrowing Models 157
7.3 OLS and 2SLS Consumer Spending and Borrowing Findings Summarized 164
7.3.1 Recap of Findings of Deficits and Borrowing Variables on Consumer Spending 164
7.3.2 Overall Consumption Conclusions (Two-Variable Deficit Effects): 165
Chapter 8: Test Results: Investment Spending and Borrowing Models (Two-Variable Deficit) 167
8.1 OLS and 2SLS Spending Models 168
8.1.1 2SLS Business Spending Findings Summarized, Compared to OLS 177
8.2 OLS and 2SLS Borrowing Models 177
8.3 OLS and 2SLS Spending and Borrowing Findings Summarized 181
Chapter 9: Are Findings Of One- and Two-Variable Deficit Models Consistent? 188
Chapter 10: Effects of Stimulus Programs on GDP, Net of Crowd Out Effects 190
10.1 Method #1: Effects Inferred from C and I Model Test Results 192
10.2 Testing the Krugman Hypotheses 199
10.3 The Gale and Orszag Issue: Are some Types of Taxes and Spending Immune to Crowd Out Effects? Test Results 203
10.4 Effect of Changes in GDP On The Unemployment Rate 206
10.4.1 Obama Stimulus Program Effects On Unemployment Rate 207
Chapter 11: Dynamic Effects 213
11.1 Incorporating Dynamic Effects in the IS Curve Model 213
11.2 Consistency with Solow Growth Model Estimates of Effects of Declining Savings on Investment 217
11.3 Dynamic Effects of Changes in Consumer and Business Confidence 218
Chapter 12: Alternatives to Financing Stimulus Programs with Domestic Borrowing 223
12.1 Increasing the Money Supply Foreign Borrowing
12.2 A Further Note on Avoiding Crowd Out Effects by Borrowing from Foreign Sources 225
Chapter 13: A Note on the Disposable Income Variable Used in Consumption Models 229
Chapter 14: Do Crowd Out Effects Differ in Recession and Non-recession Periods? 233
14.1 Methodology 234
14.2 Test Results 236
14.2.1 Consumption Function Findings 236
14.2.2 Investment Function Findings 242
14.3 Effects of Deficits on GDP in Recession/Non-recession Periods 245
14.3.1 Implicit IS Curve Net Effects of Both Stimulus and Crowd Out Effects of Deficits 245
Chapter 15: Does the Gale and Orszag Hypothesis Explain Tax and Spending Effects Better in Recessions Than Non-recession Perio... 252
Chapter 16: Summary of Findings and Conclusions 263
16.1 Concluding Observation 271
Bibliography 274
Index 277