CEPR | Stimulus and Fiscal Consolidation: The Evidence and Implications

In a previous post, see here, Matias provided a graph that displayed the fiscal results for the US as a share of GDP from 1993-2014, along with a discussion of the misconception that democrats are nothing but tax/spend liberals. I thought it would be pertinent to post this paper by Dean Baker and David Rosnick providing conclusive evidence on the effects of stimulus packages and fiscal consolidation during the recent economic crisis.

From the abstract:

The first part deals with the most important literature on the subject, the consensus in the research of the past decade attests a clear counter-cyclical effect of stimulus packages during a prolonged recession. The second part deals with the impact of changes in government consumption and investment to growth. For this data for developed countries in 1980 are analyzed. Consistent with much of the previous literature have increased government spending during a crisis has a positive effect on economic growth. In addition, the period is simulated after the crisis, the multiplier effect is around 1.5. The third part focuses on the production potential, which has declined sharply due to the economic crisis. This would have to include a comprehensive model that analyzes the effects of an economic stimulus package with, since the effect could turn out relative to the size of the stimulus package as significant.

Read rest here.

Fiscal balances in Brazil, 2002-2012

This is from an unpublised paper by Fernando Maccari Lara, Roberto de Souza Rodrigues, and Carlos Pinkusfeld Bastos.* Figure below shows the nominal and primary balances as a share of GDP, and the financial expenditures, which make the difference between the two balances (i.e. a primary surplus becomes a nominal deficit after the interest payments on outstanding debt). All figures as a share of GDP.

Note that during the whole Lula, and the first two years of Dilma, the Brazilian government kept primary surpluses, as it has done essentially for a few decades now, with few exceptions. There is a tendency for the expenses with interest rates to go down, they remain at 3.5% of GDP (in 2012), which means that it remains the largest 'social' program in Brazil, larger than the Bolsa Familia.

From the asbtract: 

Brazilian economy adopts a set of economic policies after the crisis in the end of the 1990s decade. Setting a target for the primary fiscal surplus was the main objective of the fiscal policy, and it has been in used since then. In fact, the Workers Party (PT), which was initially critical to this policy, maintained it after assumed the government in 2003. Therefore, this article analyzes the fiscal policies during this party government period from 2003 to 2012. To achieve this objective it will be used both government's official raw data and a calculation of fiscal impact of outlays and taxation. We conclude that there is no clear rationale behind the determination of primary fiscal surpluses which became more of a political dogma than a useful policy instrument. In terms of economic growth one cannot say that the fiscal policy has been effectively contractionist but in some years it most certainly did not contribute to a more robust rate o economic growth and did not respond to stabilization policy needs.

* To be published in the Annals of the Brazilian Keynesian Association Meetings.