Spending increases vs tax cuts

Greg Mankiw, the Harvard economist who was chairmen of the of the President’s Council of Economic Advisers between 2003 and 2005, has an important post on his blog about the relative benefits of spending increases and tax cuts as forms of economic stimulus:

“Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey’s research suggest a government spending multiplier of about 1.4…

…By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars.”