Economics, Pethokoukis

New study suggests U.S. fiscal stimulus generates less than $1 in GDP growth for every $1 spent

The economic theory driving the $800 billion Obama stimulus holds that government spending has a multiplier, especially during tough economic times. For every $1 of spending, overall GDP increases by more than $1, maybe $1.50 or so. That is pretty much what Team Obama assumed.

But there are lots of theories and studies about fiscal multipliers. Some even hold that for every $1 of government spending, we get less than $1 of output — and that’s not even taking into account that higher taxes will be needed to pay for debt-financed stimulus.

“Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data,” a new study from economists at the St. Louis Fed, University of California, San Diego, and the Bank of Canada, looks at fiscal multipliers during periods of economic “slack” over the past hundreds years or so, which they define as periods of 6.5% or higher unemployment in the U.S., 7.0% of higher unemployment in Canada. As does economist Robert Barro in his work, economists Michael Owyang, Valerie Ramey, and Sarah Zubairy concentrate on the impact of defense spending (via the American Economic Association annual meeting):

We have investigated the proposition that multipliers are greater during periods of slack using newly constructed historical data for the U.S. and Canada. Using Jordà’s (2005) local projection method, a threshold model based on the level of the unemployment rate, shocks to military news, and definitions of variables that obviate the need for ad hoc conversion factors, we find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010. In all states, multipliers appear to be between 0.6 and 0.7.

In contrast, estimates using quarterly Canadian data from 1921 to 2011 indicate that multipliers are typically greater during periods of slack. The multipliers are around 0.5 during the nonslack state, but are above unity during the slack state at many horizons. It is important to point out, though, that because we do not adjust for the fact that taxes often rise at the same time as government spending, these estimated multipliers are not necessarily equal to pure deficit-financed multipliers.

7 thoughts on “New study suggests U.S. fiscal stimulus generates less than $1 in GDP growth for every $1 spent

  1. Of course! The ELITE/banksters ALWAYS take their cut off the top. They create “inflation” through manipulating the money and that “inflation” is siphoned off to them, seemingly invisible.
    This is PAYBACK by o’bama to those who OWN HIM!

  2. then, obviously, we should have gone off the fiscal cliff and raised everyone’s taxes back to 2001 levels…every dollar thus taken out of the economy would reduce growth by much less than a dollar..

    • notice that 40% of it is tax cuts:
      American Recovery and Reinvestment Act of 2009
      Summary of Major Spending and Revenue Provisions
      (Billions of Dollars)
      Major Spending Components:
      State Fiscal Stabilization Fund……………………………………………….
      $53.6
      Enhanced Federal Medicaid Match Rate………………………………….
      86.6
      Transportation Infrastructure………………………………………………….
      48.0
      Other Infrastructure Grants…………………………………………………….
      72.0
      Investments in Health Programs…………………………………………….
      14.2
      Energy-Related Programs……………………………………………………..
      37.5
      Education and Training Programs…………………………………………..
      52.3
      Unemployment Insurance Expansion………………………………………
      35.8
      Health Insurance for Unemployed Workers………………………………
      24.7
      All Other Areas of Spending…………………………………………………..
      75.7
      Total Spending Components……………………………………………….
      $500.4
      Tax Revenue Components:
      Individual Tax Relief……………………………………………………………..
      $232.4
      Business Tax Relief………………………………………………………………
      34.2
      Energy-Related Tax Issues……………………………………………………
      20.0
      Total Revenue Components………………………………………………..
      $286.6
      Total Federal Stimulus………………………………………………………..
      $787.0

  3. Fine. Government spending is the blunt instrument approach, but superior to the Fed’s printing presses, which is the ineffectual approach. Now how about discussions on policies that might actually work well? You mentioned that Glenn Hubbard would have had Mitt endorsing broad mortgage relief. Bring Glenn out; let’s get the ball rolling like the pragmatic Americans we are. We are all Americans, right?

  4. This is a surprise to no one, save for those who think they can raise the level of water in their swimming pool by taking a bucket of water from the deep end and then pouring it into the shallow end.

    Keynesian Economic Theory has been successful in only one environment – The Classroom. There are no examples of Keynesian economic policy successfully stimulating an economy for even the mid-term. However, the theory doves perfectly with the social engineering efforts of the Progressive, which is why it’s worshipped and utilized – as it is an integral part of wealth redistribution, not sound economic policy.

  5. The fiscal multiplier is mathematical nonsense,
    and a government spending scam.

    How income is divided into consumption and investment,
    according to the marginal propensity to consume,
    is irrelevant to the effect of spending on income,
    which is what the “multiplier” is supposed to tell us.

    b = marginal propensity to consume

    Keynes’ original equation, with some numbers:
    ΔY = ΔC + ΔI
    10 = 9 + 1

    Keynes’ investment “multiplier” k, as he described it:

    k = ΔY/ΔI = ΔY/(1-b)ΔY = 1/(1-b) = 10/1 = 10
    so b must = 0.9

    Here’s baseline income:

    Y = C + I

    Add a $1 increment.
    Both sides must give the same result:

    Y +1 = C + I +1

    If the $1 is investment:
    ΔY = ΔI = 1
    k = ΔY/ΔI = ΔY/(1-b)ΔY = 1/(1-b) = 1/1 = 1
    and b must = 0
    Investment has zero propensity to consume.

    If the $1 is consumption:
    ΔY = ΔC = 1
    ΔY/ΔC = ΔY/bΔY = 1/b = 1/1 = 1
    and b must = 1
    Consumption has 100% propensity to consume.

    There are simultaneously 3 different values for b.
    Keynes used the wrong value.

    The fiscal “multiplier” always = 1.
    If the govt-spent $1 is offset by tax, or loss of value from inflation, then there’s no effect at all.

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