So as it turns out, there is a “multiplier effect” from government spending. Problem is, it’s more like a divisor.
Historically, every dollar of government spending “grows” the economy by 80 cents. Consumer spending is probably about break-even, and private investment stimulates the economy dollar-for-dollar, plus the rate of return on the investment.
Now to be fair, some investments incur a loss (see: Motors, General). But the vast majority enjoy profits, else we’d all still be living in caves and eating mud, quod erat demonstrandum.
Do the math, and you’ll find that the $787 billion “stimulus” package can be expected to cause the economy to grow by about $630 billion — a $157 billion loss. That, as even a Princeton-trained economist can tell you, ain’t chump change.
Now I’ll do something no one in Washington will do, and be honest with you: I haven’t read the scholarly work quoted by Nick Gillespie in the link above. So I honestly can’t tell you if it factors in the inflationary effects of all that debt, or if it includes the suppression of future growth created by higher interest rates and increased uncertainty about future government interventions.
But I can tell you this much with complete assurance: If those factors are included, then the numbers get no better — you and me and Cousin Dupree are out a hundred and fifty some-odd billion dollars. And I can also tell you — again, with complete assurance — that if those factors aren’t included, then we’re all out a full shitload more.
Feeling stimulated yet, suckers?
Government spending starves a market economy of money while tax cuts empower the economy. To illustrate, lets say you buy 5 gallons of gasoline in order to ‘get your car moving”, a nice idea and since gas powers a car so it just has to work, right? Yet there is a large difference between what happens if you put the 5 gallon can of gas in the back seat of the car and what happens if your fill the gas tank with the 5 gallons of gas. Just spending money for gas doesn’t help if it doesn’t make it to the engine that powers the car.
The argument of the Obama administration is “we had to do something” and I actually agree with that, but what they did had much more to do with power management than economic good sense. Worse than simply mismanage a bad solution to a problem, what they have done is starve the economy of its life giving oxygen just when it needed it most.
Imagine that just half of the “stimulus” was not in the form of spending but came to us in the form of direct tax cuts. Let that sink in for a second; half a trillion dollars worth of cuts in costs across the board to every business and individual, leaving whole sections of the economy performing with virtually no tax basis at all. Can you say “boom!” Yes indeed, but wouldn’t the deficit go up with these huge tax cuts? Sure it would but if the economy booming, its not as hard to digest and with it booming you can recover the taxes at different levels of the economy.
Tax cuts provide an incentive to invest your own money in a growing economy ( so as to make your worth grow), while government spending provides an incentive to hide whatever money you have, since its very likely to be confiscated ( the other word for taxes ) to pay for the spending.
I read the original paper–which admittedly is just one economist’s work–and the 0.8 multiplier is his estimate for wartime spending, where consumers can rightly assume it’s mostly temporary. (The present case may or may not be analogous, depending on the credibility of the administration.) He attempted to estimate a multiplier for peacetime spending, and calculated essentially zero; though that, too, should probably be considered only a rough estimate. The real point, I would say, is that the Obama administration’s assumption that it will achieve a multiplier greater than 1 is simply unsupported by evidence or history; that would imply that government action is more efficient than a free market.
Eric –
Just a thought.
If the stimulus is truly a temporary, one-time spending kick, then shouldn’t it have the same multiplier as wartime spending?
And if it isn’t — if all this new spending gets baselined, which is my fear — then hasn’t DC used this crisis to kickstart Washington rather than the private sector?
“If the stimulus is truly a temporary, one-time spending kick, then shouldn’t it have the same multiplier as wartime spending?”
Actually, according to economic theory, as long as consumers believe it’s a one-time event, it will work that way, and then the 0.8 multiplier is more appropriate. If not, then there’s no _economic_ benefit to Washington, either, only a political one.
I was most definitely not speaking of Washington getting an economic benefit. Like any government town, its lifeblood is political power — steadily on the increase for 70+ years now.