U.S. growth expectations may be too rosy as analysts overestimate how much tax cuts will boost the economy, according to an economic letter from the Federal Reserve Bank of San Francisco.
Analysts have forecast large increases in economic growth over the next two to three years following $1.5 trillion in corporate and personal tax cuts over the next decade. But recent research finds that such fiscal stimulus is less effective when the economy is expanding compared with its benefits when enacted during a recession.
“This suggests these forecasts may be overly optimistic,” economists Tim Mahedy and Daniel Wilson wrote in their note published Monday on the San Francisco Fed’s website. “The predominant research finding is that the fiscal multiplier is smaller during expansions than during recessions.” Wilson is vice president in the economic research department of the San Francisco Fed. Mahedy is a former associate economist in the department who recently joined Bloomberg Economics.
The authors ran down several recent papers that support this point:
• Spending multipliers were much smaller in expansions than recessions in a panel of Organisation for Economic Co-operation and Development nations.
• Microeconomic studies show that consumers spend more out of each extra dollar they earn during recessions.
• Marginal propensity to consume was 20 to 30 percent higher in the Great Recession than in other recent years, one paper found.
Source: Bloomberg News
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