In 2000, a survey of 298 members of the American Economic Association (AEA) found that while 84 percent generally agreed with the statement "Fiscal policy has a significant stimulative impact on a less than fully employed economy", 71 percent also generally agreed with the statement "Management of the business cycle should be left to the Federal Reserve; activist fiscal policy should be avoided.
"[5] In 2011, a follow-up survey of 568 AEA members found that the previous consensus about the latter proposition had dissolved and was by then roughly evenly disputed.
[6] In the early 1960s, contributing to the studies invited by the Commission on Money and Credit, Milton Friedman and David Meiselman published a study[4] whereby, they found that "[e]xcept for the early years of the Great Depression, money is more closely related to consumption than is autonomous expenditures,"[note 2] claiming moreover that "[t]he results [of the tests] are strikingly one-sided".
Also, Hester emphasized that the actual data should have been empirically tested in first-differential form so as to extricate the trends of both explanatory variables, and thus demonstrate only the endogenously generated economic growth.
[7] In a paper published in 1964,[8] Friedman and Meiselman conceded that Hester’s suggestion of using first differences was correct and that it is a better method for their single-equation approach.
One view is that the quantity of money matters little; the other, that it is a key factor in understanding, and even more, controlling economic change.
We can ill afford to waste the energy, interest, and ability that Hester displays in his paper on frivolous quibbling.
They also observed that the data used in the 1963 paper would need to be modified by including corporate retained earnings, transfer payments made by the government to foreigners, and “wage accruals over disbursement.”[9] Ando and Modigliani objected to the use of an ordinary, least squares equation because of the induced influence on the independent variable by the dependent variable[note 5] and offered their own model, which ostensibly removed the independent part from the induced part.
Moreover, Ando and Modigliani found that the error variance in predicting output[note 7] was "much higher" when using money than any of the fiscal variables and labeled the F & M respective results "spurious."
Indeed, in the opening statement of their paper, they state that the "number of basic shortcomings in [the Friedman/Meiselman] procedure...make the results of their elaborate battery of tests essentially worthless.
Hence, we are left with no reason to change our earlier conclusion that “so far as these data go [and, we may now add, those adduced by Ando and Modigliani, DePrano and Mayer, and Hester][note 8] the widespread belief that the investment multiplier is stabler than the monetary velocity is an invalid generalization from the experience of three or four years.
[11]In 1968, Federal Reserve Bank of St. Louis economists Leonall C. Andersen and Jerry L. Jordan published a study[12] that fully supported the Friedman and Meiselman single-equation approach but expanded it in response to the criticisms of the 1963 paper.
[12] In 1969, Frank DeLeeuw and J. Kalchbrenner, also St. Louis Fed economists, published an article[13] that criticized "severely"[citation needed] the Andersen/Jordan study and modeling.
They pointed out, in particular, that the tax and monetary-base variables are impossibly entangled with the endogeneity-exogeneity problem and claimed that the Andersen/Jordan method leaves out the influences introduced by inflation.
The main argument by De Leeuw and Kalchbrenne was that causality cannot be demonstrated by the single-equation approach, and the direction of causation is impossible to establish, i.e. GNP could be driving is fiscal spending rather than the other way around.
After making a "clear improvement"[13] on the Andersen/Jordan model (using high employment receipts adjusted for inflation as the fiscal variable and two different versions of the monetary base), and re-running the "St. Louis equation" on the basis of data from 1952 to 1968, they proclaimed that, according to their findings, fiscal expenditures were statistically significant, positively correlated[note 10] to changes in GNP in the long run - as was also true for changes in monetary policy.
In 1971, William L. Silber[14] posited that the researchers were altering their equations to fit into whatever their ideological worldviews were theorizing, which was the reason he gave his paper a "highly political"[citation needed] title.
In 1972, Stephen M. Goldfeld, Alan S. Blinder, John Kareken and William Poole, in their study,[16] criticized the Andersen/Jordan approach as econometrically unsound.
They argued that, without a reaction function, one cannot determine the nature of the “exogenous” from the "endogenous”, and that, if the rules or automatic stabilizers are done to counter-cyclical perfection, then the correlations do not show up with the statistical significance we would expect.
Their paper concludes that the single-equation approach used to empirically determine the comparative efficiency of monetary and fiscal policies is "without merit.
"[16] In 1973, William Poole and Elinda B. F. Kornblith found[17] that all the models tended to "underpredict," and attempted to provide hypotheses for that result.
In 1974, at a conference held at Brown University, Ando and Modigliani presented a paper where they recreated an analysis of a simulated economy using the Andersen/Jordan method, which, they concluded, was biased in favor of monetary policy.
[18] In 1977, Benjamin Friedman found that, using the Andersen/Jordan model but extending the data set out to the 2nd quarter of 1976, fiscal policy was now statistically significant in the determination of expenditures -although serious heteroscedasticity problems had appeared.
He also found that, if he used data starting at the 1st quarter of 1960, the results were even more favorable to discretionary fiscal policy, reiterating the existence in the Andersen/Jordan model of an inherent coefficient bias.
"[21] In 2000, a survey of 298 members of the American Economic Association found that while 84 percent generally agreed with the statement "Fiscal policy has a significant stimulative impact on a less than fully employed economy", 71 percent also generally agreed with the statement "Management of the business cycle should be left to the Federal Reserve; activist fiscal policy should be avoided.
"[5] In 2011, a follow-up survey of 568 AEA members found that the previous consensus about the latter proposition had dissolved and was by then roughly evenly disputed.