« Corel Office Document | Main | Bruce Bartlett: Mismeasurement of Federal Spending, Investment and Saving - NYTimes.com »

11/04/2013

Comments

Matt Kinderman

Monetary policy has a very finite limit that has been stressed perhaps too much in times of crisis. As we have regularly discussed, economists cannot tell the future exactly any more than a weatherman can. In times of economic crisis, as this article details in the 30s, 70s, and recent recession, monetary policy makers take much of the blame for an economic downturn. In kind, often they and others underestimate or under-utilize monetary policy when it is needed most. The article points out how excessive monetary policy is often feared and criticized but argues that toothless monetary policy is equally as dangerous. Thankfully this trend of weak policies has been declining over the course of our last 3 major recessions, but is something to keep in mind in our current economy when debates over the fear of expansionary monetary policy versus sitting back occurs.

Jacob Strauss

The article makes a valid point in that the effectiveness of a stimulus package largely depends on how consumers react to the additional stimulus, and through facts and figures it also shows the logical statement that lower income households will more effectively use the stimulus funds because they have a higher MPC than wealthier households. It also shows that whether it is financed through a government transfer to increase the disposable income of the poor or uses redistribution policies does not alter the fact that more money will be pumped into the economy, but the article stops short of saying which policy it advocates. Certainly taxes on the rich to give money to the poor are a very controversial topic,and the article does not address the negative concerns of this policy, such as limiting incentives for work. I think, though, that while both methods would make a fiscal stimulus more effective, the public support for increasing taxes on the wealthy will gradually grow as it has become clear that the gains of the economic recovery have almost all gone to those already at the top.

Emily Utter

Something we have talked about in class is how the marginal propensity to consume is much greater for the poor than for the middle class. This article shows proof of this. The average percentage of income that will be used to consume is around 48%, according to this article. While the poor's percentage is much higher at 65%. This causes policy makers to focus their attention on increasing the poor's disposable income because it will have the greatest effect on the economy. This is proven by the fact that when money is transferred to the lowest 10%, aggregate consumption increases by 0.08% while it only increases by 0.05% when the transferred money is targeted at the lower-middle class. This is very interesting and further explains the concepts we have talked about in class. But a warning about this article is that the economist only take into account a change in income and neglects the affects of a possible increase in tax or prices.

Kasey Canon

This article does an excellent job explaining how the marginal propensity to consume differs between the poor, middle, and upper class. As demonstrated in Figure 1, the poor have a much higher MPC than the wealthy. By understanding the reasons behind different marginal propensities to consume, policy makers can better create stimulus packages. Because of the differences in MPC, lower income households will more effectively use stimulus packages than wealthier households. The article offers two types of experiments--government transfer and redistribution policy. Although the article does a fine job explaining the effects of each of these experiments, the author does not include which policy he would support or advocate.

Jean Turlington

The article, like the previous commenters before me have discussed has raised some interesting but somewhat controversial ways of using fiscal policy to increase consumption. It makes logical sense that giving more disposable income to the poor will result in more overall consumption, than if given to the rich. The poor have a higher marginal propensity to consume. Although ideally these different policies could be in-acted and help the overall economy and counteract the Great Recession, it can be difficult to get support for policies like this. The rich are powerful, and do not want this to happen to them. Especially in America where people are skeptical of taxation overall I can see this as a problem. These seem to me like great ideas in theory but they might be a little bit troublesome to implement.

Maddie Kosar

As Kasey points out, this article does a good job of highlighting the difference in MPC for the rich and the poor. As the article states, pumping more money into the economy will reduce debt, and people may be more likely to pay off that debt than consume, so we would end up with inflation but not necessarily more spending. The data that this article presents gives reason to tax the upper classes more since their MPC is much lower than the lower classes, but this runs into many problems because of the opposition of raising taxes by the higher class. It works in theory, but many politicians are reluctant to do so because it will cause growing resentment. This article does a good job of presenting important evidence, but it does not offer us many explicit answers. It is very hard to implement these policies because of the ambiguous outcomes, but with a long lasting 7% unemployment rate, we must try something new to help our economy.

Katie Barnes

This article focuses on arguing that we must understand the MPC to design fiscal policy. Regarding fiscal stimulus packages that are created to counteract the recession, these efforts are successful depending on how consumers respond to fiscal policies and how the government finances stimulus packages. One option for fiscal reforms is to increase the tax burden of the rich. However, what is more favorable are realistic models with precautionary savings or liquidity constraints that feature heterogeneity in MPC. The example this article provides of the MPC of poor and wealthy households supports what we have discussed in class. That is, wealthier households will spend less of additional cash they receive, whereas poorer households exhibit a higher MPC. Through either government transfer or redistribution policy, which the article provides examples of, the government can predict consumption.

Mitchell Brister

The effect of monetary policy is fairly straight forward in its positive effects on the economy. It backs up the fact that lower income families spend more money of the money they would receive than a higher income family. Obviously monetary policy and stimulus should be directed toward these lower income families. This also proves that when putting in policies and laws it is always best to be as specific as possible. Instead of simply averaging the entire economy's MPC, it was best to target the lowest 10%.

Matt_Kiser

The theory makes sense. Since, the poor tend to have a higher MPC, giving them more money would have a greater effect on spending due to the multiplier effect. However, it is just a theory. It is based on how much people think they might spend if they were to receive x-amount of money. If we could somehow actually give people money and see how much they spend then that might give a better idea of what would happen. Also, as the author mentioned in the last paragraph they didn't control for the effects of the taxing or borrowing on other variables other than the MPC. The economy is a very complex system, so it would be incredibly difficult to find the exact effect a stimulus would have. But the big idea is that a redistribution of wealth would increase GDP no matter to how much of the poor to whom you give money. Which is a good idea, could it happen? Well the wealthy may use their power to stop that from happening, but who knows?

The comments to this entry are closed.