Last week, when Goldman-Sachs’ Alec Phillips released his inflated-multiplier report on the House Republicans’ budget, I noted the problems [1] with his Old Keynesian assumptions.
I was gratified to see that today, Professor John Taylor – the man on whom I’ve relied most extensively in re the new findings on the multiplier – came to the same conclusion [2] (and added some other ones that I confess I missed in my focus on the multiplier problem):
As I have written before [3], the old-style Keynesian approach used by Zandi has many of the same flaws that are found in the Goldman Sachs approach: excessively large multipliers, inaccurate predictions of the effect of the 2009 stimulus, failure to recognize that reducing uncertainty about the debt can have positive effects, especially if it is done in a credible way by reducing spending growth now, not postponing it to a date uncertain in the future.