Monday, February 2, 2009
"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 that we have the extreme demand-side view that the so-called 'multiplier' effect of government spending on economic output is greater than one--Team Obama is reportedly using a number around 1.5. ... Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requring a cut in anyone's consumption or investment. ... If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. ... Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases. Where's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market as marshalling idle resources to produce useful stuff. Unemployed labor and capital can be utlized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. ... A much more plausible starting point is a multiplier of zero. ... This approach is the one ususally applied to cost-benefit analyses of public projects. ... I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus the multiplier was 0.8 (430/540). ... There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases", Robert Barro (RB) at the WSJ, 22 January 2009.
RB is a Harvard economics professor. I agree with RB. See my 19 October 2008 and 4 January 2009 posts:http://skepticaltexascpa.blogspot.com/2008/10/dollar-si-krona-no.html.