Arnold Kling  

Stimulus Without Multipliers

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Paul Krugman provides an analysis showing arithmetically that the fiscal stimulus will have a declining contribution to GDP growth, even as stimulus spending increases.

What is interesting to me about this analysis is that the concept of a multiplier has completely disappeared. If you believe in a multiplier, then as far as stimulus goes, the sooner the better. The more you spend this quarter, the more people are employed this quarter, the more they spend next quarter, and so on. If you do not believe in a multiplier, then any time you slow the rate of government spending growth you slow the rate of overall GDP growth.

If there is no multiplier, and we follow the Krugman logic, then we have no choice but to keep increasing government spending until...what point? when it is 100 percent of GDP?

On the other hand, if there is no multiplier, then I think we should question the whole concept of stimulus. With no multiplier, its benefits are almost entirely transitory and artificial.


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COMMENTS (7 to date)
Daniel Kuehn writes:

RE: "we have no choice but to keep increasing government spending until...what point? when it is 100 percent of GDP?"

Until private investment and consumption kick in. Isn't that implicit? Until the loanable funds market can clear. At least that's the theory. Why would you say or suspect "when it is 100 percent of GDP"?

Doc Merlin writes:

Daniel, Keynesian economics doesn't work without a multiplier, because of all the money has to be diverted to fund either government debt or taxes. The only way stimulus spending works is if the Multiplier is larger than one.

Kevin Donoghue writes:

Krugman: how much higher is GDP this quarter than it would be without the stimulus? This should depend on “Rate” — on the quantity of goods and services the government is buying right now.

I'm struggling to see how one can read that sentence and say "the concept of a multiplier has completely disappeared." It's true that Krugman doesn't express an opinion here as to what the value of the multiplier is, but so what? If dY/dG=0 then the answer to his question is “GDP is unaffected” so it does not depend on government purchases. And if dY/dG > 0, one cannot say "there is no multiplier." Maybe 0.2, for example, is too small a multiplier to make stimulus worthwhile, but it's a multiplier all the same.

In October Krugman cited a couple of studies as evidence for a multiplier of about 1.5. I've seen no indication that he's had second thoughts about that.

Dirtyrottenvarmint writes:

With no multiplier, all government spending does is to replace private consumption.

Sort of. Actually G just increases the money supply. Government can increase M by decreasing taxes (allowing private individuals to keep more money) or by increasing G (giving private individuals more money). If the purpose of government policy were to consume, the government could just take stuff.

Anyways, with no multiplier, increasing the money supply (through stimulus or any other way) has no effect. Money is printed, and then used to "buy" things. The money goes into an account and vanishes, never to be used again. This is just an accounting fantasy - the same result could be achieved by the government just taking whatever it wanted. In this scenario, private investment and consumption NEVER kick in - at least, not because of the stimulus.

It is a good comment on loanable funds markets, Daniel Kuehn. Since government spending increases private holdings of fiat currency (i.e., it's inflationary) then even with no multiplier government spending might help to clear the loanable funds market. Even just sitting completely unused in an account, the new money might cause lenders to make other funds available to lend. However, the evidence from all sides seems pretty conclusive that banks are capital-constrained, not deposit-constrained. (Please cite if you have seen evidence otherwise.)

Business surveys seem to indicate that the reason for continued low lending rates is a lack of demand for loans at the market interest rates lenders feel the need to charge given the state of their balance sheets. If this is the case, injecting currency into the system in the form of new deposits is not going to have any effect.

In fact, I see little commentary on the other side of the (theoretical) Keynesian fiscal policy coin: expansionary fiscal policy theoretically pushes interest rates up. If the problem is a lack of demand for credit at existing market rates (however low they may be), and if expansionary fiscal policy pushes up rates, then theoretically we would expect stimulus spending to exacerbate existing credit market problems. Of course, if it is the case that lending institutions are simply refusing to loan funds to qualified borrowers, and prefer to forego profitable lending opportunities in favor of holding out for higher rates, then this recipe might just be the ticket to ride. So, good discussion point. Would any loan officers or other bankers care to comment?

I am always happy to see honest economists call dishonest pundits out on their misrepresentation of the facts. Besides the multiplier, other things Krugman appears to ignore in his OpEd: timing, behavior expectations, elasticities, marginal returns, deadweight loss,...

Krugman is always happy to ignore both basic economic theory (even from his own books) and real historical data in order to support his personal political preferences. His economic commentary is not intellectually credible. Not only is he not credible; in fact, he is clearly an intelligent academic thinker and the thoughtful observer must suspect that he knows what he is doing and deliberately lies in order to advance his political agenda. I am sure he assuages his conscience with the paen that "it's for the greater good". Such, apparently, is the "conscience of a liberal."

The chart Krugman lifted from Econbrowser is an attempt by DB Global Markets to predict future economic activity for their clients. That's their job. For an economist to suggest that a fabricated model of potential future outcomes is adequate evidence for his policy recommendations and pet theories, when numerous historical datasets are available worldwide (many of them free!) for that exact policy recommendation and the resulting outcomes - well, that's just absurd.

In fact it is beyond absurd, it is incredible. Krugman's deliberate ignorance of real data in favor of a hypothetical model hand-picked to "support" his beliefs exposes him as a mendacious twit.

jean writes:

@Doc Merlin:
The real threshold for the stimulus to be interesting is not one but a number between zero and one depending on the usefulness of the public spending.

(in the classical situation and if there is no revenue effect, the multiplier is zero or even negative)

Ryan Vann writes:

The entire argument about the alpha for government spending is tiresome to me. At some point Economists got entirely off track when framing the government spending issue. Instead of asking about the long term effects of increased spending (whether it helps the Economy return to trand or not) they are disputing one year national accounting identities. It is an entirely worthless discussion. I could care less what the effects of G on this year's GDP is; I want to know how it effects structure and thus GDP 10 years from now.

don king writes:

Out on the farm you had to "PRIME" the ole manual water pump to get the water from deep in the well flowing into your bucket.
Like in the 1930's, the government stimulus will have a good multiplier effect on the economy.
Back then there was good economic expansion from 1933 to 1937 from the Fed's monrtary stimulus, hence the multiplier effect from gov't stimulus is a proven entity.

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