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When Puff the Magic Multiplier Goes Poof
Townhall.com ^ | August 13, 2020 | Veronique De Rugy

Posted on 08/13/2020 7:32:11 AM PDT by Kaslin

When revenue shrinks by 1% of GDP and spending increases by 51% over 10 months, you get a $2.8 trillion deficit. That figure, according to the Congressional Budget Office, is significantly larger than the deficit Uncle Sam accumulated over the first 10 months of 2019. Yet, many in Congress demand that even more spending be enacted in the name of stimulating the economy.

More spending means more debt and more future taxes. That much we know. What we also know is that the calls for sustained spending -- in the form of unemployment checks, individual stimulus checks, small-business grants and payroll tax cuts -- which are made regularly in newspapers, political speeches and partisan punditry, are overblown to stay the least. The idea here is that if Uncle Sam continues paying people to stay home, their consumption will continue, and the economy will grow.

These calls are based explicitly or implicitly on the belief in an all-powerful federal spending multiplier, or the idea that if the government spends one dollar, the economy will grow by more than a dollar.

That's right; 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.

For starters, contrary to the claims of pro-government spending proponents, economists are far from having reached a consensus about the actual return on government spending. While some economists find that a dollar spent by the government generates more of a return than the dollar spent, others find that the return is less than one dollar. And yet others find that if you take into account the future taxes needed to pay for the dollar that's spent, the multiplier is actually negative, and the economy takes a hit.

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."

Now, in fairness, there are narrow cases when government spending can stimulate the economy, but for that to happen, the environment in which the spending takes place is important. Work by economists Ethan Ilzetzki, Enrique Mendoza and Carlos Vegh on the impact of government fiscal stimulus shows that it "depends on key country characteristics, including the level of development, the exchange rate regime, openness to trade, and public indebtedness." Many other economists have found the same. Unfortunately for the proponents of fiscal stimulus, the United States has the features of a country where stimulus by spending does have an impact and, in fact, can have a negative impact on growth.

Making matters worse is the fact that, even if you had a country with little debt and the right environment, implementing the spending correctly is a key to getting a multiplier that's larger than one. As former Treasury Secretary and former Director of the National Economic Council Larry Summers has explained, stimulus spending needs to be timely, targeted and temporary. Unfortunately, evidence from the last recession shows that it rarely is.

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.


TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS: economy; gdp; taxes

1 posted on 08/13/2020 7:32:11 AM PDT by Kaslin
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To: Kaslin

Fiat currency created at the stroke on a keyboard. Funny money. Spend while we can until we transition to gold standard. What to do it debt at the transition? You forgive the debt and move forward with the Gold standard. Look who The Fed reports to now.


2 posted on 08/13/2020 7:45:38 AM PDT by Chauncey Gardiner
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To: Chauncey Gardiner

I’m hearing about this thing Agenda 2030. I’m going to look into this.

The Fed isn’t the only problem.


3 posted on 08/13/2020 7:56:23 AM PDT by sauropod (I will not comply.)
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To: Kaslin

You can’t stimulate an economy you have locked up in chains.


4 posted on 08/13/2020 8:05:25 AM PDT by Boogieman
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To: Kaslin
We can thank British economist, John Maynard Keynes, for this multiplier theory. Keynes advocated increased government spending during bad economic times to boost the economy. However his own calculations of the GDP mandated the creation of multiplier effect or else increased government spending would just reduce consumption through added taxation and have virtually no impact on GDP. Interesting that Keynes himself admitted that the multiplier effect could be zero.

An analogy I used to explain the concept to my economics students was to imagine a swimming pool filled with money. Government spending was to syphon money from the deep end of the pool and put it into the shallow end in hopes of making the pool deeper.

5 posted on 08/13/2020 8:10:22 AM PDT by The Great RJ ("Socialists are happy until they run out of other people's money." Margaret Thatcher)
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To: Kaslin

The Laffer curve works, but only in a world where there is sanity about spending.


6 posted on 08/13/2020 8:56:33 AM PDT by buckalfa (Please forgive my feeble attempts at humor, Appalachian education, and condescending snarkiness.)
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To: Kaslin
Puff the Magic Dragon

Puff

7 posted on 08/13/2020 9:28:16 AM PDT by AlaskaErik (In time of peace, prepare for war.)
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To: Kaslin; All
Regarding the federal government's scandalous abuse of taxpayer trust, patriots are reminded of the following. Not only did the Founding States give Congress the express constitutional power to regulate the value of money, not the constitutionally undefined, third-party Federal Reserve, but 19th century, state sovereignty-respecting Supreme Court justices had clarified that Congress cannot appropriate taxes in the name of state power issues.

In other words, not only is the country badly in debt, but most of the debt is based on unconstitutional federal taxes, such taxes arguably stolen state revenues, that the corrupt, post-17th Amendment ratification Congress cannot justify under its constitutional, Article I, Section 8-limited powers.

Consider that before Pres. Woodrow Wilson unthinkingly signed the constitutionally indefensible (imo) Federal Reserve into law that ordinary legal voters had the power to indirectly regulate the value of money.

After all, ordinary qualified citizen voters have always had the power to kick bad-apple House members out of office, all lawmakers having the 1.8.5 power (above) to regulate the value of money, regardless that lawmakers are now evidently being institutionally indoctrinated to not accept responsibility for that power.

So the establishment of the Federal Reserve, done by "pen and phone” (corruption) imo instead of appropriately amending the Constitution, also scandalously weakened the constitutionally enumerated voting power of ordinary legal voters imo, by wrongly protecting career lawmakers from the wrath of the voters.

What a mess!

Corrections, insights welcome.

Send "Orange Man Bad" federal and state government desperate Democrats and RINOs home in November!

Supporting PDJT with a new patriot Congress and state government leaders that will promise to fully support his already excellent work for MAGA and stopping SARS-CoV-2 will effectively give fast-working Trump a "third term" in office imo.


8 posted on 08/13/2020 9:58:46 AM PDT by Amendment10
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