Are Stimulus Multipliers Higher During Times of High Unemployment? Not in the United States.

One of the arguments for additional fiscal stimulus over the past few years is that, sure, multipliers for deficit-financed stimulus are typically low enough that it's not worth doing. But when the economy is sluggish, like it is now, the multiplier effect grows larger, and the payoff for additional government spending becomes worth it. 

A trio of researchers from the St. Louis Federal Reserve, the University of California, San Diego, economics department, and the Bank of Canada decided to look at the historical evidence in both the United States and Canada to see if this might be true. And what they found was that multipliers do appear to be higher during times of slack in Canada, but not in the United States.

The research team looked at gross domestic product data, government spending, population, and the unemployment rate from 1890 to 2010 in the U.S. and 1921 to  2011 in Canada. And they tracked the difference in multiplier effects for periods of high unemployment  — above 6.5 percent in the U.S. and above 7 percent in Canada — versus periods of unemployment below those thresholds. In Canada, the authors report that multipliers appear to be a good bit bhigher during periods of high unemployment: about 1.6 compared with about 0.44 for periods below the threshold.

But in the United States, the effect is quite different. Not only are multipliers always below the 1.0 threshold where a dollar of government spending results in a dollar of economic activity, they're actually very slightly lower during high unemployment, ranging from about 0.64 to about 0.64 versus a range of 0.63 to 0.78 when below the 6.5 percent unemployment threshold. 

Are these results just an artifact of the particular threshholds picked by the researchers? They tested other threshold measures and say the results are similar. No matter how they test, the conclusion is the same. The authors say they "find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010."

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  • Aresen||

    The multiplier is a member of the set of i

  • A Mathematician||

    You lack understanding.

  • Sevo||

    ..."Not only are multipliers always below the 1.0 threshold where a dollar of government spending results in a dollar of economic activity,"...

    This really shouldn't surprise. Any voluntary trade automatically increases the wealth of humanity in that both parties got something they valued more than they gave. Government activity starts with a negative in that taxes are not voluntary; the act of taxation immediately lowers humanities wealth.
    Then we add in the incompetence of governments in general, their inability to respond quickly, the universal ignorance of central planning, and I'm surprised that the money returns over half of the nominal value.

  • Sevo||

    Damn edit feature...
    ..."lowers humanity's wealth."

  • SweatingGin||

    I find it surprising to see mention of a sub-1.0 multiplier coming from two central banks and a University of California school. Maybe reality is starting to sink in.

  • silent v||

    UCSD is not exactly Berkeley

  • Brandon||

    So we make it up on volume!

  • Rights-Minimalist Autocrat||

    We just haven't done enough stimulus yet.

  • Incredulous||

    We know it's you, Krugmeister.

  • An0nB0t||

    I'm a little numb from the previous stimulus. Maybe a little refractory period is in order.

  • ||

    The problem is really in how GDP is being measured.

    If you are counting both C (consumption) and G (government spending) as components of GDP, but then you are using G to give people money to create more C, then you end up double counting the same dollar. Once as G, and a second time as C.

    If I'm wrong about this somehow, I would it appreciate it if someone would point out exactly where, or how the dollars spent on (say) UI benefits, aren't getting counted twice.

    It's also possible that Canada is doing something different in terms of what it is spending money on during recessions. i.e. Genuine infrastructure improvements vs. throwing cash at welfare recipients so they'll spend more on groceries.

  • Ted_Howard||

    The G component in national income accounting only includes government expenditure on either goods or labor. Transfer payments are not included in G. So, there is no double counting going on.

    The real issue with GDP is that people confuse GDP with welfare when they aren't the same thing.

  • Tulpa (LAOL-PA)||

    If govt overpays for said goods or labor, or buys goods or labor that are not really needed, then it is really double counting.

  • robc||

    or buys goods or labor that are not really needed wanted

    FTFY

  • ||

    Yes. What's the difference between make-work and a transfer payment, really?

    It's good to know that UI benefits don't count towards G though.

  • AlmightyJB||

    alt text ftw

  • db||

    I have a serious weakness for chicks like that.

    Brown hair: Check
    Glasses: Check
    Chalkboard with math: Check.

  • AlmightyJB||

    Me too.

    Vagina: Check and mate

  • Almanian.||

    I did what you see there. I mean...you know what I mean...

  • T o n y||

    The implication being, of course, that austerity works instead. I'll note the recent apology by IMF economists for ruining Europe and Greece in particular with such designs.

  • ||

    What the researchers are asserting is that each dollar stolen in taxes results in about 40% of the wealth being destroyed. And yet you are arguing that countries that do a LOT of that wealth destroying theft are poor because not enough theft is occurring.

    If every dollar stolen in taxation makes us poorer, the optimal solution is to eliminate the theft entirely.

  • An0nB0t||

    Optimal for whom? Obv you don't own a home in the DC burbs.

  • T o n y||

    Nah all I'm really saying is everything you believe is wrong.

  • Sevo||

    T o n y| 1.5.13 @ 11:02AM |#
    "Nah all I'm really saying is everything you believe is wrong.'

    Yeah, well, you're an ignoramus, shithead.

  • Sevo||

    T o n y| 1.4.13 @ 9:33PM |#
    "The implication being, of course, that austerity works instead. I'll note the recent apology by IMF economists for ruining Europe and Greece in particular with such designs."

    Since the alternative is so effective, right, shithead?
    And these economists; would they be Krugman and Reich by any chance?
    Go suck a turd.

  • robc||

    Austerity worked in Estonia.

  • Sevo||

    And the alternative hasn't worked *anywhere*!

  • Mike M.||

    Everyone here knows that it was your scummy socialist ilk who ruined Europe.

    Of course it's no surprise at all that losers like you want to blame everyone else for your failures and inadequacies, like the little children that you are.

  • yonemoto||

    The IMF turds merely realized that are the ones who will benefit when the government doles out its largesse.

    Exactly WHAT austerity has Europe and Greece embarked on?

  • ||

    What works is freeing the private sector from the byzantine network of regulations that prevent it from creating jobs. Which is pretty much ramapant all over Europe including Greece.

    I realize that would mean laying off government workers, but that's a side effect, not "austerity" per se. If you lay off staff without actually cutting the regulations that probably would make things worse.

    I think the problem is so much of the economy is top-heavy with managers and regulators who aren't ultimately doing much if anything productive. A smaller portion of the economy gets dedicated to actionally producing the goods and services people actually want, and consequently there is less of that to go around and the general standard of living is lower. The problem with the Keynesians is that they seem to be incapable of drawing any distinction between productive and unproductive labor. They think as long as you give people "jobs" they will have money to spend and be prosperous and it makes no difference what sort of job they are doing or whether they are actually doing antyhing worthwhile.

  • waaminn||

    So who comes up with all that crazy stuff?

    www.AnonVPN.tk

  • An0nB0t||

    The trillion-dollar coin idea returns: http://abcnews.go.com/blogs/po.....nd-around/

    I've been known to compare macroeconomics to iridology and phrenology, but sometimes I wonder whether it's really just God's way of separating critical minds from out-and-out idiots. There has to be a limit to their stupidity, right?

  • Bill||

    The video at the end (60 minutes or something) was interesting.

    5 citizens had an hour to try to get 2 trillion in savings.

  • Ted S.||

    Two trillion in 10 years? Simple: keep spending at 2008 levels for the next 10 years.

  • Mike M.||

    This silly, childish idea is obviously going to be trotted out now every time we run up against the debt ceiling and Block Insane Yomomma needs to borrow another 1.5 trillion bucks.

  • Tulpa (LAOL-PA)||

    The fact that this idea looks perfectly legal and valid in our current system shows how stupid our current system is.

    Of course, it doesn't matter how high your debt ceiling is once no one wants to finance your debt. There aren't any tricks to deal with that issue when it arises in the near future.

  • ||

    It's like an Onion article come to life.

  • A Mathematician||

    Why not just strike FED held debt off the books? That's basically what they would be doing.

  • robc||

    ranging from about 0.64 to about 0.64

    That is a damn wide range.

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