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The model airplane club

By Owen Paine on Friday February 13, 2009 07:01 AM

Talk about your Gyro Gearloose -- this young Icelander, working inside the New York Fed, has taken a "state of the art" macro model used widely by Ivy policy wonks, set it up to deal with our zero short rate T-note market and made it talk to us in looking glass logic: "Forget yer massive payroll tax cut plan, Owen!"

Because according to this analyst, "it would be ideal to raise payroll taxes to stimulate the US economy today."

Yup, don't cut 'em -- that will cause further real output contraction. Nope, raise 'em. Just goes to show ya -- build it right, turn the crank, and you can get the voice of Satan.

To be fair to our sorcerer's apprentice here, he adds, "I am bit hesitant to draw the lesson from this paper -- although this clearly is a direct implication of the analysis"

Okay, I'll spoil the fun: it's all just Mankiwish hijinx. Note this in the author's conclusion:

"It is worth stressing that the way taxes are modelled here, although standard, is special in several respects."
Warning, Will Robinson, warning!
"In particular, tax cuts do not have any "direct" effect on spending. The variation in taxes only has an effect through the incentive it creates for employment and thus "shifts aggregate supply", thus lowering real wages and stimulating firms to hire more workers."
Get it?
"One can envision various environment in which tax cuts stimulate spending, such as old fashioned Keynesian models, or models where people have limited access to financial markets. In those models there will a be positive spending effect of tax cuts, even payroll tax cuts like the ones in the standard New Keynesian model."
I repeat:
"Models where people have limited access to financial markets."
Know any "environments" like that, dear readers?

Comments (5)

Al Schumann:

It makes perfect sense if you consider the supply of labor as a problem of overcapacity. But to stimulate the demand side, it would make much more sense to simply kill every tenth worker, in addition to hiking the payroll tax. It's Pigovian!


Does that also mean you can lower real wages by raising the minimum wage?


i'll go for an inter class trade

scrap 10% of the potential job force
or better just fuckin gulag em
wpa with razpr wire

so long as a 5 trillion dolllar
one time only
corporate levy is enacted simultaneously
as a nice dollar matching plan
matched in some ratio
to each individuals pay in

such a generous xmas scrooge like
this 5 trillion dollar bribe errr contribution
to the SS
retirement trust fund might be
i know it would greatly ease
my aching klass konskience

what ..its a sieve ??
nonsense gentlemen
red scare nonsense
pay no attention to talk about
an immediate dispersement
of the whole fuckin moynihan bindle


yes peter
if we hit the zero short rate bound
that too becomes reality
in newbe hicks world

note new keynesianism
is perhaps new
but its not keynesian

by whatever assumed name
johnny hicks
he of is/lm model
is the natural demiurge-father
of this string of
false bottom box trick macro-cons
we've lived under since WW II


We've gotta assume that at some point the great American worker will say "no way!. Keep your eye on California where state workers' pension funds are running out of money, and even cops and firemen are being cut back.

Of course, this could all result in the re-election of Schwartzenegger, or, yikes!, Dianne Feinstein.

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