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Of course, these data do not allow one to distinguish the treatment effect from self-selection based on innate characteristics.

How large is the fiscal policy multiplier?

Volker Wieland's answer:

Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

Update: A reader emails me a recent, related study, which makes an important point: The impact of a fiscal change depends on whether and how quickly people expect it to be reversed. If the fiscal stimulus is very temporary and soon to be reversed, the crowding out effects described above by Wieland will be smaller, and the effects on output will be larger.

Unemployment Update

Source of graph. Click here for my interpretation of it.

More on Rising Healthcare Spending

In a previous post, I quoted economic historian Robert Fogel on the income elasticity of healthcare. Fogel's claim of an elasticity substantially greater than one brought this email from MIT's Daron Acemoglu:

Dear Greg:

We noticed your blog on health care and I thought it might be useful to bring my research with my colleague Amy Finkelstein and our PhD student Matt Notowidigdo to your attention.

In this paper, Amy, Matt and I looked at the relationship between income and health care spending. Unlike the results you reference, our findings suggest that rising income cannot explain much of the rising share of GDP devoted to health spending. (In other words, we do not find evidence of an elasticity of health spending with respect to income that is greater than one). We think that the "assumed" relationship that health-care share of GDP should rise automatically as incomes rise is on much shakier grounds than most people realize.Of course, people with different priors will interpret the evidence differently, but we think in this case the evidence is interesting and informative. The paper is here.

Of course, one may ask, if not income, what is responsible for the dramatic rise in the health-care share of GDP. Amy has a very interesting paper on this, which you may have seen, estimating that the spread of health insurance may have played quite a large role in explaining the rise in health spending. So our view has now evolved,as a result of the empirical evidence in these papers, to the tentative conclusion that much of the rise in the health-care share of GDP may be due to policies and regulations related to private and social insurance and the way that the health market is organized (that dreaded word "incentives"). But again I am sure many people will not agree with this conclusion.

In any case, some quick reactions from us, which may or may not be useful to you.

Daron

Thanks, Daron.

Beyond a large income elasticity and the effects of incentives Daron describes, there is a third logical possibility to explain a rising healthcare share of GDP: an expansion in the range of products available to the consumer due to exogenous* technological change. As doctors figure out new and better ways to prolong and enhance life, we may rationally choose to buy these products. It might be tempting to view this effect as a large income elasticity (which is perhaps what Fogel is doing), for the technological change raises real incomes as well as healthcare spending. But the resulting parameter is not a true income elasticity, which measures how much more healthcare we buy if income rises while the range of products is held constant.

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*Of course, technological change is not completely exogenous. Surely, the incentives offered by such policies as the patent system and government research funding matter for medical advance. Here what I mean by "exogenous" is not driven primarily by the incentives determined by the health insurance system.

Krugman on Macro

Paul offers up a very nice essay explaining his view of the field.

Why are we spending more on healthcare?

The answer from Nobel Prize winning economic historian Robert Fogel:

The main factor is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend. Between 1875 and 1995, the share of family income spent on food, clothing, and shelter declined from 87 percent to just 30 percent, despite the fact that we eat more food, own more clothes, and have better and larger homes today than we had in 1875. All of this has been made possible by the growth in the productivity of traditional commodities. In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

See also these wise words from DeLong the elder.

The secret is out

Click on the graphic to enlarge.