In a fascinating article in the New York Times
, N. Gregory Mankiw points out why the "stimulus bill" has failed so signally to help the economy recover: it's the wrong tool.The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.
All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Bocconi University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”
Supply-siders, though, might be quick to pick up the justification offered, and investigate the academic and statistical underpinnings linked to in the article.
UPDATE: Corrected spelling of Bocconi University, added link to their website, thanks to fpb for pointing it out.