A Stimulus Dollar Is Only a Dollar
Democrats devise magic ‘multipliers’ to justify spending, but the returns never show
Wait for it . . . any day now . . . get ready for the “multipliers.” You know, the idea that a government dollar spent magically turns into multiple dollars in the economy. We ought to start hearing that silly word again as the lame-duck coronavirus stimulus negotiations kick in. Expect more multiplier mumbo jumbo as the Biden administration begins its tax-and-spend fiesta.
Let’s face it, the Democrats haven’t had a believable economic messenger since Robert Rubin during the Clinton administration. Since then they’ve presented a cast of characters— Larry Summers, Mr. Biden’s adviser Jared Bernstein, and lately Elizabeth Warren —who bend themselves into pretzels to justify higher spending and then higher taxes.
The New York Times described this trend during the early days of the Obama administration. The financial crisis team of Jason Furman, Tim Geithner and Mr. Summers were “carrying around this list of multipliers” taken from a chart by Mark Zandi, chief economist for Moody’s Analytics. Every dollar spent extending unemployment insurance benefits would, the fairy tale went, boost the economy by $1.64. Sadly, a dollar in reduced corporate taxes would boost the economy by only 30 cents. But cheer up, every dollar spent on food stamps would spur a $1.73 increase in gross domestic product. Mr. Zandi called it “bang for the buck”—the proverbial free lunch. It’s more like “dud for the dollar” because it didn’t work. It never does. Multipliers are a canard, a Keynesian conceit.
The economy grew after the Great Recession, as it does after every recession. The stimulus didn’t stimulate. Shovel-ready projects weren’t ready. Many complained that the stimulus wasn’t big enough. More hooey. The Obama administration’s high taxes and heaps of regulation held the economy back. Is spending driving today’s recovery? Think back to the Heroes Act 2.0, Nancy Pelosi’s $2.2 trillion coronavirus relief bill. Economic growth in the third quarter of 2020 was 33% as lockdowns were lifted, despite—or because of—that gigantic stimulus package not becoming law.
The theory of multipliers is based on the Keynesian view that poorer consumers tend to spend a large amount of increased income, and the rich less so. But multipliers are half a story. Someone has to put up the original money that allegedly gets multiplied, taking it away from the private sector and negating whatever dwindling chain of transactions are hypothesized. It’s like two waves canceling each other out—you can’t just do the math on the additive public wave and ignore subtracting the private. This demand-side theory omits the principle of productivity, the real driver of economic growth and prosperity.
But no matter, expect multiplier talk to, er, multiply. The Biden team already has gnomes busy at work sharpening their pencils finding new and innovative ways to raise taxes to spend on green and other favored projects, without having to pass new laws in a potentially divided Congress.
Mr. Biden’s secret weapon is a guy named Ben Harris, who apparently knows his way around budget models and tax tables. The New York Times quotes the University of Pennsylvania’s Rich Prisinzano saying Mr. Harris and the Biden team have a plan to “tax the same people and the same income as Warren and Sanders”—who want to impose wealth taxes—“they just do it through the existing tax code.” I’ll bet you dollars to doughnuts the justification is multipliers.
They don’t work. “Why the Fiscal Multiplier is Roughly Zero” is the title of a 2013 paper by Scott Sumner for George Mason University, summarizing the Obama stimulus. The key line is that “estimates of fiscal multipliers become little more than forecasts of central bank incompetence,” meaning the Federal Reserve’s job of maintaining stable monetary conditions should actually require it to fight against stimulus. I’ve also read papers from the International Monetary Fund (a better sleep inducement than melatonin) that support Keynesian multipliers, and others that say multipliers are a lot smaller in reality than theory.
Actually, if you want to see a real multiplier in action, take Amazon. Since it began, it’s had $47 billion in invested capital, equity and debt. It’s worth a tad more than that now. Just sayin’.
What else will be justified with multipliers? Maybe nationalizing the 5G network and reinstating net neutrality. The pesky private sector can’t be trusted, the reasoning might go. This isn’t voodoo economics, it’s froufrou or even tutu economics: dressed up to look good but only a facade.
About the only government spending that might actually multiply in the real economy is basic research—pure, fundamental research. Not enough, and you become a Third World has-been. Too much and you get Solyndra. Sure, I’d like to see money spent on basic research for nuclear fusion, advanced artificial intelligence, and genomic drug development. But keep it research; don’t add in development as in R&D. And please don’t slap a multiplier on the money spent, a number pulled out of thin air. How long will it be before Mr. Biden’s pick for Treasury secretary, Janet Yellen, who studied under the Keynesian James Tobin, uses the M-word?
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