Rethinking keynesian fiscal stimulus
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Welcome to the LSE events podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences. So welcome everybody and thank you for joining us at the LSE for this evening's event, which is hosted by the LSE's Department of Economics and Economica. My name is Wouter Den Haan and I'm a professor in the Department of Economics and

and until very recently an editor of Economica. Throughout its history, Economica has been LSE's house journal and its history now spans more than a hundred years. In fact, we recently celebrated our 100th anniversary and to commemorate that is that we're still in the process of publishing a hundred papers by current and former LSE economic affiliates. So if anybody is in that category, check out our website.

So turning to this evening's event, I'm very pleased to welcome Professor Valerie Ramey to deliver the Economica Phillips 2025 lecture. Phillips used to be a professor here at the LSE. Professor Ramey is Professor Emerita of Economics at the University of California, San Diego, and a senior fellow at the Hoover Institute. She has published numerous scholarly and policy-relevant articles on macroeconomic topics, such as, and now this is the long list,

The sources of business cycles, the effects of monetary and fiscal policy, and the impact of volatility on growth. She has also written numerous articles on trends in wage inequality, changes in time use, such as the increase in time investment in children by educated parents. Her recent work has studied the size of government spending multipliers and has estimated the projected effect of climate change on economic growth.

I mean, I wish my research had covered so many different types of fields. I mean, that's really hard to pull off. And her work has been featured in major media such as the Wall Street Journal and the New York Times. She's had a massive impact on students and other economics. And I know that for a fact because we actually were colleagues for quite a long time at the University of California in San Diego, starting out as very junior academics.

And Valerie being a mentor, a teacher, and a friend made my time in San Diego truly exceptional. And it's that and surfing that I really miss from San Diego. The topic for this evening's talk is rethinking Keynesian fiscal stimulus. It's hard to think of a more important topic in the business cycle literature, and we are lucky to have such a prominent speaker to shed light on this question. The hashtag for today's event is #KeynesianFiscalStimulus.

Well, maybe it is LSE offense, but usually it's a little bit different. I should have it here. It's LSE Phillips, which is probably on the next slide. LSE Phillips. Valerie's going to give a talk, and then after that there will be a chance for Q&A. But for now, please join me in welcoming Valerie to deliver her lecture. Well, I want to thank Wouter for the very kind introduction, and he was also a wonderful colleague, and we really miss him at UCSD.

So it is a distinct honor and pleasure to be invited to give the Economica Phillips lecture here at the wonderful London School of Economics. So I've been looking forward to this for some time now.

I'm going to talk about rethinking Keynesian fiscal stimulus and part of it is how the profession has been thinking about Keynesian fiscal stimulus over time, but also how my views have evolved and I'll talk about those in quite a bit of detail. But before talking about Keynes, I do want to say a few words about the name of this lecture, A.W. Phillips. So let's see, how does this progress?

Thank you. So, just a few words about A.W. Phillips. So, since I was being asked to give the Phillips lecture, I said, well, you know, I should learn a little bit more about him. So, I went beyond the curve because, of course, I knew the Phillips curve. I taught it in classes. I had to read it multiple times to remind myself before teaching it, but I had no idea about

about how fundamental his other contributions were. I ran to the Stanford Library and got a collection of his works along with commentary and was just astounded how far ahead he was of his time in terms of thinking about dynamic macroeconomics, the importance of lags, econometrics, statistics, optimal control. So that was definitely an eye-opener. The other thing is,

that it solved a long time puzzle because I realized by studying about him what the source of my early ideas on what was involved in building a macro model. So I was an undergraduate and this is before the internet was invented

I was signed up for my first macro class and my idea was that we were going to go in a big room to build a model and there would be a big machine there. And of course I was shocked when I found out that building macro models was writing down equations, solving them algebraically and then writing them on a computer to estimate them. And it was only when I was researching A.W. Phillips for this

that I found out about the MONIAC model and I was astounded to hear that he used hydraulic systems and fluid dynamics.

So moving on to Keynes. So I'm going to talk about several things. First I'm going to step back and look at the rise, fall, and rebirth of Keynesian fiscal stimulus. And one of the themes that comes out of this lecture is how there are cycles, not quite business cycles, but cycles in the prominence of Keynesian thought in academic research and in its influence on policy.

And I'm going to tie that to the interplay of three elements: new economic theories, empirical evidence, and economic events. And I'm going to give you some examples of that. So why it is that it ebbs and flows. Then I'm going to talk about some of the costs of the economic stimulus starting with the global financial crisis, in particular the debt consequences of Keynesian fiscal stimulus. And then I'll move on to the main part, which is

How well does this stimulus work? I talk about the cost, what were the benefits? And I'm going to argue that they were modest.

Now, I don't want to leave you despairing, what are we going to do next time interest rates hit the zero lower bound if monetary policy can't do anything and traditional Keynesian stimulus isn't very effective? Well, I'm going to talk a little bit about unconventional fiscal policy and the possibility that that might be a way out as an additional policy tool, and then summary and conclusions.

The rise, fall, and rebirth of Keynesian fiscal stimulus, and you can tell I watch Monty Python in my youth, right, do the animation. So let's talk first about the rise of fiscal Keynesian stimulus. So remember I talked about the three elements. Well, the first, of course, was the theory, the general theory, and as we know from reading either the general theory or seeing it in almost any undergraduate textbook,

A key part of Keynes' model of the macroeconomy is the consumption function and the idea that it depends on current disposable income. The parameter on current disposable income we call the marginal propensity to consume, MPC. So I'll use the abbreviation from here on. He thought that was about 0.8, okay, quite high, based on what he'd seen in the data. And in that particular model, that meant the multiplier was five, okay?

Now he thought, however, and going back and reading this, that he thought that the multipliers were probably somewhat lower for the US and the UK. Lower for the UK because trade was so important, so you have a lot of trade linkages when this consumption happens. And for the US, he actually got some data from Kuznets on GDP and investment, and then when he looked at those data, he said, "Multiplier's probably two to three."

Now, that theory, and then the other key element here, I think, is economic events, and in this case, the World War II experience, when government spending increased and GDP increased and seemed to lift all the economies out of the Great Depression, I think that that was key to convincing economists and policymakers that

government spending could be very powerful, that not only could it lift the economy out of the Great Depression, but it could be used to stabilize business cycles. Now, moving to the 1960s, people like Solow and Samuelson looked at

Phillips curve and said, okay, we could use Keynesian stimulus policy to choose the level of GDP or the unemployment rate. And then the Phillips curve tells us what the cost is in inflation. But then we have what I call the fall of Keynesian fiscal stimulus. So why was that? So after the 1970s, monetary basically replaced fiscal stimulus policy as a stabilization tool.

So which of those key elements played a role here? Well, new theories and new evidence. So the first new theory was Milton Friedman's permanent income hypothesis, augmented later with rational expectations by Bob Hall.

And that implied a very small marginal propensity to consume at a transitory income, because of course the idea was that individuals want to smooth their consumption over time. They don't want to just go on a shopping spree based on a transitory blip in their current income.

But then in the empirical evidence, I think Freeman and Schwartz was very important for convincing many people that monetary policy could have very significant effects on output and therefore could also be a part of the policy toolbox. And of course there were vigorous debates about whether fiscal policy or monetary policy was stronger, but monetary policy ended up winning because of the speed of the policy response.

Fiscal policy is set based on all kinds of other goals about redistribution, infrastructure spending, all those sorts of things. So it meant that a number of times in countries, the

the legislators would finally pass a stimulus and the recovery would have already happened, so then actually destabilize. Whereas they thought monetary policy with its much more limited focus could be much more nimble. So that's why it really passed so that monetary policy was the key.

I went through my old graduate textbooks through the indexes. So I went through all of the Sargent ones. I have, say, three Sargent, and the one with Sargent and Lundquist. I looked at Blanchard and Fisher. I looked at the 1999 Handbook of Macroeconomics. In all of those books, and also Obstfeld and Rogoff, there was only one

in the index that said, that was on multipliers, and it was a footnote in Sargent 1979 saying that, oh, this partial derivative traditionally was called a multiplier, and that was it. All right, so no talking about multipliers then. Now, why do we have a rebirth of Keynesian fiscal stimulus? Well, I'd say the number one reason, of course, is the global financial crisis.

So we had the global financial crisis, interest rate, the monetary policy interest rates fell to the zero lower bound and constrained monetary policy. They tried all sorts of other things like QE, but most people think that that's not as powerful as standard monetary policy. So policymakers said we've got to dust off the old Keynesian playbook because that's all we have.

But meanwhile, there had been hardly any research using the newer methods on the size of fiscal multipliers since the 1970s. So at the aggregate level, only a few researchers were actually studying the effects of fiscal policy. So for example, Matthew, some were doing long-term fiscal policy and neoclassical. And Matthew Shapiro, when we wrote our first paper on this,

we were more using government spending as an indicator of reallocation or looking to see, using it to see whether new Keynesian models or neoclassical models were better approximation to the economy. We did not even mention the word multipliers in that paper.

So that meant that no one was really sure what the macro effects of stimulus were. So when reporters called me in late 2008 and 2009, I said, "We're not quite sure," and I'd kind of go back to the old papers and say, "Well, here's probably what the multiplier was."

And then I said all kinds of things about infrastructure spending that, as you'll see, I found out were wrong. So we really had very little knowledge when we were suddenly spending in the U.S. a trillion dollars for the initial part.

Now, the events and then our realization that we needed to know much more about what multipliers were led to what I call the renaissance in fiscal research, starting with the global financial crisis. Not only did the global financial crisis awaken us to the need to know what this was, but it also provided all kinds of natural experiments because different countries were using different kinds of fiscal stimulus.

So by then, so then later in the Hamburger Macro 2016, there were 125 mentions of the multiplier and I should say they weren't all from my chapter. So there were some, you know, that I'm talking about. So I would say that most economists currently believe that Keynesian stimulus is effective and they've been spending like, and policy makers have been spending like they think it is. And why is that?

Well, even before the global financial crisis, there was a literature that was sort of peripheral to the main part of macro, but it was an active literature that was sort of testing the permanent income hypothesis. They would use all these little natural experiments and test whether this key coefficient beta was equal to zero, which is what was predicted by the permanent income hypothesis.

And these were nice papers when Matthew Shapiro was co-editor of the AER, he accepted a lot of them. They were usually the shorter papers because they were nice little natural experiments. And then when I took over as co-editor of the AER, I accepted quite a few of these because they were really well done papers. So these are just a few of the names of some of the leaders in that and there are many, many more.

Sometimes these estimated quite high micro-NPCs, and some of these were some of the leading ones. So a natural experiment involving the 2001 Bush rebate found, just for non-durables, found NPCs of 0.38 to 0.66, so pretty high just for non-durables. 2008 total consumption,

The estimates were between 0.7 to 0.9. Singapore natural experiment, MPC equals 0.8. Norwegian lottery winners, MPC 0.5 to 0.7. So these newer experiments and what was then the state-of-the-art methods was giving us MPCs that were very similar to what Keynes said that they would be.

So everybody says, gosh, let's give out these rebates if we want to stimulate the economy, the consumers will go out on a shopping spree. But then the question is, well, why aren't they using the permanent income hypothesis? Because that, you know, the idea of smoothing consumption, all of that makes a lot of sense.

So these new high micro MPC estimates using much better data and much better econometric methods led to new theories of household behavior. So for example, Kaplan and Violante

Huntley and Michelangeli had these ideas of households where you have two assets that you can invest in, and one has a much higher return, but it's very illiquid. And then the other one, which has the lower return, is liquid. So that means that households are often liquidity constrained, even though they're completely optimizing.

And so then that means that if you give them a temporary stimulus, they might actually spend more of it than the standard permanent income hypothesis that doesn't take into account these liquidity constraints. So then these new macro models with heterogeneous agents, some with some of these high NPCs because of liquidity constraints, also myopic behavior, are

started to be formulated and what they figured out is these kinds of macro models calibrated with the high micro MPCs implied very big multipliers, not quite five typically but still very big multipliers. In response, policy makers adopted big stimulus packages in crises.

Well, not without a cost. So let's just remind ourselves what happened in terms of debt, because most of these were financed with deficits. A few countries, I believe the UK actually had fiscal consolidations, and that also has costs, as many people tell me, for example, in terms of the national healthcare system.

So as I said, it was mostly deficits. And then there are some very prominent recent papers that argue that with these high micro-NPCs that these deficits can finance themselves.

What I will argue is they haven't financed themselves except through the inflation tax. We see some of that there, but we don't see any evidence that they're financing themselves by generating so much growth that they generate enough revenue. In fact, every round of Keynesian stimulus has led to something that I call the ratchet effect on the debt-to-GDP ratio. So this applies to a lot of countries, but let me just use the UK and the US.

So this is the gross government debt to GDP. So this is based on the IMF wheel and starting in around 2000. So the UK started below 40% debt to GDP ratio. The first line shows you the year 2008, which is of course the first big year of the global financial crisis. The second line 2020, which is COVID. So what you see there is just there's this big jump in the debt to GDP ratio.

and just little or no evidence of it declining. Now, part of that is there just seems to be hysteresis that, oh, we spent a lot on this crisis, let's look forward and not worry about where we are in debt.

But something else, of course, that happened is that with the global financial crisis, the paths of GDP growth seem to fall in a lot of countries. So, of course, that affects the denominator of the debt-to-GDP ratio. But then again, it happened in 2020. That little blip down is mostly just the inflation tax, and then the projection is for it to continue going up. So these are based on IMF projections.

The U.S. is even worse. It started with about 55% and then went up well over 100%, towards 120% with the global financial crisis. There were multiple stimulus packages, they were big.

And then afterwards, of course, there was Obamacare passed and then the Trump tax cuts. And so nobody seemed to worry about paying off the past debt. And with the projected spending in the US on Medicare and Social Security, we're clearly on an unsustainable debt path. It went up again, of course, during COVID, a huge amount that was spent, you know, 23% of GDP just in the third round of the stimulus.

It did come down, but only because of the inflation tax and then is projected to continue upward. So the US particularly is on an unsustainable debt path and that is one of the consequences of all of that spending. So was it worth it? Okay, so how well does this traditional Keynesian spending stimulus work? I'm going to assess three types of spending: temporary transfers,

Government defense purchases, so here's a case where my human capital suddenly increased in value because of recent world events. And I made sure to get the latest UK tank, which is the Challenger 3, for those who don't know. And then infrastructure spending.

All right, temporary transfers. So you take a new Keynesian model with heterogeneous agents, you know, and all of these assets, calibrated with high NPCs, it says temporary transfers should have large macro impacts, and particularly if monetary policy is accommodative. So some work with Jake Orchard and Johannes Wieland. We have one forthcoming QG and one on EJ. And then my forthcoming Mundell-Fleming lecture from last fall.

We conduct a series of what we call historical macro plausibility case studies. And we find no, little or no evidence of macro effects of these transfers. And I'm going to briefly summarize those two case studies because this also shows how, you know, the profession and policymakers can get kind of wrapped up and kind of have blinders and get too enamored of one kind of policy.

one kind of research tool over another. So I'm going to talk about the 2008 US tax rebate because that's the most striking and then also the Singapore natural experiment. So 2008, the US government even early on figured out that the economy was slipping into a recession.

So it enacted big tax rebates, February 2008, paid them out from April through August. It was $100 billion, which was equal to 11% of January disposable income on a monthly basis. So it was big. And then the average check was about $1,000. So about 50% was distributed in May, and the rest mostly in June and July, but a little bit in April.

So here is aggregate real disposable income. Can everybody see the rebate there? Yes. Big spike. So it had macro effects and that's what allows us to do a macro, historical macro plausibility analysis. If it wasn't big enough to show up in the aggregate data, we couldn't do this. But this one we could. So what happened to aggregate consumption? Remember all those high MPCs, 0.8? The blue line is aggregate consumption.

There's no spike. There's, you know, a molehill maybe there. That's what aggregate consumption looks like during that period. So big disposable income spike, no spike in consumption, maybe a little bit of molehill. Now, Marty Feldstein, I remember in the summer in Cambridge, Massachusetts, him showing a graph with the latest data saying, look,

They saved it all. This was a bust, a flop, and he had a Wall Street Journal article on it. Also, John Taylor ran some simple regressions on aggregate data and said, no, it didn't stimulate the economy. So they concluded that MPCs were low. So this was right after that happened. But a few years later, influential new microestimates appeared. They were by Jonathan Parker and his co-authors, and they had done

you know, years of work on this kind of thing and had amazing data and natural experiment and were using what was then state-of-the-art methods.

They had enough foresight, they'd done this first in 2001, so 2008 they were doing it again. But they contacted government official and the statistical agencies, and the one that asked people about what they're consuming, they do this to figure out the consumer price index basket weights, they said, "Please add a question

Did you receive a rebate? How much? When did you receive it? And they put it there. So they created a really good new data set for this. And they also did it for the Nielsen household surveys. These are where people scan what they buy, and then they ask them when they received their rebate. These are great natural experiments. They were using standard applied micro methods, and they estimated very high NPCs, 0.5 to 0.9 on total consumption.

Now policy and policymakers and researchers believe the microestimates and ignored the simple macroanalysis. Why? Well, it's because of Angrist and Pischke's credibility revolution

that said micro, you can believe micro estimates, and then they even scolded the macroeconomists for not picking those up so much because, you know, macro, you know it's time series and, you know, things can change if you put trends in. I mean, I know as well as anybody. So everybody thought the micro estimates were more credible, and then people loved their models, and so then they just paid no attention to this time series.

Well, when Jonathan Parker's paper first came out in something like 2012, I think, or maybe 2011, I kept asking, I remember Bob Hall, I said, "How is that consistent with the aggregate data? How is that consistent?"

And I didn't have time to work on it, but then when I was doing my Journal of Economic Perspectives piece in 2019, I did note that the few papers on transfers, there was a Romer and Romer one on that, was suggesting very little effect. There was just that one paper that I knew of. So there was this disconnect, and somebody should do research on that. So then I decided that I should and got together with my co-authors to figure out how to reconcile these two results.

So what we did was this sort of historical macro plausibility analysis and this was inspired by a calculation that Matthew Shapiro and his co-authors had done and I only knew about because he told me about it because otherwise nobody ever gets to the end of that 50 page paper and sees that key table.

So what do they imply would have happened to consumption in 2008 if there had been no rebate? Okay, that's a way to kind of quantify how much we...

how those big estimates translate. So we first construct a micro counterfactual. We multiply the aggregate rebate amount by the MPC estimates to calculate induced consumption. We allow some spreading over several months kind of thing. Then we subtract that induced amount from the actual aggregate consumption to construct the counterfactual. What would have happened had there been no rebate? Now, this particular one excludes general equilibrium.

caused by Keynesian multipliers. So this is just sort of a first step, because it doesn't need a macro model to translate it yet. So what do we get there? All right, so the blue line is actual data. So that's just a magnification of what we saw, that little hump we saw underneath the disposable income spike. The teal line is for an MPC of 0.5. That was the lower bound of the Parker et al. estimates.

The brown line is for the MPC equals 0.9. Now, what was going on this summer? There were some increases in oil prices, quite a bit. But then remember Lehman Brothers failed in September. These counterfactuals say that the US economy would have gone into deep, deep, deep recession

mostly recovered when Lehman Brothers is failing, right? And those points are way above this, all right?

We argue that that is implausible, and I should say, actually, we argue that's implausible in a number of ways, where we look at these declines in consumption relative to other episodes in history. We also look at forecasts from the Federal Reserve Green Book, the professional forecasters, and then we come up with a forecast that's even more pessimistic than theirs, where we

where we allowed the equation to use the fact that real oil prices in fact went up, which people hadn't realized would happen, and that Lehman Brothers would fall, all of those things. That was the most pessimistic forecast that we could find.

Now, the things get even worse once you take those MPCs and put them in a macro model with Keynesian multipliers. You get even more pronounced U-shapes. For example, the MPC of 0.9 says that the counter produces a counterfactual where consumption falls to 782, which is basically below the slide. All right. So it just magnifies the problem and magnifies the implausibility. So we said, how do we reconcile this?

And we were trying all these things, some behavioral model where, because we really believed the microestimates. Again, we believe the credibility revolution and that you can trust microestimates and the Parker team always does good work.

So we said we did behavioral models, we could get things qualitatively but not quantitatively. And then we said, well, how can we put dampening in the macro models? And then we kind of put it aside because we were having trouble reconciling it. But then the econometrics literature discovered that what was then the standard method that Parker and all of them used of two-way fixed effects

was inadvertently using the wrong control group and doing these forbidden

comparison, so one example is by Javier Harvell and Borchuk also. They even had a paper in 20, a working paper in 2017 where they said these are big biases and here is a new method that will overcome those biases and when they did that they applied it to the Broda and Parker Nielsen data and they found much smaller NPCs on consumption.

So we applied their techniques and then we found even more biases in the particular 2008 one. So we even applied other techniques. We got similar results. When we applied it to the consumer expenditure survey data that produced those estimates from 0.9 to 0.9, we estimated MPC instead of 0.3 and with all of that spending on motor vehicles.

So the marginal propensity to consume on non-durables was zero. And so then this meant that this wasn't against the permanent income hypothesis, but of course it could still stimulate the economy if it's stimulating motor vehicle sales. But we found that the counterfactual was still implausible with this lower one. That meant there must have been some dampening effect.

We discovered that the relative price of motor vehicles rose in the summer of 2008. So a bunch of people who got their rebates ran out and bought motor vehicles, drove up the price so that the aggregate real motor vehicle sales didn't go up by much. So we used our macro model to show that you had this dampening effect from the price rise. So we concluded that the multiplier on the 2008 rebates was below 0.2.

So then let me just talk briefly about the Singapore case study. A really nice micro analysis was by Aguiar and Qian in American Economic Review, and they exploited a natural experiment from 2011 in Singapore. So the Singapore government announced a one-time payment to citizens, but not foreign residents, which it turns out is 40% of the population.

Aguiar and Keon got data from the largest bank in Singapore where you know everybody's expenditures and what's going on with their finances. So it's an ideal natural experiment, rich data, and the non-residents were the control group. So they didn't have this problem with having the wrong control group. They estimate a household cumulative MPC of 0.8 within 10 months. Again, Keynes' number, 0.8.

Now when I was looking at this, because I was saying why did the government do this? Because I wanted to make sure it wasn't a response to a recession or something. Well I discovered that no, the economy was doing well, but it was an election year ploy and they had done it several times over 20 years.

So that meant I didn't have to do all this plausibility analysis. I could just use time series. So I went and created, using narrative methods, what we call an external instrument of these payouts over time. I had both announcement and the actual payout. And then I put it in a structural vector auto-regression model and just saw what happened when you got one of these payouts. So what did I find? So the program payout, it's normalized to one and then goes down.

Disposable income goes up, saving goes up, and then there's, in some rounds there was a second payout later, that's why you see the second spike, but look at consumption. You just don't see any effect on consumption in the macro data.

So I was left with a puzzle. Turns out you can use Agarwal and Qian's data if you go to Singapore. I haven't had a chance to do that yet, but so we have a puzzle of why they estimated such a high MPC, but yet it doesn't show up in the aggregate consumption. So historical macro plausibility tests in four cases, I've only given you two, show little or no effect of temporary transfers.

And when we reexamine it, we sometimes find that the econometrics that we were all using had problems. And when you use the newer methods, you don't find that. And we also found some evidence of dampening. What this means is that there just doesn't, I can't find any evidence of stimulus from transfers. Government defense purchases. So this is what I first started working on in 2016.

when I started looking at fiscal. So theoretically, even if the multipliers on transfers are zero, they can be bigger, still be positive on government purchases because first of all, typically the increase in defense spending is more persistent and there are a variety of other reasons. So in many models, this more persistent government spending leads to higher multipliers.

So what does my research show? Let me just, because I'm a little bit shorter in time than I thought. So I looked at some on my own and then later with Sarah Zuberi at historical time series data back to 1889 through 2015, which included lots of big wars. So we get lots of variation in the data.

When we estimated the multiplier, so I'm giving you the two-year cumulative multiplier, which is the one most relevant for stabilization, we get a multiplier of 0.7. And we didn't find evidence of higher multipliers during times of slack. My student, Eduardo Briganti, he uses shocks to defense contracts for the post-World War II period. He gets slightly bigger multipliers, but also a bigger standard error, but up to one.

The aggregate evidence suggests one or less. Now, on the other hand, the people who use state panel data were finding bigger multipliers. So, for example, Nakamura and Steinzen studied the effect of defense contracts on states, and were estimating what's called a relative multiplier, 2.5, using Bartik instruments, standard error. So I left it in my...

Journal of Economic Perspectives piece. Oh, you know, how can these be? I hadn't solved it. Well, by chance, because I was discussing another paper there, I went back to this paper, and we had discovered something later, which is you really should have lags of things in there. And when I re-ran their specification, putting in those lags to make sure you have lead lag exogeneity, suddenly the two-year key rule to multiplier fell to 0.75%.

So what the aggregate said. So also I reconciled those kind of things. But then here's a question. If those multipliers are so low, one or below, how do we explain the GDP rise during World War II? So here's an example showing the U.S. and government spending and GDP. GDP, they're different states.

but the vertical distance is the same. And basically, at least during the first part of the war, GDP rose as much as government spending. It fell less than...

than government spending at the end. Well, my answer is, yes, defense spending did lift a lot of economies out of recession, out of the Great Depression, but not because multipliers were so high, but because the increase in government spending was so great. So you're multiplying these two things as long as one of them is positive, then if the other one is very large, you'll get what you want there.

Government investment, let me just talk, so I wrote a chapter in the NBR volume on infrastructure spending. Many of us initially thought that using government spending such as infrastructure spending was win-win. You get stimulus in the short run, you get higher productivity in the long run. What we found, however, was that it doesn't work well in the short run. And why is that? There's two features of it that really reduce its short run stimulus effects.

The first is time to spend and time to build lags are inherent in infrastructure spending. So Eric Lieper and his co-author first noted that, and then I extended on that in my infrastructure chapter. So even the Obama stimulus, where they were really trying to get shovel-ready projects, took a long time to spend. Now, in this case, it wasn't so bad because unemployment stayed high for so long. But for most recessions, it wouldn't be a good idea.

And I've gone through models showing that even if you have a souped up Keynesian model with big multipliers, if you don't get that increase in disposable income right away, you're not gonna have much of a multiplier. So without delay, you get these multipliers that start at 1.5 and go down towards one. But with the delay in the spending, the multipliers are even slightly negative at the beginning and very, very low. So infrastructure spending isn't a good model

isn't good for stimulus. You can do infrastructure spending for all kinds of other reasons, but trying to time it right for a recession is hard. There's another thing, but I will skip that.

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Short-run multipliers, what I say is government consumption, so this is like defense spending, probably has the biggest ones and they're one or a little bit below, but they do seem to be positive. Government investment is lower than that and then transfers are low or zero, similar to government investment. Government investment likely has the highest long-run multipliers, but it's probably best timed based on long-run goals, not on short-run stimulus.

Now you can say transfers do a lot of things like income redistribution and things like that. If that's the goal, then it really makes, it should be financed with current taxes, not deficits. And so they probably shouldn't be used in recessions when you don't want to be raising taxes to do this.

So just a couple words on unconventional fiscal policy. So conventional Keynesian policy depends on income effects, all right? You give people more income, they spend more. And what I've suggested to you is that mechanism doesn't seem to be showing up in the aggregate. Unconventional fiscal policy exploits what we call intertemporal substitution. So a wonderful paper by Correa and authors says that at the zero lower bound,

when the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time consistent manner. So there's no need to use inefficient policies or wasteful government spending.

So, this is beautiful theory, but you know, we know that there's sometimes, sometimes doesn't show up, but there's actually some evidence for this. And some of it is from the news about future tax increases. Morton Robin has some of this, Leeper, D'Acunto, and Bachman. Some of these take the form of announcements of future tax increases. Others are temporary cuts in the VAT.

Another thing, which is more recent, the forthcoming paper by Bonfus and Jaravel is transfers with expiration dates. So if you give somebody a transfer of their permanent income, they're going to save it over their lifetime. But what they did in their...

randomized control trial is that they gave some with a three week expiration and they get much higher MPCs on that. So that's a possibility. But of course, that doesn't mean you're gonna get the big Keynesian multipliers because the second round is still gonna have the other smaller MPCs. But those are potential things that could be used and there is some evidence on this which I will skip right now. So,

I haven't, oh yes, I do want to say something else that is good for these, such as temporary VATs, is that consumers pay much more attention to this than for guidance. So you may not know yourself, you may not keep track of when the VAT is going to go back up again.

But as I say, Madison Avenue in the US and whatever the equivalent is in the UK is these stores, all of these advertisers have an incentive to remind you that the taxes are going to increase and therefore you should buy now. So it's what I call salient because they're telling you it's happening, comprehensible. Everybody knows that you should go shopping when prices are low.

actionable. They know how to shop. So I think that there's some potential here, but they warrant further investigation. So summary and conclusions, all right. As I said, there are cycles in the influence of traditional Keynesian ideas. These are driven by new theories and

economic events and new empirical evidence. And it's sort of that interplay that leads to Keynesian economics being high or Keynesian economics going low and those sorts of things. So my assessment of the current evidence suggests that stimulus effects are modest at best for traditional Keynesian models. It's difficult to find any macro effects of transfers

Time to build and time to spend delays make government investment ineffective. Government consumption probably has the highest short-run multipliers, but they're not giant. And I think it's worthwhile because we really need to be ready with the playbook the next time we hit the zero lower bound. We should do more research on the unconventional fiscal policy. So, thank you.

Thanks, Valerie. So now is the opportunity to ask questions. The idea is that raise your hands, but wait until you get the microphone from one of the stewards and keep it short, ideally one question. And if you're brave enough, then please state your name and affiliation. That helps a bit. But maybe I can get started with a hard question.

So you said this is that, you know, the effects are modest at best. So with the benefit of hindsight, would you have not done the stimulus during the great financial crisis and during COVID? You think we would have been better now if we would not have done it? Knowing now, I mean, knowing then what I know now, I mean, I think there is still a role for transfers that are insurance, income insurance,

But one shouldn't fool themselves about what the aggregate effects are. So given the cost in terms of debt, I mean, in the US, crazy things are happening and part of it is because politicians are finally waking up to the debt to GDP ratio and that's having huge costs. So those costs were not adequately taken into account. And then the other thing is to always remember

When people look at multiply on changes in taxes that involve tax rates, they are big. They're big, you know, in the US, Romer, Romer, Mertens and Robin. Cologne keeps finding them being very big. I think they're bigger than I think they should be. I have tried to knock them down. You know, I'm somebody who knocks things towards their, I cannot knock them down much.

So that's a huge cost, right? You spend a dollar for stimulus and then you end up losing two to three dollars of GDP later. And Droutsberg and Uhlig made this point even during the global financial crisis that

The multipliers on taxes are higher than the multipliers on spending. So do not spend lightly. So I think that was important, unemployment insurance, those sorts of things, the more automatic ones and then extension, some of the generous extensions, though not like they did with COVID, which was, went over the top. - Great, maybe we can collect some questions. So first over here, is that in the middle?

And then here in front. Hi, good evening, Professor Rami. I was a student until two years ago, graduated econometrics and mathematical economics from here, also taught by some of the people you mentioned. So the question, it's somewhat lighter, I suppose, than Professor Martin and Han is,

Being from the younger generation, we are now seeing two big consequences. One of pensions and the consumption smoothing not playing part anymore, looking at our future. And there's also the geopolitics, which I hope I don't have to cover. But how would you navigate the future policymaking? Or what are the key tools you would look to so then the younger generation can actually have...

Something more positive than what the media often reads You want to collect some questions here at the front here in the middle yeah, I'm Wendy Holland from UCL I wonder what the what what you think about the implications of your work for the interpretation of the functioning of automatic stabilizers in the economy and Wendy just give it to Sylvana

Thank you for the talk. Silvana Ternarero from the LSE. How do you explain the consumption boom in the US during COVID? And if people had saved all those transfers, probably we wouldn't have seen that expenditure boom and probably we wouldn't have seen the surge in inflation. How do I put those together?

Okay, so good. All right, so tools for the younger generation. Boy, I wish we could do more. For the U.S., I would say a big thing would be completely restructuring the healthcare system for the U.S. So the U.S. has this

big efficiency that is just there. If somebody can do something about it, that would free up so many resources. It would help reduce deficits because so much of the deficit is caused by spending on elderly people and all of those sorts of things. So that would be my number one thing. We don't have much choice on the response to geopolitical, right? You know, when these things happen, defense needs to be built up, so it's very hard.

I would say, even though it dampens the economy, I think being more fiscally responsible and raising taxes

needs to be done more than it has been done in the U.S. or just not extending tax cuts would also be helpful. But yeah, I wish it were easier. The U.S., I have my whole spiel on that. That's really a huge part. And of course, DOGI is not going after that at all. They're going after little tiny parts in the budget, so that's too bad.

interpretation work in automatic stabilizers. Presumably they would be very similar. I mean it depends on the persistence of the automatic stabilizer, but the only reason that we look at these sort of exogenous kind of timing is just so that we can identify, estimate the parameters without bias, because if we, you know, estimated the effects of automatic stabilizers because there are feedback from the economy.

Yeah, I would say so. Now there's some income insurance provided, but I think policymakers need to be open-eyed about this. Okay, if we're doing this, we're going to give people insurance, but it's not going to stimulate the economy much.

Yeah, yeah, yeah. And then Sylvana, yes, good question. So the consumption boom. So one of the reasons I have not yet done the COVID stimulus as a case study is because it is so hard to figure out what the counterfactual is. But I did start peeking at it because I said, do I, I forgot, I didn't have enough time for this. But here's the interesting thing. So let's look at the third stimulus in the U.S., which came out in, what was it,

March or April 2021, and you see consumption rising. But guess what? That was when the vaccinations were being rolled out. So I know for us, we were going out, we went to New Orleans that summer. So I think many, many people were doing this. So trying to parse out how much was because of the transfers

and how much was that we were finally not locked down, we weren't sitting in our houses fearful of getting COVID, would lead to that. It's just very, very hard to parse that out. And when you look, I've looked at it, I think,

Lower income people did spend some of it, but I think in the aggregate, I don't know how much evidence that there is that it was due to the transfers rather than the recovery from COVID. On the inflation, yeah, they certainly asked me about that in the IMF, because most of us said, oh, it's the fiscal stimulus led to the inflation. Monetary policy was also very accommodative, and they left

But both they left interest rates at the zero lower bound too long in the US. And there were supply disruptions. So I think potential GDP fell temporarily. And if you take a Phillips curve, anything that changes output relative to potential is going to give you inflation. So that's another possibility. But that's not a definitive answer, but that's just what I think might have happened.

Okay, so we're ready for the next round. This is in front of the pillar and then, yeah, okay, I have to look upstairs too, I guess. But there's no hands upstairs, but yeah, so over there. Ronnie? Hi, Joseph Wheeler from University of Hertsforshire. When they were looking at the 2008 rebate, was there any interest in the percentage of change in household debt levels or interest during times of stagnation versus uncertainty?

Hi, yeah, Rudy Parker, no relation. I was an alumni here. So Hayek, who taught here, his Austrian business cycle theory suggests that stimulus-induced booms misallocate capital into unproductive areas, leading to painful corrections later. Do you think that could be part of the reason why GDP growth has flatlined in the UK and actually has gone down since 2008? Yeah.

And then I guess, Bobby? Thank you. Rani Razin, Economics, LSE. I have a question because in all of your empirical

papers that you're talking about, you measure what happens when you give people more money, the government spends more. My question is about the opposite. So what happens when the government tightens up, austerity? Do we see any evidence in kind of the data that there's something going, something is different, that it's not the same derivative?

- Okay, can I take the three? Okay, so let's see. Chris, about the household debt payoff. Yeah, so one way to save is to pay off your debt. So that shows up in saving rate. So that's, I definitely think that was a big issue in 2008. And people who have studied other episodes find that often these temporary transfers go into debt pay down. But again, that's in the saving rate.

You know, you can either, the way you can save is either build up your assets or decrease your liabilities. And so they were doing it. And it was probably particularly pronounced in 2008 because everybody was starting to worry. And they were so over leveraged that that would be another reason why they wouldn't

So that's a great question. So then Rudy, misallocation due to stimulus, that's an interesting idea. So I don't know enough about the UK, you know, the narrative about the UK. All of these narrative things I do always take a long time, so even figuring out Singapore, and I have, the UK has so many good economists, I figure that, you know, their own economists are probably better at this than I am, but that's a,

The flatlining, now if I recall there was austerity and were taxes increased? Yeah, and with those high multipliers on the tax increases that could be part of the reason for it. But I don't know what other sorts of things did it

something that I'd like to study more because I'm intrigued by why the U.S. was still doing pretty well. I mean, it was slow for a while but then picked up, but then the U.K. flatlined, and then I've seen the more recent projections and was sort of surprised at how

how pessimistic they are and how they were cut even before whatever's gonna happen tonight from Washington, even before that, that they were cutting the projections. I wish I could answer that better, but that's a great question about the misallocation, 'cause that is a possibility.

What happens with decreases, okay, so I actually recently wrote a paper, are the effects of government spending asymmetric? And we found that they weren't, okay, but

Austerity, what we know from the IMF studies, from Alessina and co-authors, is that it really depends on what the austerity package is. And it appears that if most of the austerity comes about in tax increases,

it has a much more negative effect on GDP than if it comes about in terms of decreases in government spending. And that's consistent with what I just showed you, that the multipliers on spending seem to be lower in absolute value than the multipliers on taxes. So those are things I did not have to reconcile, is those austerity studies and the multipliers.

Great. We're ready for another round. Let me take one from an online attendant by Omar Carnival, a PhD student at Queen Mary here in London. So he asked whether you're looking only at the short-run effects and whether you should also check whether the long-term effects, and in particular he mentions a recent paper by

Paulo Chirico and Antolin Dias. And then I think there's somebody over there at the back who's been very keen. And then Morten over here in the front. Go ahead. Hello. Thank you very much. I was a student here and now an economist with government.

In the intro to your research, you talked a lot about debt-to-GDP ratios and how they're rising across the world, and then also a bit later on about the importance of fiscal discipline and constraint. At the same time, we've seen the Japanese debt-to-GDP ratio rise above 250%, and it

In the UK context, I think a few years ago, in the midst of the austerity that you mentioned, we had estimates of something like 80% of GDP as this tipping point, after which everything would really go downhill.

I'd put it to you that it seems as if we have the constraints wrong. It's much less in the case of countries that issue their own currency that there's a financing constraint and much more that we should be thinking in terms of real constraints, stuff like unemployment, underemployment and then specific sectors. Interested in your thoughts on that.

Okay, so Omar from online. Yeah, checking the long run effects. So the Sirico et al paper is very interesting. And I had wondered this before I'd actually started working on this and then got busy with other things. Because you see...

productivity growth and GDP growth so fast after World War II. And that's an influential observation. I saw the working paper version, so I hope it's the same as in the published version. They show some very thought-provoking evidence. And it could be that there are long-run effects. I think a lot of it is very specific. It's not so much from just arbitrary transfers, but rather this focused...

research and development in order to build up during the war and then also the space program in the US led to all kinds of spin-offs. Also right after World War II, the US set up this thing where the government would fund research at universities

and it led to a lot of research and development. So I think that there's something there, but it's not going to happen with just haphazard spending, I think is the way to think about it. But I'd like to look more at that. The Japanese to debt GDP ratio, yeah, 'cause I always wondered about that too, 'cause we all heard about these tipping points, Reinhart and Rogoff.

So I've been talking a lot to people like Michael Bordo who reminded me about the importance of financial repression, which the US used to have and Japan still has. So how can they get away with such high debt to GDP ratios? Well first of all, the Japanese themselves own almost all the debt in Japan, so they don't have to worry about owing the debt to foreign people.

Also, there's a lot of financial repression in Japan in that the Japanese households are earning hardly any interest on all of those funds that they're lending to the government. So that's a very different sort of thing. Country issue its own currency.

I've been talking more now to the finance people like Hanno Lustig at Stanford, and people are finding more and more evidence that there is a downward sloping demand curve for U.S. Treasuries.

and that if you keep issuing them, interest rates are going to start going up. And the problem is when you already have as much debt, which you can't get rid of except with inflation, then those high interest rates are gonna really send you off on a path. So the US now spends more on interest payments than on defense.

Given what's happening geopolitically, it is really scary how little fiscal space there is. Now the US does have exorbitant privilege, but it could end up having to pay much higher interest rates, which would probably get the government doing financial repression again. Which of course, wreaks havoc with financial markets. So I think it's a very, very scary situation. And modern monetary theory doesn't work.

Did we forget you in the last round, Morten? I think we did. So there's two over here, Marvin and Morten. Okay. So right over here? Yeah, sorry, here in the front row too, and then we'll go to the balcony right in front. M&M. M&M.

No, yeah, so one way of reading your lecture is that we should look more at these unconventional policies that might be what I was hoping. But we do know, for example, one example of that cash for clunkers was not effective at all because people buy cars when they are cheap and then when they're no longer cheap, you get a reversal. So if you look during the year, the multiplier is almost zero.

Now of course in our models the beers are not cars because they're not durable, but they are storable. So wouldn't you expect that because goods are storable, you get exactly the same effect with a temporary VAT card. So at the end of the day, I'm just wondering what these unconventional policies, as a matter of fact, what they can do.

Thank you, Valerie. And I'm Marvin Barth from Thematic Markets. I do recall when I learned macroeconomics from a couple of people back in the 90s that we spent a lot of time talking about multipliers. So two of those people might be on the stage here. But

My question is actually following up on Ronnie's about the difference in spending effects, contractionary, but also

in terms of positive fiscal multipliers that a lot of people are expecting for Europe right now with all these announcements of new fiscal spending. And you mentioned it earlier, but I've always been very impressed by the work of Alessina and Francesco Gervazzi looking at how

how you might have non-linear Keynesian effects. At low levels of debt, you might have very strong multipliers. At high levels of debt, they might actually be negative. And since most of Europe is actually massively over-indebted, just like the US, as you say, I'm wondering if you have any thoughts on your research as it's applied here, particularly given that you said that defense purchases are actually pretty stimulative. Will they be in this case?

Hi, thank you for giving the speech. So you do mention you're using a lot of historical data and/or qualitative data to study the stimulus. And so my question is related to the pros and cons of using historical data. So I think the

If you use data from a long time ago and especially long periods of time, then a lot of things can change. For example, the government policy and the stimulus packages and even productivity. Especially a lot of the theories or empirical evidence are found after the crisis have already taken place.

My question can be phrased, can you please tell me the pros and cons of using historical data and what we should keep in mind when using this data to help us whether to revise our model or to design our policy in the future? Thank you. - So this is why I say we need to study it more. Now in your, so I didn't have time to show it, but the one where you don't have this issue is when there's an announcement

of a permanent change in taxes, or as permanent as they can be. So for example, the 2006, I had graphs showing what happened in Germany when they announced that they were gonna raise, and you definitely see this run up of spending before that actually happens. And so you're not gonna get so, I mean you're gonna pull some of it forward, but you have to just see, it depends on how long your recession lasts.

So it goes into the high and VLAN in Econometrica where they actually figured out monetary policy also has this problem because if you lower interest rates now, you're pulling vehicle durables purchases forward and you're stealing from the future. And they find that that was a big issue for the global financial crisis, all of that zero lower bound interest rates. So yes, we need to study it more.

Because now one thing with taxes is though if you announce a change in tax rates like what you and Carol Carl Merton's found At least you're going to get more revenue to pay off some of that debt from some of the other stimulus there Marvin yes, Valor and I only talked about multipliers. He was our

when we were teaching undergrad. And in fact, one of the reasons both of us decided to quit teaching intermediate macro to undergrads is because there was such a disconnect with what was going on at the graduate and research level because nobody was talking about multipliers. So that's one thing. So nonlinear effects of debt, I think that's definitely a possibility. So we had looked at state dependence

with respect to asymmetry, with respect to whether unemployment rates were high or low, whether there was slack in the economy, whether it was ZLB. We had not looked at debt, but there's actually a good paper of broke,

Bronar at Pompeo Fabra, he has a very interesting paper that looked at debt ratios, but I'm trying to, he got higher multipliers. Oh, when you could sell more of your debt abroad, that's what it was. So there are all kinds of, and then also Geert Pierson in Belgium also has some work, but I'm trying to remember exactly what he found. So there is some work on that, but I think we should look more at that.

And then the question about the pros and cons of using historical data. Believe me, I agonize about everything about historical data because you do worry things might have changed. And one of the things is you need to understand the context of the historical data and that's why it always takes me so long to do each project. So I've done exhaustive analysis of World War II

And I came down under the same, there's a wonderful quote from Milton Friedman that says, a lot of people throw wars out of the data, but that's a mistake because that's when you get huge movements that aren't going to be hidden in the just noise of everyday life.

And what you have to do is understand the context. So, for example, World War II, GDP, something that would make GDP go up more than usual was the huge increase in the labor supply because of military conscription and patriotism.

Okay, so that would make multipliers bigger. But on the other hand, there was a lot of, there were price controls and rationing, so people couldn't consume everything they wanted, so that would make multipliers lower. So you just have to understand your data. You can't just blindly run some time series analysis. And so I feel comfortable using historical data as long as I know what was going on there. So, you know, the cons are things can change, but the pros are you really get striking results.

You get big upheavals and so you can see effects a little bit better there. But it's a good question that one always grapples with. Okay, I think we have time for another round. There's one over here. And then I'll take those two right next to each other. Okay, we can probably have another round. Go ahead. Thank you so much for the lecture.

Can I ask what do you think is the role of price expectation on the effectiveness of fiscal policies?

- And then I think there were two questions. You already have a microphone? Okay. - Thank you very much for the talk, Professor Valerie. My name is Manc. I'm a year 12 student currently doing my A levels. So my question would be many advanced economies including the US and UK and also several European nations are grappling with record high government debt levels and at the same time, recent and rising interest rates are making debt servicing costs much higher.

So do you think governments even have the fiscal space to implement large-scale stimulus? Or do you think we're moving towards an era where debt constraints force policymakers to rethink traditional Keynesian responses to recessions? Yeah, just pass the microphone to him. Hello. That was a very nice lecture, Professor Valerie. Very profound. My name's Tuki Brown. I'm also a year 12 student.

My question is you said that defense spending was a proven great stimulant during World War two as GDP's rose With the increased of conflict around the world and the EU pledging around 800 billion dollars defense spending and the UK increasing its defense budget will this translate into? Just repeat your question With the rise in conflict

With the rising threat of conflict throughout the world and the EU pledging $800 billion towards defense and the UK increasing its defense spending, would you say that this will serve as a stimulant for European economies? - So role of price expectations, the effect of fiscal policies.

So that we certainly have theories that say, you know at the zero lower bound the multiplier will be bigger because if the fiscal stimulus should raise expectations of prices, I don't think

that's a big channel. I mean, I don't have strong opinions, but just from what I've seen, I don't think that that's a big channel is the price. I could be convinced otherwise, but I think the main thing is just through the spending and how it stimulates sort of employment kind of thing. Grappling with record high debt, should we rethink Keynesian stimulus? Yes. That's my point is, given our debt levels right now, we can't just...

you know, throw things out with the hope because we can't afford to do so. And exactly leading into the third question, you know, about, you know, whether we have, you know, fiscal space, and it's actually that. We don't have the fiscal space to spend on things that we're not sure, you know, whether they're going to have...

many benefits and then with the rise in the current conflict will defense spending stimulate yes i think it will not a huge amount but it you know could be up to one percent it'll stimulate manufacturing industries in europe you know um so yeah there'll be some stimulus from it but but of course that's going to raise debt even more and they'll probably pay higher interest rates but i could imagine central banks

saying for patriotic reasons we have to accommodate, but then to keep the inflationary expectations out they'll have to do financial repression and those sorts of things. - Maybe I can add on a question from the online, it's also related to your question. So given the current high debt to GDP ratios, suppose that for whatever reason is that maybe a trade war is that we do get into a recession, what would you do?

Is it just monetary policy, but then given that inflation is not that low either, is there anything left? Just – Just – yeah. Or should we just – yeah. Well, if –

Monetary policy should be the first line as long as the interest rates are above the effective lower bound. I mean, that's how it was before the global financial crisis. And of course, you know, automatic things giving insurance to people who've lost their jobs. I mean, I think that as a society. But one could consider, you know, during the good times actually building up, raising taxes to build up stores to be able to pay out rather than increasing debt more.

Okay, maybe quickly, I think because there were a couple more young people who were very keen to ask questions. So the one on the side, maybe, maybe, and okay, ah, very good. Just those two and then, you know, we'll end.

Hi, current econometrics undergrad here. Thank you for the really insightful lecture. You mentioned the use of an external instrument approach and a structural vector autoregression. I think for your Singapore case study, in light of your handbook chapter in 2016 and then the recent Wolf paper, I was curious for your thoughts on structural vector autoregressions versus local projection methods for time series macro in general.

- Very good, and then in the front, get a microphone. - Yeah, hello. - Is it me now? - Yes, hello, Frank Wingate. I teach economics at school, secondary school. My question is regarding taxes. You suggested that tax could be possibly a beneficial way of stimulating the economy. What about cutting taxes for the wealthy like Donald Trump's

threatening to cut taxes for his oligarch friends and the theory of trickle-down economics would be that those people would then invest the money in productive activities. I generally teach my students that's a lot of rubbish and that they'll probably spend it on assets and mega yachts and mansions. Am I right?

So great question about external instruments, LPs versus VARs. When I was doing the Singapore thing, I did robustness checks, and if I recall, the LPs were just fine. It's just I got prettier graphs with the VARs. But the latest, the greatest on LPs versus VARs is going to be presented at the MBR Macro Annual next week.

And I'm an organizer of that and we commissioned a new paper from Christian Wolff and Blackberg Muller and it's the handbook for people. It's gonna be like a handbook paper that will tell you which is best in which situation and what the trade-offs are. And since they're so good at giving answers, I'll let you, you can watch it online. Usually the video will be up for at least two weeks afterwards and there's a paper there already. They kind of come down LPs.

you know, are the best. It's just this one, I did the VARs, but I think the L's were similar if I recall. The cutting taxes for the wealthy, trickle-down economics, oh yes, good terms from before. So that's what's, so Morton Robin, he's, you know, from UCLL, he and Carl Mertens use Romer and Romer, so this is Christy Romer, who's chair of the Council of Economic Advisors of Obama, no crazy right-winger.

they found really high multipliers. And when Morton and Carl split it up between corporate taxes and income taxes, they found that on average in the post-World War II period in the US, cuts in corporate taxes were basically revenue neutral, though cuts in personal taxes were. Revenue went down. Now, most recent tax cuts seem to have smaller multipliers. And I asked Carl, I don't know if Morton agrees with him,

One of the things is where you're starting from. So the tax cuts that are in their sample are things where the highest marginal tax rate in the U.S. for personal income tax before the Kennedy tax cuts, it was 90%.

So Kennedy cut it from 90% to 70%. Reagan tax cuts cut the highest marginal rate from 70% to 50%, and then it was cut further down. Now cutting them even below this, it's diminishing returns, I think. So you expect lower multipliers when you're already starting from a low tax rate, so I don't think you're going to get much trickle down. You know, you'll get lower multipliers.

So there's another state dependent kind of thing. - That's a good point to end, is that I would like to thank everybody for coming. I think we had a great mix of questions, very technical ones about local projections and common sense ones. So please join me in thanking Valerie one more time.

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