The Fiscal Multiplier is Less than One

Keynesian economics postulates that when the government spends money, it has a multiplier effect. For every dollar the government spends, the economy grows by that portion of the coefficient that is greater than one. Reality has ended up being the opposite.

Just before the last recession, the two leading economists that work on empirically measuring the fiscal multiplier, Robert Barro of Harvard and Valerie Ramey of UCSD, found the fiscal multiplier has been less than one, warning that Obama’s $787 Billion America Recovery and Investment Act of 2009 would actually undermine an economic recovery. If the multiplier were = 1, then a stimulus bill would have no effect, but a multiplier < 1 means, in a time of economic crisis, GDP would actually be contracted further.

The bigger the spending the bigger the damage. Today at noon, the Trump administration is planning to blow even more money on fiscal stimulus than the astounding expenditure of $2.2 Trillion by refilling the PPP, a wasteful program that gives forgivable loans to businesses that agree to pay workers who have no work to do. Donald Trump has been jumping at the chance to make the same mistake that got people out into the streets at Tea Party rallies eleven years ago, this time risking even more damage given the significantly higher price tag.

The silence is deafening. Are there no fiscal conservatives left in the Republican Party?

Eric Shierman lives in Salem and is also the author of We were winning when I was there.