What If There is Little or No Multiplier?
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Steve Verdon | Friday, January 23, 2009 |
When you think of fiscal stimulus in this manner it becomes apparent that Barack Obama maybe make the mother of all gambles. This report by the Congressional Budget Office (CBO) indicates that the deficit for 2009 could be as high as $1.2 trillion. Consider that President Obama’s stimulus packages is about $825 billion. Now I don’t know when all that spending will be released/send out/spent/etc., but if it takes place in 2009 as some seem to think, and there is no multiplier we’ll have a deficit of $2 trillion and be in no better shap than we are right now, and maybe even worse.
Now consider the issue with Medicare. With all these baby boomers getting ready to retire that program is going to start eating into the federal budget as well unless we raise taxes, and that probably isn’t a good idea given the state of the economy. These deficits will make that situation even worse. Add on the expectations for increasing health care coverage (i.e. making health care more expensive) and things just don’t really look good from a budget perspective. And if deficits matter, like many on the Left have been saying for the last 8 years, President Obama has some really serious problems.
About the Author: Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.
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I certainly think that those who support a big stimulus package need to show their work. I've seen lots of assertions and very little proof. The prevailing wisdom appears to be that the Obama Administration is counting on a 1.5 multiplier. Why is that the right number? Why isn't the .8 that Robert Barro suggested recently closer to the mark?
I think there's an even more pressing question: how long do they think the recession will last? Worst/best cases?
We're in something like the 16th month of the recession now. If it goes on another 16 months that'll be the longest post-WWII recession by quite a bit and it takes us into mid-2010. How does spending that doesn't take place until 2011 help us with a recession that ended in 2010?
We have never been able to "spend" our way out of a recession or a depression. Why is this situation so different? Between TARP and the Stimulus Pkg, we are talking about well over $1T.
Barack Obama may be a needed change, but we we could do without flushing that kind of coin.
A broad IMF survey of the evidence on fiscal multipliers says they are "very small" -- no larger than unity (a dollar more G adds only a dollar to GDP)and sometimes negative (Denmark and Ireland slashed spending and their economies boomed).
