Eliminating a known unknown: Firm evidence on tax multipliers

Donald Rumsfeld, former US defence secretary, famously drew a distinction between "known knowns", "known unknowns" and "unknown unknowns". How might this apply to the polls?

By Lawrence Weinman: Donald Rumsfeld made popular the term “known unknowns,” things we know we don’t know, and this is a term that is particularly apt for economics and financial markets. In my previous article I pointed out the terrible track record of short term forecasts for 2011 and there is no likelihood the current forecasts for 2012 will prove any more accurate. Benjamin Graham wrote that in the short term the markets are a beauty contest and in the long term they are a weighing mechanism.

Price Fishback has a new paper (ungated but earlier draft here) surveying what we have learned about the macroeconomics of the Great Depression, here is one bit:

HOW you feel about fiscal stimulus generally comes down to how big you think the multiplier is. Does a dollar of stimulus produce two dollars of GDP, one dollar, or none? Stimulus sceptics generally assign a lower number to the multiplier. Conservatives usually assign a lower multiple to government spending than to tax cuts.

The first problem with the distinction Republicans are making between the need to offset the cost of extended unemployment benefits (they say “yes”) versus the need to offset the cost of tax cuts for the rich (they say “no”) is that they are mixing up the short-term fiscal policy goal of stimulating aggregate demand with the longer-term fiscal policy goal of en

Context relevant estimates suggest larger, not smaller, fiscal multipliers. In it's newly released Budget and Economic Outlook, the CBO has released new estimates of potential GDP.

Hot off the presses from the NBER, from Andrew Mountford and Harald Uhlig, the evidence is mounting: