government enacted several rounds of activist fiscal policy. These began early in the recession with temporary tax cuts enacted in February 2008, followed by a first-time homebuyers tax credit enacted in July 2008. They reached a crescendo in February 2009 with the American Recovery and Reinvestment Tax Act (ARRA): a combination of tax cuts, transfers to individuals and states, and government purchases estimated to increase budget deficits by a cumulative amount equal to 5.5 percent of one year’s GDP. The fiscal stimulus continued thereafter with more targeted measures, notably the temporary “cash for clunkers ” program in summer 2009 aimed at stimulating the replacement of old cars with new ones, and an extension and expansion of the homebuyers tax credit in November 2009 and July 2010. Accompanying these fiscal efforts were the Troubled Asset Relief Program, enacted in fall 2008 to address the financial crisis, and a continuing array of interventions by the Federal Reserve Board that aimed to stabilize credit markets and stimulate the economy. Around the world, other countries caught in the grip of recession also pursued a variety of active fiscal strategies, ranging from temporary consumption tax rebates (for example, in the

I am grateful to the Society of Business Economists for being included on the program of today’s Annual Conference. This is my first straight-up speech focused on the outlook for the British economy as an external Monetary Policy Committee [MPC] member, and this is the right audience to which to give it. I hope that you will correct my errors, and add to the hopefulness of my outlook, but also not be too rough with me in doing so (MPC meetings are rough enough). The theme of this year’s conference, “Sustaining the Recovery, ” is the right one for us to be considering, both as a matter of forecasting and of policymaking. What I would like to offer today is my own individual take on how the British recovery is progressing, and thus what I think is likely to happen next. My inclination is always to look at such questions in a comparative context, and, having had the excellent assistance of my advisers on the Bank’s MPC unit, I will take you through a series of pointed rather than comprehensive comparisons of the UK economic outcomes with (primarily) those of France, Germany, Italy, and the United States. I hasten to add that these countries were not chosen for their similarly disappointing (all but one) World Cup performances, but for their comparability with the UK economy in size, development, and exposure to the global economic shocks of the last three years.

In this paper, we estimate government purchase multipliers for a large number of OECD countries, allowing these multipliers to vary smoothly according to the state of the economy and using real-time forecast data to purge policy innovations of their predictable components. We adapt our previous methodology (Auerbach and Gorodnichenko, 2012) to use direct projections rather than the SVAR approach to estimate multipliers, to economize on degrees of freedom and to relax the assumptions on impulse response functions imposed by the SVAR method. Our findings confirm those of our earlier paper. In particular, GDP multipliers of government purchases are larger in recession, and controlling for real-time predictions of government purchases tends to increase the estimated multipliers of government purchases in recession. We also consider the responses of other key macroeconomic variables and find that these responses generally vary over the cycle as well, in a pattern consistent with the varying impact on GDP.

Japan’s Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan’s recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.

“Human beings share the same common problems. A film can only be understood if it depicts

The authors extend earlier models of economic growth and development by exploring the effect of economic freedom on U.S. state employment growth. They find that states with greater economic freedom—defined as the protection of private property and private markets operating with minimal government interference—experienced greater rates of employment growth. In addition, they find that less-restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states. Beyond labor market policies, state employment growth is influenced by state and local government policies, but not the policies of all levels of government, including the national government. Their results suggest that policymakers concerned with employment should seriously consider the degree to which their own labor market policies and those of the national government may be limiting economic growth and development in their respective

A d a m S. Po s e n

Proponents of fiscal stimulus argue that government spending is needed to replace the private spending normally lost during a recession. Estimates of the so-called fiscal multiplier based on wartime episodes are used to support the proposition that a peacetime intervention can “stimulate” the economy in a desirable manner. The author argues that a wartime crisis is fundamentally different from a peacetime economic crisis. What may be desirable in war is not necessarily so in peace. This is demonstrated formally in the context of a simple neoclassical model, which delivers fiscal multipliers consistent with the wartime evidence. The optimal fiscal policy, whether it entails expansion or contraction, is independent of the size of the fiscal multiplier. (JEL E6, E62) Federal Reserve Bank of St. Louis Review, March/April 2010, 92(2), pp. 121-27. Should governments attempt to “stimulate ” the economy at the onset of a major recession? Until recently, the conventional wisdom has been that discretionary fiscal policy, even if desirable in principle, is operationally too clumsy a tool to