Friday, January 22, 2010

There Is No Known Positive Economic Stimulus Multiplier Effect

If the government spends a dollar to "stimulate" the economy, that dollar is coming from somewhere. The government is thus destimulating the economy at the point from where it is obtaining the money for its "stimulus."

Since the money obtained is being taken away from where it otherwise would be put into personal exchange, we know it has a negative impact at that point.

On the other hand, the money that is then cycled through a group of politicians may end up on any type of boondoggle. And even if the politicians were sincere in their attempt to properly stimulate the economy, there is still no way that they can say, in the way you can in a personal exchange, that all sides benefited, since the group the money came from (ultimately taxpayers or those squeezed by inflation) have no direct say in how the money is spent. Thus, the greatly hailed Keynesian multiplier effect could very well be negative.

In a column at FT, economist Tim Harford almost gets to this point in his analysis on the topic, but not quite. Nevertheless, his insights and perspective on the subject are worth reading, especially his observation on the zero to negative characteristics of the multiplier. Read the column here.

1 comment:

  1. So you disagree that taxing upper income individuals who would most likely not circulate that portion of their income in the general economy to add to capital to local economies would not have a positive stimulative effect upon the economy at large. Adding and maintaining capital circulating in the economy has a multiplier effect and can create as much as 10 times the overall economic activity as the original amount added. Capital removed from the economy like the billions of dollars that flow in off-shore tax shelters yearly has very much the opposite effect.

    Is government spending the most efficient way to maintain capital flowing throughout the economy? Probably not, but keeping capital circulating in the system is necessary for the health of the economy. Governments should discourage large amounts of capital to be held static or worse to be completely removed from the economy. Tax policy and governmental spending on local projects or government direct payments to individuals does help keep the economy vital. Even better if the tax policy prevents the capital to be removed from circulation