The View From 1776

The multiplier effect of Obama’s $800+ billion stimulus plan was forecast to reduce unemployment to 8% and to jump start economic recovery.  It has done neither.

That is hardly surprising.  What magical quality could government confer upon the process of taking money from constituents who are out of favor and giving it to favored groups?

Many studies by American economists have discredited the multiplier effect.  Now even socialist Europe’s official institutions agree.  Read the Wall Street Journal’s report (if you happen to be an online subscriber).

Quote:

Will austerity sink European economies? Or will fiscal consolidation instead pave the way for faster growth? The debate divides policy makers, economists and voters. A key consideration is the size of the fiscal multiplier, or how much bang for its buck a government gets in terms of gross domestic product. Some evidence supports the cutters.

A fiscal multiplier above one implies a dollar of government spending generates more than a dollar of GDP; a fiscal multiplier below one implies that it is less effective. A working paper from the European Central Bank estimates that fiscal policy in the euro area has become less effective over time, with an increase in government spending of 1% of GDP generating a response of just over 0.5%, down from over 1% in the late 1980s.

A fiscal multiplier below one doesn’t automatically mean government-stimulus efforts are wasted, since the boost to GDP could still be important to counteract falling private demand. But the ECB paper argues that the decline in effectiveness is due to rising government debt; as private-sector concerns about the sustainability of public finances increase, individuals and companies rein back spending amid fears of future tax increases…