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Where’s the Multiplier?

The Hoover Institution’s John F. Cogan and John B. Taylor combed through state and federal spending data from the past few years looking for a multiplier effect from the stimulus. Instead, they found that purchasing increased very little at the federal level and not at all at the state level.

The ARRA attempted to stimulate government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services; mainly for infrastructure, law enforcement and education. Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.

Recently released Commerce Department data show that of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). Infrastructure spending increased by an even smaller amount: $4 billion. In a $14 trillion economy, these amounts are immaterial.

The Commerce Department also provides data on ARRA grants to state and local governments and the amount of purchases by these governments. According to these data, state and local government purchases of goods and services did not increase at all in response to the large federal stimulus grants. These purchases have remained slightly below their pre-ARRA level since the fourth quarter of 2008.

Meanwhile, state and local revenues fueled by the receipt of ARRA grants have grown by 10% over the same period. The low level of state and local purchases is consistent with the initial fall-off and subsequent slow growth in revenues excluding ARRA grants. Our statistical analysis shows that, once revenues are controlled for, ARRA grants have no statistically significant impact on state and local government purchases.

...So where did ARRA's state and local grant money go? While some of it increased transfer payments to individuals in the form of welfare and Medicaid, the major part was simply used to reduce borrowing. As ARRA grants increased, net borrowing by state and local governments decreased. In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008, even though their revenues from all other sources were only $76 billion higher.

It is becoming increasingly difficult to argue that the stimulus worked as intended. The evidence that stimulus backers have used to argue that it worked is not very convincing. The evidence that it failed to either energize the economy as planned or create long-term jobs, however, is mounting.

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  • ||

    "Repent, Suderman!" Said the KrugKrugman.

  • ||

    To my knowledge there has never been a study that ever definitively proved the existence of much less measured the multiplier effect. It really is a figment of people's imaginations.

  • ||

    Your knowledge is woeful. Barro has published a number of studies on it. Its anemically low. Like .05, when it even exists.

  • ||

    Ugh, my brain was off a factor of 10, but maybe not for non-defense spending.

  • ||

    No. Your knowledge is woeful. If the result is > one, that means that the government spending has a negative effect on growth. You have to get over 1.0 in order for their to be a multiplier effect. Barro wrote in the WSJ in 2009

    "For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

    Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%."

  • ||

    >No. Your knowledge is woeful. If the result is > one, that means that the government spending has a negative effect on growth.

    No. Your knowledge is even worse. The multiplier is the number an increase in G, I, C etc. is multiplied with to get Y, or the GDP. If the multiplier is 0.7 it means that every ten dollars increase in government spending increases GDP with seven. If the multiplier is over 1 the GDP actually increases more than the gubmint spending, which is the Keynesian wet dream.

  • ||

    http://online.wsj.com/article/.....86310.html

    there is the link. and above I mean < 1,

  • ||

    John. I know what I multiplier less than 1 means. Mabye its my engineering degree, but I can multiply by numbers less than 1, negatives, and even irrational numbers.

    You said you hadnt seen any studies proving the existence of a multiplier, I pointed some out to you. And then you quoted me from further down in the thread.

  • ||

    It would be hilarious if someone determined that the stimulus multiplier was complex. Would explain where the money goes (perpindicular to reality!).

  • ||

    when I said "the existence of a multiplier effect", I meant the existence of a positive one associated with government spending as is commonly claimed. The work you cite proves that government spending can have a positive effect only in the most dire of circumstances, which I think makes the effect as popularly conceived, a figment of people's imagination. Most people when they say "multiplier effect" think in terms of every government dollar spend equaling some great amount of economic growth, and this just not true.

  • ||

    when I said "the existence of a multiplier effect", I meant the existence of a positive one

    Numbers between zero and one are positive.

  • ||

    thanks man. If you didn't point that out, I was gonna have to.

  • ||

    Perhaps John is thinking of mulitpliers that produce an increase.

  • ||

    Right. The most compelling argument I've seen as to why this is so is that for every dollar that the government spends, it borrows 1 dollar from the private sector. (We don't print that money any more).

    If you are a private business sitting on 1 Billion in cash, as we enter "Financial End Times" you are going to look for the least risky way to leave that money invested. And over the past years, the government has been giving them all of these low-risk treasuries to invest in. Sure, the yield sucks, but you KNOW that you are going to have that money when you need it.

    Basically, by spending all this money, the government is giving private businesses a safe harbor- a great big mattress stuffed with eagle feathers- to store their money. And then the government turns around and spends that money on what the fuck ever.

  • ||

    There is a multiplier effect, only the multiplier is less than 1.

  • ||

    The multiplier is actually a member of the set of {i}.

  • ||

    LOL

  • ||

    This. The true value of the multiplier is something like .98 or .99.

  • ||

    Isn't it worse than that? You have to take into account that it costs the economy more than a dollar to pay a dollar in taxes, the costs of borrowing much of the money, etc.

  • ||

    The number I've heard is about 0.7.

    >1 is highly unlikely -- else places like Cuba, North Korea and Venezuela would have grown into their dictatorships.

  • ||

    Barro's numbers were much lower than that, IIRC.

  • ||

    Nope, I was off by a factor of 10.

    From a WSJ article last year, here is what Barro has to say:

    For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

    Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.

  • ||

    Oh, and non-defense multipliers are harder to quantify, according to Barro, but are LOWER than defense multipliers.

    So, we still havent reached unemployment levels that would even make stimulus a break even proposition.

  • ||

    Thanks, this is great information here, and very plausible.

    So at the current rate of 9.8% unemployment, the multiplier should be somewhere around .9%.

  • ||

    So at the current rate of 9.8% unemployment, the multiplier should be somewhere around .9%.

    .9, not .9%. And that is for defense spending. Non-defense is lower (but lack of sudden changes makes it harder to measure, Barro isnt sure it isnt zero for non-defense spending).

    But yeah, .9 as a high end estimate is pretty good. So at the current time, any stimulus spending is pissing away at least 10% of the money.

  • ||

    It's gotta be much smaller considering they are spending 500,000 per 50,000 position. And since many of these positions are for municipal bureaucrats, it's hard to see how they add any value to the economy at all.

  • ||

    Even if the argument is that the stupid market isn't taking on enough debt, the problem is that the market may still react by lowering its on borrowing in response. So even if Krugman believes that there ought to be more debt, he can't force it to happen beyond a certain point.

    Also consider that in general government directed projects are simply less efficient and worse uses of money.

  • ||

    Wait, you mean the pointless, never ending "rip up the sidewalk and then repave it" projects going on here in Seattle aren't indicative of long term job creation? If those unionized stooges don't have long term jobs, who does?

  • ||

    Idea: The EPA could set a new standard for windows of office and residential buildings. Then they could demand compliance, but fund it with taxes. Just think of all the jobs that would be created!

  • ||

    We just needed more...

  • ||

    I have two questions:

    (1) Why does Hit & Run hate SpaceX?

    (2) Why does Hit & Run refuse to call Gingrich "Newcular Titties Gingrich?"

    I await official response to these queries.

  • ||

    1) Because SpaceX has no photon torpedos.

    2) Because the website is actually hosted in the UK with it's rather strict libel laws.

  • ||

    I'll accept your response to #1; however, I don't see anything libelous about that name. In fact, I think it's complimentary. And complementary.

  • ||

    Actually, I lied. I cannot believe that there was NOTHING on SpaceX successfully launching the Dragon spacecraft, which, incidentally, also splashed down safely on target. The fact that we'll be seeing private people going to space via Falcon boosters in Dragon capsules you'd think would be of interest.

    Maybe they could do phasers?

  • ||

    $50M/7 = $7.14M/person for a private flight. Call it $8M by the time you provision the capsule. I'm down. Let's do it. Right after I make $7.995M more dollars.

  • ||

    It'll get better. Wait until Bigelow decides to move forward with a transportation deal with SpaceX. They're supposedly just waiting for a transportation system before deploying orbital hotels.

  • ||

    I agree with you. But until it gets below $10K, I'm going to have to amass some more assets to go to space. However, even $8M to LEO is significantly cheaper than the $20M flights previously offered to private citizens.

  • ||

    If I were you, I'd get in on the ground floor. Once the private space industry proves viable, the government will regulate the shit out of it.

    Imagine paying $8M to have some TSA stooge fondle your junk.

  • ||

    Of course regulating an industry where an "accident" during the state of the union address can land a kintetic balistic missle into the well of Congress may be a mistake.

  • ||

    $8M for a handy? That's shocking considering Uncle Sam only charges me 33% of my yearly earnings for a good ass ramming

  • ||

    ""Imagine paying $8M to have some TSA stooge fondle your junk""

    Charlie Sheen pays less for more.

  • ||

    Oh you just wait, and wait and wait. Orion will really make Dragon look like crap.

  • ||

    boom boom.

    Oh, you mean the project that stole the name?

  • ||

    I thought the same thing when I heard the project name the first time. We're doing the atomic putt-putt? Cool.

    Consider it a warning to the Fithp.

  • ||

    Those are elephant invaders, right?

  • ||

    Yes, thats the 2nd place I saw Orion. The first was Cosmos, I think.

    Project Orion

  • ||

    That was a reply to Pro Lib and JW. Parse as necessary.

  • ||

    I remember that one. Nukes. . .in. . .space!

    That's not necessarily off the table for manned exploration of the outer solar system.

  • ||

    Footfall is on the list of things that get made into movies/miniseries/tv shows when I own the SyFy network.

    First, of course, is changing its name back.

  • ||

    @robc:
    "when I own the SyFy network"

    Executing everyone associated with the Ghost Hunter shows has to be near the top, right?

  • ||

    I dont think owning the network would grant me that power. But I will check.

  • ||

    I would settle for breaking those goddam 'low-light' filters they use and firing them in a live production.

  • ||

    This may have killed what was left of Orion. The next Dragon mission, if successful, will probably be the actual deathblow.

  • ||

    Don't underestimate how badly Alabama and Mississippi crave the intellectual respect (and tax dollars) of having NASA installations.

  • ||

    Huntsville could try to bring some of the commercial operations there, instead of relying on Shelby to keep the pork flowing. That's a losing strategy, in my book.

  • ||

    I don't disagree. SpaceX (or their competitors) can't keep fabbing things in Hawthorne, CA forever. It makes sense to find a place like Huntsville where doing business is cheap and talent is concentrated.

  • ||

    I think we can comment on Gingrich's titties. We just can't comment on his sheep fucking prowess.

  • ||

    That's correct. Only professional, licensed journalists can do that.

  • ||

    Fine just no mentioning He-Who-Must-Not-Be-Named...

  • ||

    "It is becoming increasingly difficult to argue that the stimulus worked as intended."

    < snark > But everything would have been much worse without the stimulus.

    And Ben Bernake's recession-repelling magic beans. < / snark >

  • ||

    I keep coming back to the phrase "ex recto." It accurately describes where most government estimates come from, how they come up with the stimulus benefiting the economy, and, really, most anything the government tells us.

  • ||

    Whereas in recto accurately describes how they give it to us.

  • ||

    Indeed.

  • ||

    I'm going to use this phrase in a meeting sometime soon. It's a good one.

  • ||

    I can actually accept the multiplier effect - under circumstances of 50 years ago. Of course, that was in a society where the Fed wasn't printing (WHOOPS - they're not printing, they are ELECTRONICALLY CREDITING the RESERVE throug ASSET SWAPS) money and keeping interest rates articficially low, and bailing out every unwise investment.
    Also, this is back when banks had the unsophisticated view that loans had to be PAID BACK. Once the banksters learned that they could get bonuses just on the amount of loans made, and it didn't matter if it got paid back, well, the whole intellectual basis of the multiplier goes out the window.
    Honestly, when you invest in housing, at a price that only appears that people can afford because of shady loans, well....do we need more houses built? We can't sell the ones we got AT THE CURRENT PRICE.

    Finally, look at the chart from the FED
    http://research.stlouisfed.org/fred2/series/MULT

    The FED itself is saying the multiplier is BELOW one - what does that mean? Every dollar you invest you lose money on. Doesn't that make sense now? How many people invested in houseing, both at the retail and wholesale level?
    How many people reading this now know somebody who bought a house in the last five years and sold it at a profit?

  • ||

    It's the Bureau of Engraving and Printing that's printing the money, and even they're fucking it up.

    But think of all the jobs that could be created, sorting 1.1 billion $100 bills into "good" and "bad" piles.

  • ||

    If it doesn't solve for opportunity cost it is a money loss, and unscientific in the first place. Even in the best conditioned scenario of high savings and low consumer demand calculated by Robert Higgs in his study of the war economy of the Second World War, the multiplier was around .80.

    A recent study by some mainstream economist of the neo-Keynesian/moneterist variety concluded a positive multiplier doesn't exist for economies with substantial trade outside of their communities but could theoretically exist in a closed economy. No shit. How else are you going to solve for the 'problem' of savings under the Keynes/Samuelson model? That economy would not even be one that the neolithic iceman would have recognized as progressive.

  • ||

    Wait a minute, they didn't study the army of newly trained weatherizers?

  • ||

    the major part was simply used to reduce borrowing.

    Federal money displaced state/local money; what a surprise.

  • Atlas Shagged||

    "Where’s the Multiplier?"

    Where's the Morning Links?

  • ||

    Same place as the multiplier.

    Oh god is this some sort of death spiral? Call Ben!

  • ||

    Every dollar you invest you lose money on.

    But those deflated dollars are worth more. Prices are falling everywhere Bennay looks.

  • ||

    In other news Kieth Olberman is a racist who wants Obama to fail.

    http://theothermccain.com/2010.....ment-evah/

  • ||

    "insatiable maw of capitalism"

    ROFL

    douche nozzle

  • ||

    I'm torn between hating the Democrats for their asinine positions, and respecting them for calling out their politicians for selling those positions out.

  • ||

    Yesterday I had an exchange with a very Senior member of this Administration who wanted to sell me on this deal. I pointed out that that was fine, except that — as I phrased it to him — “frankly the base has just vanished.” “Well,” he replied, “then they must not have read the details.” There, in a nutshell, is this Administration. They didn’t make a bad deal — we just don’t understand it.

    Just as it was our fault, Mr President, for not understanding your refusal of even the most perfunctory of investigations of rendition or domestic spying or the other crimes of the Bush Administration, or why you have now established for those future Administrations who want to repeat those crimes, that the punishment for them will be nothing.

    Just as it was our fault, Mr. President, for not understanding Afghanistan. Just as we didn’t correctly perceive, Sir, the necessity for the continuation of Gitmo. [...] Or how we couldn’t have foreseen your foot-dragging on “Don’t ask, don’t tell.”

    Isn't a stopped clock supposed to be right only twice a day? I count five here.

  • ||

  • Draco||

    The Democrats. The party who could f*ck up an $800 billion stimulus. The party of big government itself, of FDR and LBJ, couldn't find a way to spend $800 billion such that it actually created any significant economic growth or reduction in unemployment.

    Even my default plan, if I couldn't think of anything better in about 15 minutes of trying, would have been better than this: give $800 billion in payroll tax holiday to every person that earns a paycheck over the course of a couple of years.

    I am still working on the thought experiment of how you could give people suitcases full of cash with an "expiration date" so that they were forced (even the natural savers, and "the rich") to spend it. Solve that problem and you've maybe solved the liquidity trap.

  • ||

    Dream on. Regardless of whether or not you see yourself as more competent than the Democrats, you are still a planner. The only thing a planner can do is confiscate private resources at the barrel of a gun and redistribute at the expense of consumer demand. It is irrelevant whether that demand is less than last year's demand, you would still be a burden on it, shifting time preferences for short term gains but leaving a bigger hole in the aggregate than what was there before, as you yourself just outlined, a Cash4Clunkers writ large.

  • Draco||

    To be clear, lest anyone think I am or want to be considered a "central planner": I am not. I am a radical, free-market libertarian. I want people to decide what they should do with their time, money, and resources, and to be free to do so. What I stated was that if I were charged with implementing a stimulus plan, mine would have been better than what the Democrats implemented (if you can call it that). The Democrats are fundamentally dishonest - they used the need for stimulus in a macroeconomic sense (assuming there was such a need, which you will debate) to transfer money to their pet projects and causes. In other words, they literally took advantage of the country when it was down and out. My proposal doesn't do that.

  • ||

    If by stimulus you mean easing the burdens of government in its consumption of private resources through cutting taxes and slashing the regulatory burden, I go along with that. I would even put in measures that may have a short term loss but a definite long term gain like cutting the size of the bureaucracies just to show how serious we are.
    Monetizing debt is another matter. If the purpose of adding monies to the economy is to prevent monetary deflation than the purpose at least starts from a sound principle, as even most of the Austrians that I have read do not advocate monetary deflation, most forms that price deflation take are a net bonus to the economy, but a smaller net money supply not being one of them.

    Monetary stability is the important thing to keep in mind, Friedman's calculus of the amount needed to add to replace depleted monies (money that eventually gets sucked out of the economy) always sounded about right to me (I originally came across his discussion of this in Money Mischief if I'm not mistaken), but monetizing debt opens up its own can of worms in regard to systemic stability.

  • ||

    It wouldn't be that hard to implement this at all. Give everyone a prepaid debit card. DONE.

  • ||

    Where's the multiplier?

    I dunno. Probably out back, with the unicorn. Sharing a Slurpee.

  • ||

    I dunno. Probably out back, with the unicorn. Sharing a Slurpee.

    If there were any justice, Krug would hand his prize over to you -- brilliant!

  • ||

    Don't worry, you can just hand me out amongst yourselves, as usual.

  • ||

    The multiplier is not being properly accounted for and even if it was it is low becasue the stimulus was too small, you non-Nobel Prize-winning clowns.

  • ||

    I am still working on the thought experiment of how you could give people suitcases full of cash with an "expiration date" so that they were forced (even the natural savers, and "the rich") to spend it.

    Sounds like inflation, to me.

  • Draco||

    No. This doesn't lead to inflation in an economy with excess capacity. This is macro-econ 101. It does lead to inflation when you're at full employment, but we're a long, long way away from there.

  • ||

    You are looking only at "demand-pull" inflation in a closed economy.

    There is also "cost-push" inflation in closed economies, where your currency is devaluing relative to others, and so the inputs that you have to import are rising in (cash) price. After you've compressed margins (that is, killed profitability), those increased costs are passed through, and prices go up.

  • ||

    How bout we all just get to add zeros to our currency with permanent marker, and it like totally still counts. This would save us the costs of all those suitcases. It also shows how stupid the macro-econ 101 definition of inflation is.

  • ||

    There is also "cost-push" inflation in closed open economies,

  • ||

    "As ARRA grants increased, net borrowing by state and local governments decreased. In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008"

    What this study proves is something no one ever thought before--that state governments are rational actors. Knowing that ARRA funding was a one-time event, and that cutting spending is painful, they held spending constant and pocketted the money in the form of reduced borrowing. In other words, they played Pelosi, Reid, and Obama for suckers by letting the Feds take on the debt for the local pols' spending. Some things are just too beautiful for words.

  • ||

    Precisely.

    The stimulus bill was more of a state bailout bill, allowing them to continue spending at unsustainable levels for another budget cycle.

  • ||

    Wait a minute. If I am to believe this, that would mean that when the government takes a dollar from me, then spends that dollar or gives it to someone else to spend, it has the same economic impact as if I had spent that dollar myself?

  • T||

    Less.

  • ||

    No, because had you spent the dollar, you would have probably spent it in a way that maximizes your utility- aka makes your life more efficient and productive (either through leisure or improved capabilities).

    The Government, on the other hand, will buy you a strip of airfield in the middle of BFE that will take 20 years to build due to EPA grievances.

  • ||

    Who the fuck cares?

    To even engage in this argument of what the multiplier is, is to give credence to the Keynesians (and Chartalists) that the economy can be managed.

    The real truth is that the functions of government do not include micro-managing the money supply and using tax money (collected or borrowed against) to "stimulate" the economy.

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