David Henderson Versus the World



David Henderson has a column in Forbes getting some pick up in what passes for conservative movement policy circles alleging that Christina Romer’s co-authored paper on “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” debunks Barack Obama’s approach to fiscal stimulus.

Curiously, in the course of making the argument Henderson notes a few things that I would consider to cut against his argument. For one thing, Romer has been designated to serve as the Chair of Barack Obama’s Council of Economic Advisers which either makes the situation ironic (Henderson’s view) or else makes Henderson mistaken. For another thing, conservative economist Greg Mankiw doesn’t agree with Henderson’s interpretation. And for another other thing, conservative economic Larry Lindsay doesn’t agree with Henderson’s interpretation. But none of this gives Henderson pause. Instead, he confidently opines that they’ve all got the paper wrong.

I’m going to go with the other interpretation: Henderson is wrong.

He writes “The Romers carefully sift through all federal tax cuts and tax increases from 1947 to 2005 to figure out, based on the discussion at the time, whether the changes in tax policy were motivated by a desire to offset the business cycle or by other goals.” Their finding was that tax cuts implemented between 1947 and 2005 that were intended to serve as economic stimulus didn’t work. Henderson takes this to mean that the whole idea of fiscal stimulus is discredited and Obama is being foolish. A more reasonable way to look at the situation is that Obama and his team, like most economists, thinks that under ordinary circumstances recession-fighting should be done through the federal government’s “automatic stabilizers” and through the monetary policy actions of the Fed. But under rare circumstances—circumstances that everyone agrees never arose between 1947 and 2005—the Fed has already lowered interest rates to zero and the economy is still weak. That was the situation during the Depression, it was the situation during Japan’s “Lost Decade,” and it’s the situation today. But it never happened during the time period the Romers were looking at.