Magic Multiplier Theory
Veronique de Rugy discusses When Puff the Magic Multiplier Goes Poof.
The belief is that when the government takes a dollar out of your pocket, puts that dollar through the political process and decides where to spend it (based on input from special interest groups), the economy will somehow return more money in growth than the money invested, even after Washington bureaucrats take their cut. It’s magic! Sadly, these arguments ignore recent empirical evidence that the costs of increased government spending far outweigh the benefits to the economy.
After reviewing the recent academic literature for the Mercatus Center’s publication The Bridge, my colleague Jack Salmon and I found that most of “the empirical literature on fiscal multipliers conducted since then (2009) has found economic multipliers resulting from additional government spending ranging from a lower estimate of around 0.2 to an upper estimate of around 0.9.” We go on to explain that in “(p)ulling the results from two dozen academic studies, we calculate an average multiplier at the low end of 0.31 and an average multiplier at the high end of 0.66.”
There are always economists, journalists and pundits willing to assume that this time will be different and government spending will deliver on the promises made on its behalf by pro-spending advocates. Unfortunately, this is wishful thinking. It is also a dangerous game to play. If spending doesn’t deliver on the promised economic growth, what it will undoubtedly achieve is more debt. That, sadly, is a scenario where future growth goes up in a puff of smoke.
No Magic Multiplier, Only Debt
The headline title is a bit misleading. It sounds as if there is a multiplier about to go poof.
There is a temporary demand shift forward but at a huge cost.
Long-term, the multiplier is negative for many reasons.
Negative Multiplier Due To:
- Increased long-term debt.
- Zombification of unproductive companies at the expense of healthy ones.
- Taking money from productive segments of the economy to relocate them to segments performing poorly is poor policy.
- Government can never allocate money wisely. Only the free market can.
Let’s not confuse the alleged short-term benefit of .31 to .66 (assuming it happens at all), with magic.
Ho, Ho, Ho!
Ho, Ho, Ho, It’s NOT Magic. It’s just foolish. Debt and deficits are proof.
Mish
Sure, but there is a certain curve. The first 20% GDP spent by the government might be very efficient or necessary, then less and less so. Depending upon what you want to optimize in your country (GDP, employment, happiness, net income, military might, etc etc) there is the right amount to tax and spend. Maybe 25.5% for max GDP, 41.3% for max employment, 39.4% for max happiness – your guess is as good as mine. Surely going towards 100% has been proven a pretty bad idea.
Negative rates !
I would have responded earlier but I took the day off to do some cycling. Seems like one can go shopping for the number that fits one’s ideology.
III. Why Do Multiplier Estimates Vary Widely?The variation in estimates of the fiscal multiplier cannot be explained by economists’ use of different types of models. Each type described above can generate a broad range of multiplier estimates. For example, Reichling and Whalen (2012) find estimates for the United States, as measured (on a cumulative basis) after eight quarters, ranging from 0.75 to 2.25 for macroeconometric forecasting models, from 0.3 to 3.5 for time series models, and from 0.5 to 2.25 for DSGE models. To better unde
rstand the variation in multiplier estimates, one must consider analytical and measurement issues, fiscal policy details, economic conditions, and how fiscal policy can affect people’s confidence in the future of economic activity.
No one sees the cost of debt with such low interest rates. Still counts tho!
Deficit spending is akin to pumping water from the deep end of the swimming pool to the shallow end using a leaky hose.
It actually increases the size of the note in your pocket. Before you could buy a one dollar pack of Monster Minto Nibbles and the packet was as long as a dollar bill, and now the dollar bill is twice as big !
I think maybe part of it though is that they have problems with the printing press and it is squeezing the paper longer and thinner as it goes through. People complain about the same thing from tax collectors, they say they are being squeezed by them, and they always look a bit thinner when coming out of a tax office, paler too. It’s the same company apparently so maybe they inadvertently moved a collector to the print room ?
“Sadly, these arguments ignore recent empirical evidence that the costs of increased government spending far outweigh the benefits to the economy.”
…
The Republican Fable / Con for years was supply side economics. Bush called Reaganomics (when he was running against him) Voodoo Economics. That by cutting taxes the extra growth would more than pay for tax cut. Back in 2005 or so (when Republicans held Congress therefore controlled CBO) the CBO came out with a report on Voodoo Economics, er, supply side BS. Ran multiple simulations. Iirc, the worst case added growth only generated enough extra taxes to replace 8% of tax cut … best case was around 22% replacement. The weak growth fleeting … the added debt … Forever.
Could have reduced spending or obliged a balanced budget I suppose ? I’m not sure if that is how it always works out
for example says opposite.
Cato? A Koch Brothers creation?
Some cherry picked stats.
Govt surplus / deficit
2001 … $128 billion surplus
2002 … $157 billion deficit
2003 … $377 billion deficit
2004 … $412 billion deficit
2005 … $319 billion deficit
2006 … $248 billion deficit
Or a Peter Sellers butler ? The main was wsj though, and I don’t know about no Kosh people, I will have to read up on them.
This could all be argued in circles, but the revenue was higher than predicted/increased for those years. The deficit also obviously increased per your table, and spending/economy/rates would also have changed. So to say what led to higher revenue, whether lower taxation or more spending etc. , looks like something of a fools errand – because the whole structure of the economy is so complex. Lowering taxation for workers seems like the right direction though, and lowering the level of public spending also. Neither is the trend of the last century.
If there is no magic multiplier, then we need to get rid of ALL welfare (corporate and individual), foreign aid, and foreign military occupation immediately.
The bottom line is money is simply a way to keep score of production. Money is not wealth, production is. Fed and government policies of free or no cost money undermines productivity of both workers and companies, and decreases wealth overall. We are doing the wrong things at the wrong time and the outcome is going to be much worse than anyone now realizes…..
Votes are expensive!
The last 3 weeks M1 has risen.
The last 3 weeks M2 has dropped.
And, since change to neither measure effects anything resembling real value at all, all that those changes measure, is just slightly different schemes for redistribution of claims to underlying real value…..
0.33 …??? That says the the money would have been allocated 3X better if left in the pockets of the people that earned it. We already know that.
That’s 0.33 more than if it had stayed in your pocket you old miser.
😉
Economics is no more an empirical science than math is.
.33 is just random gibberish backed by arbitrary curve fitting. Depending on exactly which arbitrary, dreamt up “data” you cherry pick, that .33 can be anything you want it to be.
It matters absolutely not one iota more, than some similarly intellectually limited idiot “publishing” a “study” demonstrating that, based on data from the past 7 years in Uganda, 2+2 in warm climates is 3.542. Which, of course, makes it really important that we support The Government banning and robbing us, to Prevent Global Warming(tm).