Comment on “The Fall and Rise of Keynesian Fiscal Policy”

• Date: 01 December 2012
• Published date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01230.x
• Author: Hiroshi Yoshikawa

Comment on “The Fall and Rise of Keynesian

Fiscal Policy”

Hiroshi YOSHIKAWA†

The University of Tokyo

JEL code: H30

Despite the downfall of Keynesian fiscal activism in the economics profession, govern-

ments around the world facing the Great Recession turned in unison to an unprec-

edented fiscal expansion. At the same time, public deficits worsened, and fiscal

consolidation has become an important issue on the policy agenda worldwide. Auerbach

(2012) surveys both theoretical and empirical issues relating to fiscal policies in the light

of the US experience. Auerbach keeps to the safe middle ground.I have three major com-

ments on his paper.

First, Auerbach demonstrates that fiscal policy had been inactive under the Clinton

administration during the 1990s, whereas fiscal activism was revived during the 2000s,

culminating in the American Recovery and Reinvestment Tax Act (ARRA) adopted in

February 2009 shortly after the accession of President Obama. By estimating simple

policy reaction functions which depend on the full-employment gross domestic product

(GDP) gap and a measure of the deficit, Auerbach then distinguishes whether the

changes in fiscal actions are attributable to a change in the willingness to use discretion-

ary policy, or simply to changes in the perceived need to use such policy interventions.

Given the estimated policy reaction functions, it is found that a weakened economy

and a stronger budget position led to the renewed expansionary fiscal measured in the

early 2000s. To quote Auerbach (2012; p. 161), “That is, even assuming no change in

policy reaction functions, we should have expected increased activism in the early

2000s.”Although there is evidence showing a greater responsiveness of policy to the state

of the economy during the late 2000s (see column seven of Table 1 in Auerbach, 2012),

Figure 2 in Auerbach (2012), based on the full-sample estimates, still suggests that the

unprecedentedly expansionary policy actions during 2009–2010 were an outlier.

As a possible explanation, for the apparent outlier,I speculate that although the GDP

gap is a reasonable measure of the seriousness of a “normal” recession, it may miss the

seriousness of the “Great Recession.”Policymakers must be concerned with the outlook of

the economy. In addition to the current state of the macroeconomy as measured by the

GDP gap, they look at many things. Bad debts and the fragile financial system must have

been great concerns. Besides, the Great Recession was a global recession. To the extent

that the current state of the economy as of the time policy action was taken did not fully

†Correspondence: Hiroshi Yoshikawa, Graduate School of Economics, University of Tokyo, 7-3-1

Hongo, Bunkyo-ku, Tokyo 113-0033, Japan. Email: yoshikawa@e.u-tokyo.ac.jp

bs_bs_banner

doi: 10.1111/j.1748-3131.2012.01230.x Asian Economic Policy Review (2012) 7, 178–179

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research

178