Defenders of the economic stimulus package have shifted from being disingenuous to just plain crazy talk.
President Barack Obama, along with others, claims the stimulus package will boost total gross domestic product (GDP) by $1.50 for every $1.00 the government spends. The justification for the claim is what economists call the “multiplier effect.”
Assume Jones invests $10 million in a new factory. He hires contractors to get his new business ready, and he hires new employees. Those individuals will spend that new income on things they need, and they may put some of it in a bank, which can then loan part of it to others.
These transactions tend to expand the original $10 million, although no one is sure by exactly how much. Most economists think it’s in the range of 1.5 or 2.0 times the original amount. Thus, a $10 million initial investment could ultimately add $15 million to $20 million to the economy.
But this logic applies to private sector investment.
If the government is spending the money there isn’t just a multiplier effect, there must also be a “divider effect.” That is, the government has to take the money from someone else.
So while the government is handing out $10 million, it is also taking it away—which means no money is really put into the economy. And under the current version of the stimulus package, a good chunk of the money goes to government agencies, rather than job-creating businesses and entrepreneurs.
Plus there is another downside: When the government takes money away from another taxpayer, there is always “leakage” (i.e., some of the money stays with the government rather than being passed on).
Harvard economist Robert J. Barro, writing recently in The Wall Street Journal, says that his calculations of past government-spending initiatives indicates that only about 80 cents of a taxpayer’s dollar actually gets back into the economy at all, much less creating any multiplier effect at all.
Let’s hope Congress figures out what a multiplier really does before legislators start dividing us from our money