Edward Renshaw
Professor of Economics
State University of New York at Albany
While most large scale econometric forecasting models are basically Keynesian in character, there has been a notable reluctance on the part of textbook writers to confront economic theory with fact. Part of the over- reliance on pure theory may be related to the difficulty that has been encountered in establishing plausible direct multiplier relationships between aggregate income and the two most important fiscal policy variables, government spending and taxes. The absence of easily verified multipliers in the early post World War II period led Milton Friedman to conclude in the words of Paul Samuelson (1976), "that fiscal policy per se has essentially no predictable effect of any significance on the prospects for inflation or deflation, for high employment or mass unemployment."
Keynesian economics is basically disequilibrium or depressionary economics. During periods of reasonably full employment one can use production possibility curves involving a tradeoff between guns and butter to seriously question the notion of sizable multiplier effects for government spending. Three economic recessions in about one decade, the monetary revolution of 1979, and the Economic Recovery Tax Act of 1981, however, helped to produce a "window of opportunity" where it was easier to explain changes in the national income and product accounts on the basis of a rather simple Keynesian model which focuses one's attention on the problem of large budget and trade deficits in the US (Renshaw 1990). A large decline in the personal saving rate and some major changes in the way real GDP is computed, though, have made it desirable to up-date and modify that version of the Keynesian multiplier.
In Chapter 8 of The General Theory of Employment, Interest and Money it is stated that: "The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori and from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income."
The simplest way to describe this type of consumption function is with the linear equation, C = a + bY. When this equation is fit to cross- sectional data for a particular time period one obtains a value for "a" that is positive and a value for "b" that supports the Keynesian hypothesis that the marginal propensity to consume "mpc" is less than one.
In this essay we will use annual data, rather than quarterly data, to obtain time series estimates of the marginal propensity to consume and determine whether the implied multipliers can be independently verified. Annual data facilitates a condensed comparison of cyclical fluctuations in GDP and its components and also has the advantage of allowing one to obtain multipliers that are more or less comparable to those reported for quarterly models of the US economy without having to face the complexity of converting quarterly estimates into annual equivalents.
When the equation, C = a + bY, is fit to annual time series data for the 1960-95 period one obtains a negative constant term and a coefficient for the marginal propensity to consume out of real chain weighted disposable personal income expressed in 1992 dollars of .934, which can be increased to .945 if an AR(1) type of adjustment is made for serial correlation.
The negative constant terms of -89.5 and -127.5 billion chain weighted 1992 dollars for these two regressions during the 1960-95 period are probably reflecting a decline in the average propensity to save out of disposable income. The personal saving rate averaged 7.7 percent from 1959- 86. It has since slipped to less than five percent, on the average.
Some text book writers do use an mpc equal to .9 to compute an implied multiplier for the US economy equal to ten. If this inference with regard to a government expenditure multiplier were correct, Communism would still be flourishing and no one in this country would be worried about budget deficits of a chronic nature.
There are at least two ways to discredit an mpc of this magnitude and obtain textbook multipliers that are low enough to be more consistent with the government expenditure multipliers that are derived indirectly from more complicated econometric models of the US economy. One approach is to broaden the definition of "Y" to include other types of income besides personal disposable income.
When real consumption is regressed on a constant term and annual values for chain weighted real GDP from 1960-95, for example, one obtains a "b" coefficient or mpc value of .712 which is quite a bit smaller than the mpc of .934 for disposable personal income.
Large mpc values have also been discredited by empirical research and more elaborate theories which suggest that consumption can be influenced by wealth, lagged consumption and other variables besides disposable income in the current period. The presumption is that these variables will tend to shift the constant term "a", in the simple Keynesian multiplier equation C = a + bY, upward with respect to time.
In (1952) Brown argued that "the full reaction of consumers to change in income doesn't occur immediately but instead takes place gradually". He then went on to suggest that the "a" value in the simple Keynesian consumption function, C = a + bY, might be influenced or shifted around by previous consumption. Since Brown's research was published numerous model builders have included a lagged dependent variable in at least some of their consumption functions (Duesenberry 1965, Evans 1969 and Fair 1984).
When consumption expenditures are regressed on the preceding year's consumption and the current year's disposable income from 1960-95 the mpc for disposable income declines to .504 for disposable income expressed in current dollars and is reduced to only .448 for disposable income expressed in chain weighted 1992 dollars. Using earlier data for the 43 year period from 1948-90 one can also obtained an MPC equal to .504 by regressing annual current dollar consumption data from the Economic Report of the President (for 1991) on disposable personal income and consumption in the preceding year.
In the analysis which follows we will assume that the marginal propensity to consume in relation to current income is in the vicinity of .5. This number was first obtained from empirical data by Paul Samuelson in 1941. In an appendix to Chapter 11 of A. H. Hansen's Fiscal Policy and Business Cycles he found that "In the period between the two world wars, the marginal propensity to consume relative to income produced was approximately .5."
While there may have been numerous years and periods when the mpc was not equal to .5, there are a lot of advantages in featuring this number when confronting theory with fact and trying to reconcile textbook multipliers with those derived from complex models of the US economy.
For readers who are intrigued by the notion of a forward looking modification of the permanent income hypothesis, which was invented by Friedman and has been elaborated upon by younger economists such as Campbell and Mankiw in (1991), an mpc equal to .5 has the nice property of falling midway between the unlikely extremes of one and zero.
In deriving multipliers, however, we will ignore the Commerce Department's estimates of disposable income and follow the usual textbook practice of utilizing a broader and less conventional definition of disposable income. Our starting point is the accounting identity, income equals consumption plus investment plus government purchases of goods and services plus net exports:
Y = C + I + G + NX (1)
Consumption is now regarded to be a function not only of current income but also wealth which can be approximated by consumption or the value of income in the preceding period (Duesenberry 1949, Modigliani 1947 and Friedman 1957). Since positive amounts of net exports cannot be consumed in the home country and are unlikely to have as big an effect on local output as domestic investment, if they are used to finance investment in other countries, this variable will be subtracted from GDP along with net taxes to arrive at a useful definition of disposable income that can be simply linked to both consumption and aggregate income:
C = aY + b(Y - NX - T) (2)
-1
Setting Y equal to nominal GNP in billions of current dollars and
fitting this type of consumption function to US data for the 1952-86 period
allowed this analyst to obtain the following least squares regression
(Renshaw 1990):
C = 1.59 + .25Y + .5(Y - NX -T) (3a)
-1
There has been a note worthy reduction in the personal saving rate since 1986. The Commerce Department's new way of measuring government purchases of goods and services (now termed government consumption expenditures and gross investment), moreover, has produced a big savings type of surplus in the national income and product accounts for state and local governments which is not available to help finance current expenditures. Since most states and local governments are required to balance their budgets without regard to this surplus, it now seems appropriate to assume a balanced budget at the state and local level and confine our estimate of net taxes, Tf, to the surplus or deficit associated with the federal government. When this is done one can obtain the following consumption function expressed in current dollars for the more recent period from 1987-94:
C = .270Y + .494(Y - NX -Tf) (3b)
-1
Disregarding the constant term for equation (3a), which is not very significant from a statistical point of view, and substituting rounded values for the remaining coefficients into accounting identity (1) enables one to obtain the following multiplier equation:
Y = .5Y + 2I + G + (G - T)f + NX (4)
-1
In equation (4) we have separated the government expenditure multiplier into two G variables to allow one to more easily assess the economic implications of large trade and federal budget deficits in the national income and product accounts. The coefficients for the first regression in Table 1.1 are remarkably close to and not significantly different from what one would expect on the basis of equation (4) when an auto regressive parameter is included in the regression. The composite multiplier for an increase in government expendtiture is equal to 1.89.
There are some other ways, however, to support the conclusion from most large scale models of the US economy that the composite government expenditure multiplier is probably in the vicinity of two or less. If our primary goal was to obtain a simple multiplier equation that might be useful for the purpose of making conditional forecasts of what will happen to the US economy, one would probably be well advised to replace lagged GDP with real personal consumption expenditure in the preceding year, as is done in the second regression in Table 1.1.
The substitution of lagged consumption for real GDP in the preceding year reduces the standard error of the regression by more than one third and eliminates the need for an autoregressive parameter. The regression coefficients, however, are not as closely connected to what one would expect on the basis of an mpc equal to .5, which was used to derive the multipliers in our "role model" equation (4).
Using lagged consumption instead of lagged GDP to shift the implied consumption function around reduces the estimated investment multiplier from 2.165 to only 1.692 and the composite government expenditure multiplier from 1.89 to only 1.58. The coefficient for the federal deficit in the national income and product accounts is reduced even more dramatically from .875 to only .440. The surprisingly large coefficient for lagged consumption, however, may be capturing some of the benefits from "automatic" increases in the federal deficit during economic recessions, when the economic benefits from deficit spending are probably greater than during more prosperous years.
The coefficient for the real value of net exports of .950, however, is close to the presumed value of 1.000 from equation (4) and the regression coefficient of .976 that was obtained for its counterpart in Table 1.1. Both of these coefficients provide some empirical support for the idea that net exports should be subtracted from GDP along with net taxes in computing a broad based measure of disposable income.
In Table 1.2 all of the errors for our featured version of the Keynesian multiplier model implied by equation (4) are assumed to change the propensity to spend out of the previous year's income. The coefficient for the lagged income (or GDP) variable in column (6) is expressed in percentage points and is referred to as the "shifting propensity to spend".
While some of the error terms for this multiplier model may indeed be related to shifts in the marginal propensity to consume out of current income, rather than the previous year's income, a consolidation of the error terms in conjunction with lagged GDP can serve a useful purpose in enabling one to more easily appreciate, in relative terms, how well this version of Keynesian economics has explained the data during different periods and at various points in the business cycle.
The smaller the year-year changes in the shifting propensity to spend out of the previous year's income in column (7), the more confident one can be that the marginal propensity to consume is in the vicinity of .5 and that our fiscal policy multipliers are in the right ball park.
The large differences in the shifting propensity to spend that emerged in the late 1960s and continued to occur through most of the 1980s, help to explain why Keynesian economics has fallen out of favor, in some quarters, and is now confronted with a number of competing schools of thought (Snowdon, Vane and Wynarczyk 1994).
During the 1990s, however, the year-year differences in column (7) have consistently been equal to .5 percentage points or less. The implication is that our multiplier equation now fits the data better than was the case in the early 1960s, when Keynesian economics was the most highly featured school of macroeconomic thought.
In a world where inflation is no longer as serious a problem as was the case in the late 1960s through portions of the 1980s it can be instructive to use the data in Table 1.2 to better assess the success and failure of the fiscal policy implications of Keynesian economics.
The data in column (2) on the real value of the federal deficit in the national income and product accounts help to dramatize the importance of automatic "built in" stabilizers in helping to offset the deleterious effect of recessionary declines in gross private domestic investment on real GDP. Since the mild recession of 1960-61 the real value of the federal deficit has always more than doubled from its preceding cyclical low to the first year of recovery from an economic recession.
The peaks and troughs in economic activity compiled by the National Bureau of Economic Research (NBER) suggest that the emergence of numerous automatic stabilizers since the great depression of the 1930s may have shortened the duration of economic recessions. From June 1857 to June 1938 the United States experienced 21 economic recessions with an average duration of 21.2 months. In the post World War II period no recession has persisted that long. The average duration for the ten recessions from 1945- 95 is only 10.4 months.
The longest recession recorded by NBER lasted 65 months from October 1873 to March 1879. The next longest persisted for 43 months from August 1929 to March 1933. In the post-Keynesian era, the two longest recessions were the 16 month contractions from November 1973 to March 1975 and from July 1981 to November 1982 (Table 13.1).
The sad thing about this success story is that it has depended a lot more on an expansion of consumption type transfer payments rather than a contra cyclical expansion of government investment in infrastructure which can improve economic efficiency and yield long term benefits. One way to begin the task of validating this point is to examine changes in the inflation adjusted value of government consumption and investment in column (3) of Table 1.2.
During the recessionary trough year of 1961 there was a thirty billion dollar increase in total government consumption and investment and only a lower surplus for the federal government in the national income and product accounts.
From the recessionary peak in business activity in 1990 to the anemic recovery year of 1992 there was a 115.6 billion dollar increase in the real value of the federal deficit and only a 13.4 billion dollar increase in total government consumption and investment.
Since the mild recession of 1960-61 government investment in structures has declined more often than not during economic recessions. See Table 1.3. In Albany, New York, Washington, D.C. and many other capital cities in the USA construction budgets are routinely robbed or short changed during economic recessions to hide deficits. This is a very inefficient way to cope with the problem of recurring recessions.
Equation (4) implies a first year multiplier of only one for an increase in the deficit that is associated with a cut in taxes. This can be compared to a multiplier of two for an increase in government purchases that is not offset by an increase in taxes.
The problem with a tax cut is that businesses and consumers are left with a choice as to whether they use the cut to bolster their savings (and help finance the deficit) or to increase their consumption of goods and services. An increase in government purchases, other things equal, ensures an extra round of expenditure that will help to get the economy moving again. If the increase in expenditure is used to enhance the nation's infrastructure it can be expected to yield even more benefits with the passage of time.
Tax cuts, regardless of whether they are deliberate or the result of a recessionary decline in sales and income tax payments, can take a long time to pay for themselves. One of the more dramatic ways to illustrate this point is to examine the cyclical lows in the real value of the federal deficit in column (2) of Table 1.2. From 1960-90 these lows consistently increased from one business expansion to the next.
The upward drift in the real value of the federal deficit in the national income and product accounts is rather surprising when one examines the downward drift of federal consumption and investment from 15 percent of chain weighted real GDP in 1967 to only 8.8 percent in 1990 and 7.0 percent during 1995.
The spectacular deficit for 1992 and the slow decline in its size in the wake of persistent cut backs in the real value of federal spending for goods and services since 1992 inspired chairman Alan Greenspan and economists associated with the Federal Reserve Bank of Kansas City to host a major symposium on Budget Deficits and Debt: Issues and Options at Jackson Hole, Wyoming from August 31-September 2, 1995. In his summary of the symposium's conclusions Stuart Weiner noted:
"Chronic government budget deficits and escalating government debt have become major concerns in both developed and developing countries. Concern arises because fiscal imbalances siphon funds from private sector investment, retarding growth and ultimately reducing standards of living. Fiscal imbalances also create potentially large burdens on future generations, as workers may be forced to finance unfunded social programs for rapidly expanding elderly populations. And, fiscal imbalances can trigger disruptive movements in interest rates and exchange rates, as highly indebted countries become increasingly vulnerable to global market forces. Few economic issues have such far-ranging implications as excessive deficits and debt."
Stanley Fischer (1994) examined data for a sample of 94 countries between 1962 and 1988 and found that large budget deficits are negatively associated with economic growth.
Large budget deficits, moreover, provide no assurance that a country's unemployment rate will be low. Belgium, Italy, Canada, Spain and Austria are projected to have more net governmental financial liabilities outstanding as a percentage of nominal GDP during 1996 than the United States and are all suffering from higher unemployment rates according to statistics in the OECD Economic Outlook for June 1996.
Economists in recent decades, however, have tended to favor tax cuts over increases in government purchases when the economy US slips into a recession on the theory that they can be implemented more quickly. There is little evidence to support this conclusion, however. During the last recession the US Congress was inundated with all sorts of tax cut proposals but none of them were implemented.
The fiscal gridlock which resulted in connection with 1995 efforts to enact a long term plan to balance the federal budget raises a question mark as to whether politicians can be relied upon to take actions which will move us in that direction.
If the Governors of the Federal Reserve are really disturbed about the federal deficit they should be at least as forward looking with regard to the prevention of economic recessions as they were in 1994 with regard to the possibility of an acceleration of the inflation rate.
The data in column (2) of Table 1.2 would strongly suggest, in any event, that we are not likely to achieve the goal of a balanced budget in this century if the US economy falls into a near term recession.
One way for the Federal Reserve to improve its own ability to stabilize the US economy might be to have Congress authorize it to diversify its own portfolio to include some debt issued by state and local governments. At the end of 1995 the Federal Reserve banks held more than 380 billion dollars worth of U.S Treasury securities and federal agency obligations--most of which were not needed to manage the money supply.
If the Fed was authorized to purchase some of the obligations of state and local governments, its regional branches could cooperate with say state bond banks to develop a backlog of infrastructure projects that could be quickly started or accelerated during periods of economic weakness.
Another way to facilitate a contra cyclical investment policy for public infrastructure would be to develop aid formulas for roads, sewage treatment plants, and other structures that are partly funded by the federal government which are more contra cyclical in character. In the post 1947 period the civilian unemployment rate has increased from one to 16 months in advance of the nine economic recessions which have been identified by the National Bureau of Economic Research. By letting federal support for public infrastructure automatically increase in response to rising unemployment it might be possible to prevent some recessions and moderate those that do occur.
Another way to make monetary policy more effective would be for Congress to give the Board of Governors some authority to regulate the income tax withholdings of individuals and corporations. Fiscal policy could then be implemented more quickly and in a manner that is more in harmony with monetary policy. With some direct control over personal and business saving the Fed would not have to allow interest rates to fluctuate as much to get its message across to consumers and producers.
Regulating income tax withholding rates to help stabilize the economy is not exactly a new idea. A 20 month slump in payroll employment finally ended in February 1992 after President Bush announced that he was lowering the federal income tax withheld from people's paychecks by about $12 billion over a six month period.
If Keynes were alive today I am sure that he would also be intrigued by proposals to allow first time home, and perhaps new car buyers, to make penalty free withdrawals from their IRAs. If these withdrawals were limited to periods of economic weakness when real GDP is increasing at a below average rate, or when unemployment is excessively high, it would help to stabilize the US economy and might even reduce the federal budget deficit since most first time home buyers would have to borrow far more than they withdraw from an IRA to finance the construction of a new home.
It should be emphasized that a composite multiplier of 2 for government spending will not be valid unless taxes and imports remain the same. A more "autonomous" open economy type of government expenditure multiplier can be derived from equations (1) and (2) by making taxes and imports a function of income. Where, T = tY, and, IM = mY, we can obtain:
Y = [1/(1 - b + bt - bm + m)][aY + I + G + (1-b)X] (5)
-1
When the marginal propensity to consume out of current disposable income is assumed to be equal to (b = .5), the marginal tax rate for nominal GDP (net of tax receipts that are used to finance federal transfer payments that are not included in GDP) is set equal to (t = .18 for 1990) and the marginal propensity to import in relation to nominal GDP is assumed to equal (m = .11 for 1990) we can use the multiplier in equation (5) for government expenditure, 1/[1 - b + bt + (1 -b)m], to obtain a more autonomous multiplier (for both G and I but not X) that is a little over 1.5. This number is more comparable to the multipliers which have been obtained from more complex models of the US economy.
In a polling of eight macroeconomic models with an emphasis on interdependent economies, Bryant and others (1988) obtained first year government expenditure multipliers ranging from almost zero to slightly more than two. The average multiplier for both the first and second year was around 1.4. In the 1989 edition of their textbook on the Principles of Economics Case and Fair conclude that "the multiplier probably has a value of around 1.5; certainly it is not bigger than two".
When real GDP in column (5) of Table 1.2 is regressed on a constant term and the sum of gross private domestic investment, government purchases, one half of US exports and twenty five percent of real GDP in the preceding year (as suggested by equation 5 where "a" is set equal to .25 and "b" is assumed to be equal to .5), one obtains an autonomous expenditure multiplier that is equal to 1.54 for the 1976-94 period.
Kohn (1997, pp. 177-84) has used an mpc equal to .7 for a broad based measure of income and a relatively high marginal propensity to import to go directly to an open economy multiplier equal to 1.54. My own preference when teaching international economics, however, is to start with an mpc equal to .5 and use an equation (2) type measure of disposable income to derive preliminary multipliers since it encourages one to explore the interconnection between large trade and government budget deficits. If domestic investment is assumed to equal domestic saving one can then use the notion that leakages must equal injections to conclude that the trade deficit should be about equal to the government deficit.
There is another good reason for featuring equation (4) as an intermediate role model for teaching purposes. This analyst, after engaging in a lot of "data mining", has never had much luck at deriving open economy multipliers that are consistent with the parameters implied by equation (5). Nor is it easy to start with the more conventional textbook type of open economy multiplier equation and obtain regression coefficients for I, G and X which are not significantly different from each other.
Changes in income and sales tax rates, wide fluctuations in international exchange rates and large increases in the propensity to import may have helped to make the multiple regression coefficients for I, G and X unstable and super sensitive to the time period under consideration. When lagged GDP or consumption is included in the regression, the coefficients for these three variables usually turnout to be small.
The academic world, for the most part, however, has been slow to adjust to the possibility of small multipliers and most textbook writers make no effort to derive their featured mpc's and Keynesian type multipliers from historical data. Many of the consumption and saving functions that are used for teaching and evaluating student performance in macroeconomics have marginal propensities which imply a (simple) government expenditure multiplier in the range of from three to ten. Only one of six Graduate Record Exams analyzed by Gallagher and associates in (1989) had a question with an assumed government expenditure multiplier as low as two.
About half of the textbooks that are currently utilized in courses concerned with money and banking are still featuring a multiplier of 5 derived from an assumed mpc equal to .8. Since paying for the "free lunch" that was supposed to have resulted from the Economic Recovery Tax Act of 1981, which slashed income tax rates, has turned out to be an agonizing proposition it seems clear that professors of economics should do a better job of trying to reconcile the fiscal policy parameters in their teaching examples with the MPC's that are now obtained from broader based consumption functions and the simulation results which have emerged from econometric models of the US economy.
Does an autonomous expenditure multiplier in the vicinity of 1.5 mean that Robert Lucas was correct in suggesting in 1982 that Keynesian economics is dead. I don't think so. There can be crowding in as well as crowding out. His policy ineffectiveness proposition should be considered a special case that may or may not be true depending on the circumstances. If a tax cut, or a timely increase in government expenditure, keeps private investment from falling further during an economic recession, that will help to moderate the recession and might very well imply an indirect effect upon the economy that is greater than the direct effect.
While it has become fashionable to reduce the autonomous expenditure multiplier by making taxes and imports a function of income, text book writers have been less inclined to rebuild the multiplier by making investment a positive function of income. Barro (1993, p. 550), who doesn't place much stock in the idea of a government expenditure multiplier, is an exception, oddly enough.
The most notable difference between the great depression of the 1930s and recent recessions is the extent to which an increase in the government deficit was able to offset the adverse effect of a decrease in investment spending. During the 1929-32 recession the increase in the budget deficit only offset 9.6 percent of the assumed direct and indirect effect of the slump in investment (Renshaw 1990). In the post 1947 period increases in the government deficit have typically offset from 21 to more than 80 percent of the decline in investment times its assumed multiplier of two.
When the indirect effect of a slump in investment spending is largely offset by increases in the other variables in equation (4), a steep decline in investment spending will apparently reverse itself in a year or so as excess inventory is liquidated and worn out equipment breaks down and needs to be replaced.
While the Keynesian multiplier model focuses one's attention on fluctuations in gross private domestic investment as a primary cause of recessions it is by no means clear that the blame for economic recessions should be placed on business enterprises. The Commerce Department's revised data for real GDP and its components indicate that consumer investment in automobiles and other durable goods has peaked out before producer's investment in new equipment in three of the last four recessions.
It should also be noted that the shifting propensity to spend out of the previous year's income in column (6) of Table 1.2 has declined during economic recessions. At least part of this unexplained collapse in spending should probably be attributed to consumers. (See Essay 3.)
Barro, Robert (1993). Macroeconomics(New York: John Wiley & Sons).
Bryant, Ralph C., Dale W. Henderson, Gerald Holthham, Peter Hooper and Steven A. Symansky (1988). Empirical Macroeconomics for Interdependent Economies(Washington: The Brookings Institution), 63-72.
Case, Karl and Ray Fair (1989). Principles of Economics(New Jersey: Prentice Hall), 831-32.
Campbell, John and N. Gregory Mankiw (1991). "The Response of Consumption to Income," European Economic Review.
Duesenberry, James (1949). Income, Saving and the Theory of Consumption(Cambridge, Mass.: Harvard University Press).
-----, (1965). The Brookings Quarterly Econometric Model of the US(Rand McNally), Chapter 7.
Evans, Michael (1969). Macroeconomic Activity(Harper & Row), Chapter 3.
Fair, Ray (1984). Specification, Estimation, and Analysis of Macroecnometric Models(Harvard University Press).
Federal Reserve Bank of Kansas City (1995). Budget Deficits and Debt: Issues and Options.
Fischer, Stanley (1994). "The Role of Macroeconomic Factors in Growth," NBER Working Paper No. 4565.
Friedman, Milton (1957). A Theory of the Consumption Function(Princeton: Princeton University Press).
Gallagher, G. and Associates (1989). GRE Economics Test(Piscataway, New Jersey: Research and Education Association).
Kohn, Meir (1997). Macroeconomics(South-Western College Publishing).
Lucas, Robert. (1982). "The Death of Keynes," in Viewpoints on Supply Side Economics, ed. Thomas Hailstones (Richmond, Virginia: Robert Dane), 3.
Modigliani, Franco (1947). "Fluctuations in the Savings-Income Ratio," Studies in Income and Wealth(New York: National Bureau of Economic Research), 371-441.
Renshaw, Edward (1967). "The Future Income Hypothesis," The Southern Economic Journal, 34(July), 40-52.
-----, (1990). "A Keynesian View of the US Budget and Trade Deficits," Public Finance, 45(No. 3), 440-48.
Samuelson, Paul (1941). "A Statistical Analysis of the Consumption Function," in the appendix to chapter 11 of A. H. Hansen, Fiscal Policy and Business Cycles.
Snowdon, Brian, Howard Vane and Peter Wynarczyk (1994). A Modern Guide to Macroeconomics(Brookfield Vermont: Edward Elgar Publishing Company).
Regression Coefficients
Equation Number (1) (2)
Independent Variables
Real GDP in the preceding year. .489
(8.413)
Real personal consumption expenditures .815
in the preceding year. (21.380)
Real gross private domestic investment. 2.165 1.692
(9.201) (13.386)
Real value of government consumption expenditures 1.011 1.137
and gross investment. (5.483) (21.674)
The federal deficit in the national income and product .875 .440
accounts deflated by the chain-type price index for (4.063) (3.970)
gross domestic product.
Real value of net exports. .976 .950
(2.106) (5.405)
Auto regressive parameter AR(1). .614
(3.337)
Summary Statistics
Adjusted R-squared .9988 .9995
Standard Error of the Regression 45.475 29.552
Durbin Watson Statistic 1.866 1.947
The parentheses contain t-statistics for the hypothesis that the coefficient's true value is zero.
Source of basic data: Economic Report of the President.
Gross First Diff.
Private Gov. Shifting Shifting
Domestic Federal Cons. Net Actual Propensity Propensity
Year Investment Deficit Invest. Exports GDP to Spend to Spend
(1) (2) (3) (4) (5) (6)n (7)
1960 270.5 -31.8L 617.2 -21.3 2261.7 52.3 ---
1961T 265.2 -12.3* 647.2 -19.1 2309.8 51.4 - .9T
1962 298.5 -11.7 686.0 -26.5 2449.1 52.1 .7
1963 318.1 -22.3 701.9 -22.7 2554.0 51.5 - .6
1964 344.6 -3.7 715.9 -15.9 2702.9 51.6 .1
1965 392.5 -13.6 737.6 -27.4 2874.8 51.5 - .1
1966 423.5 -10.1 804.6 -40.9 3060.2 50.8 - .7
1967 406.9 31.2H 865.6 -50.1 3140.2 48.4 - 2.4**
1968 429.8 10.1 892.4 -67.2 3288.6 50.8 2.4**
1969 454.4 -30.0L 887.5 -71.3 3388.0 51.5 .7P
1970T 419.5 46.1* 866.8 -65.0 3388.2 50.2 - 1.3T**
1971 467.4 78.8H 851.0 -75.8 3500.1 50.5 .3
1972 522.1 61.2 854.1 -88.9 3690.3 52.0 1.5**
1973 583.5 31.4L 848.4 -63.0 3902.3 52.0 .0P
1974 544.4 43.9 862.9 -35.6 3888.2 49.4 - 2.6**
1975T 440.5 175.1H* 876.3 -7.2 3865.1 49.9 .5T
1976 536.6 128.3 876.8 -39.9 4081.1 52.8 2.9**
1977 627.1 97.5 884.7 -64.2 4279.3 51.6 - 1.2**
1978 686.0 62.3 910.6 -65.6 4493.7 51.7 .1
1979 704.5 33.3L 924.9 -45.3 4624.0 51.2 - .5
1980T 626.2 101.0H* 941.4 10.1 4611.9 49.9 - 1.3P,T**
1981 689.7 87.4L 947.7 5.6 4724.9 50.0 .1P
1982T 590.4 191.9* 960.1 -14.1 4623.6 48.8 - 1.2T**
1983 647.8 238.3H 987.3 -63.3 4810.0 50.9 2.1**
1984 831.6 205.5 1018.4 -127.3 5138.2 49.4 - 1.5**
1985 829.2 207.3 1080.1 -147.9 5329.5 49.2 - .2
1986 813.8 220.2 1135.0 -163.9 5489.9 50.1 .9
1987 820.5 155.1 1165.9 -156.2 5648.4 51.8 1.7**
1988 826.0 140.9 1180.9 -114.4 5862.9 53.2 1.4**
1989 861.9 126.4L 1213.9 -82.7 6060.4 52.5 - .7
1990 817.3 165.3 1250.4 -61.9 6138.7 52.0 - .5P
1991T 737.7 201.4* 1258.0 -22.3 6079.0 51.6 - .4T
1992 790.4 280.9H 1263.8 -29.5 6244.4 51.8 .2
1993 857.3 249.1 1261.0 -72.0 6386.4 51.8 .0
1994 979.6 181.1 1260.0 -105.7 6608.7 51.9 .1
1995 1010.2 150.3 1260.2 -107.6 6742.9 51.7 - .2
1996 1060.2 118.2 1271.8 -114.2 6911.0 52.1 .4
Footnotes for Table 1.2.
(6)n. The shifting propensity to spend out of the previous year's income is equal to column (5) minus two times column (1) minus the sum of columns (2), (3) and (4) when this Keynesian type residual is expressed as a percent of chain weighted real GDP in the preceding year.
*The federal deficit in the national income and product accounts deflated by the chain-type price index for gross domestic product in those years containing a recessionary trough in economic activity. Built-in stabilizers have resulted in substantial increases in the real value of the federal deficit in trough years.
**Identifies years when the absolute first difference in the shifting propensity to spend in column (6) was equal to 1.0 percentage points or more.
L identifies the low value for the business cycle.
H identifies the high value for the business cycle.
P identifies a year containing a recessionary peak in economic activity.
R identifies the lowest cyclical federal deficit in the national income and product accounts deflated by the chain-type price index for gross domestic product. These lows have trended upward over time.
T identifies a year containing a recessionary trough in economic activity.
Source of basic data: Economic Report of the President, February 1994.
Change in the Value of StructuresPercentage
Peak Trough National Fed Non State and Change in
Year Year Defense Defense Local Real GDP
(1) (2) (3) (4)
1960 1961 .9 .9 5.0 2.1
1969 1970 -1.3 .0 -6.9 .0
1973 1975 - .7 .2 - .9 -1.0
1979 1980 .7 .1 - .1 - .3
1981 1982 .8 -1.9 -6.3 -1.1
1990 1991 -1.7 1.0 .6 -1.9
Source of basic data: Economic Report of the President. February 1996, Tables B-2 and B-17.
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