Adumbration

Theory and practice for those considering the benefit of stimulus programs.

This edition of EconTalk (Ramey on Stimulus and Multipliers)(12/10/2011) discusses the empirical studies that have been performed related to computing the economic "multiplier" - that figure intended to represent the compounding economic effect of spending, how what is spent in the first order may be subsequently spent by those recipients.  Proponents of stimulus make claims that the effect can be double the nominal amount of original spending, but the actual effects may be negative on balance. 

On the theoretical front, I often come back to this excellent piece by Frederic Bastiat - What is seen and What is not seen, which points out all the ways that the people's desires are subverted when the state presumes to choose how to spend our savings.

A related point is the adverse effects of tax increases.  The combination gives reason to expect economic benefits from large federal budget reductions.

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Valerie Ramey of the University of California, San Diego talks with EconTalk host Russ Roberts about the effect of government spending on output and employment. Ramey's own work exploits the exogenous nature of wartime spending. She finds a multiplier between .8 and 1.2. (A multiplier of 1 means that GDP goes up by the amount of spending--there is neither stimulus nor crowding out.) She also discusses a survey looking at a wide range of estimates by others and finds that the estimates range from .5 to 2.0. Along the way, she discusses the effects of taxes as well. The conversation concludes with a discussion of the imprecision of multiplier estimates and the contributions of recent Nobel Laureates Thomas Sargent and Christopher Sims.