The Stimulus Hoax

I have written before in this space that government stimulus packages have failed to work in the past. The reaction of consumers has been to reduce debt rather than to engage in new spending. But no matter. As politicians are wont to do, their reaction is that what is needed is simply to have an ever bigger spending package - hence Obama's trillion dollar government stimulus. I haven't seen the details but I would wager that most of the package is for growing government rather than increasing consumer spending. However, that aside, the effectiveness of government spending depends on the so-called multiplier. That is what is the impact that increased government spending will have on the economy? Much of my academic career I have assumed that the government multiplier is less than one and probably negative. That is, if the government spends a dollar, it increases GDP by less than a dollar and may even reduce it. Why is this possible? Its because the government has to get the money from somewhere. If it borrows the money, it drives up interest rates and down private investment expenditures as it makes borrowing more expensive for businesses and households. So why isn't this a mere substitute - which would be a multiplier of one? Its because the longer term effects of reducing investment will have reverberations for years to come by reducing economic growth. Of course, Keynesians project a government multiplier greater than one. Paul Klugman is an extreme case and thinks that the multiplier is even larger. But of course Klugman gives the Nobel Prize in economics as bad a name as Al Gore gives the Nobel peace prize.It is said that the Obama package assumes a multiplier of 1.5.  Interesting though is that research by members of the Obama team find a multiplier of 1 not 1.5.  That means that when the government spends one dollar that GDP increases by one dollar not one dollar and fifty cents. What is closer to the truth? Robert Barro writing in the Wall Street Journal states that his research shows a government wartime multiplier of around 0.8. This implies that a peacetime multiplier will be less. How much less? Try a multiplier of zero. Well I am man enough to admit I might have been wrong. In the face of this evidence I will revise my view of the government multiplier from negative to zero. The important question is whether Obama is man enough to do the same.