There are many reports that the Obama economics team is using a multiplier of 1.5 to estimate the effects of government spending. The theory of the multiplier is that $100 of government spending is supposed to "stimulate" the production of $150 in increased wealth as an increase in GDP. GDP is Gross Domestic Product, the total value of all goods and services produced in the US economy.
These links report on this government thinking, and offer interesting analyses:
MasonWhat Will Be the Impact of Obama's Stimulus Plan?
01/26/09 - Seeking Alpha by John Mason
[edited] The Keynesian model says spending $825 billion will generate something more, as new investment and spending is created from the initial stimulus. The word going around is that the Obama economists are using a multiplier of 1.5. Thus, $825 billion in new spending and tax cuts are supposed to result in another $412.5 billion in spending, raising the total effect to $1.2375 trillion., BeaudoinObama’s Bogus Economics
04/2009 - Reflections by Joseph Beaudoin
[edited] The prediction of 3.5 million new jobs comes from a Keynesian economic model built by Christina Romer, chair of the White House Economic Advisory Board, and Jared Bernstein, economic advisor to the vice president elect.
This model assumes a wealth multiplier averaging 1.5 for government spending. Mr. Obama would rather talk about these jobs than about how these jobs are supposed to come into existence., RugyThe Myth of the Multiplier
November 2009 - Reason by Veronique de Rugy
[edited] Two studies stand out: by Robert J. Barro and by Valerie Ramey on how military spending influences GDP. Both studies found that government spending crowds out the private sector, at least a little. Both found multipliers close to one: Barro’s estimates 0.8, Ramey estimates 1.2.
This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four.
Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases., and BarroGovernment Spending Is No Free Lunch
01/22/09 - WSJ by Robert J. Barro
Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues.
Now we have the extreme demand-side view that the multiplier effect of government spending is greater than one. Team Obama is reportedly using a number around 1.5..
Obama also believes that the multiplier for tax cuts is only about 1, so much more wealth is created when the government spends money collected from taxpayers than when the taxpayers spend that money. The idea is that the taxpayers might save some of that money, so it won't flow around and create wealth.
Obama believes that the government can spend so that its dollars go to people who won't save any of it. They will help the rest of us by spending it all. They will be doing their patriotic duty while they watch big-screen TV's and eat at expensive restaurants.
Obama's team is making this stuff up as they go along. It can't possibly be true. But, being in a good mood, let's assume that it is true. Then the following is also true.
We should immediately license counterfeiters.
Anyone who can produce good looking paper money should be licensed to print up as much as possible, after agreeing to give it to people who are likely to respend it immediately. That would be anyone working for minimum wage, the obviously unemployed, or even friends who would take the oath to spend, spend, spend.
This meets all of the conditions that the government likes for its own programs. There is no trickle-down; the money goes straight into the hands of the people who can save us. This avoids giving any money to the fat-cat businessmen who have let us down so far.
This money should have the same 1.5 multiplier associated with government spending. The money won't be saved, it won't go to the taxpayers (who have their own money), and it will get into circulation immediately where it can stimulate the economy and even create more tax collections.
Even better, there is no need to raise taxes to get back the money in the future, because this would create it at very low cost. The investment and job creation plans of the taxpayers would not be interrupted.
There is one catch. The multiplier is "only" 1.5, so it seems unfair to give the counterfeiters too much wealth. So, here is the deal. The counterfeiter would keep $15 out of each $100, using $5 for supplies. He would agree to give $40 to approved charities, and $45 to the chronically unemployed and underemployed. There is no need to be picky, because there is plenty more where that came from.
Here is how the wealth totals up per $100 counterfeit:
New Spending Counterfeiter $ 10 Supplies 5 Charities 40 Unemployed 45 Multiplier effect 50 (on $100) It's Fake Money -100 Counterfeiter - 10 ------ New Wealth $ 40Every $100 that the counterfeiter prints up creates $40 in new wealth in the economy for the rest of us, after subtracting the counterfeit money (it is fake) and the counterfeiter's share. There is no increase in taxes, and tremendous support for charity and the un/underemployed. This is a win-win situation for everyone. Let's get printing!
Does this seem too good to be true? Yes, it isn't true. But, given the 1.5 multiplier, where have I gone wrong? Or, much more importantly, where has Obama and his economic team gone wrong? Maybe they don't care, as long as they are the ones spending the money. Real money taken first out of investment and jobs.
Why Spending Stimulus Plans Fail
The money isn't free. It is taken from the people who plan and invest in productive organizations. This destroys jobs and lowers everyone's income. The money is then given to government agencies who increase budgets. This is a form of government consumption. Investment is turned into consumption, and job expansion is killed.
Keynes, Digger of Holes
No one should trust a theory that predicts greater prosperity from digging holes. Yet, this is the theory by Keynes that Obama is following, and many past presidents have followed, to forcibly change our society. We will supposedly create even more wealth in the future by wasting our current wealth today.
Econ 201: The Myth of the Economic Multiplier
Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.
The "multiplier" from government taxes is actually less than 1. The government wastes resources collecting more tax, and the citizen wastes resources trying to minimize his tax. Then, the government spends the tax revenue wastefully, achieving less economic activity than the citizen would have created with his resources.