The multiplier is “one”

In case you were wondering.

And that’s now a blog, written by Susan Woodward and Robert Hall, both impressive thinkers.  Greg Mankiw offers additional comment


If that's the case, then I would think the best plan would be to boost the SBA loan guarantees. This would provide much leverage, create jobs and let the market decide where to invest.

In fact, you could have the Fed (or some institution) pay interest on these loans as they now pay interest on reserves (which seems to me to be an incentive not to make loans).

From Mankiw:

"By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars."

If Govt is 20% of gdp, then does it not follow that a tax cut pays for 60% of itself. This is even higher than Mankiw's own estimates of 50% for capital gain tax reductions and 33% for income tax reductions.

Even if it were only 50%, two bucks in my pocket is better than one in the fed's.

For military spending. So we have decided that fighting wars is a bad way to use money, even in a depression.

I am sorry but I can't believe we're having this discussion. Do we not believe in scarcity? If you want to make an argument about idle resources, OK, but that's not what the main argument is about.

I mentioned this in the other thread, but in section 17. C. here, Rothbard (in my opinion) blows up the whole "multiplier" argument.

My own suggestion is that the government order shipping companies and airlines to stop changing the oil in their vehicles. Then depreciation will go up, and since this is a component of GDP, it will boost national output.

To discuss "infrastructure" expenditures decided upon by government relative to "military" expenditures by government is pointless in the absence of details as to such things as: 1) the types of each expenditures ("what is spending on, not in general, but specifically?"); and 2)the contextual situation in which expenditures are to be made (e.g., "where are resources expended").

There are no such things generic "infrastructure expenditure" or "military expenditure". This means discussions at this level of generality are vacuous.

It may well be that for reasons given, certain
sorts of tax cuts might in fact have bigger
multiplier effects than spending increases.
However, the label on this is simply off. Going
to Mankiw's site, one finds that Ramey's finding
is of a multiplier of 1.4. Where one finds little
multiplier is in WW II, when (hack, cough) we had
rationing of consumer goods going on. In the early
50s one can see GDP rising more than military spending.

Thanks for the reference!


My confidence in government "stimulus" spending being "efficient" in any sense of the word is nil. Surely I am not the only one who watched how TARP was put together (I recall money being allocated for bows and arrows or something similarly ridiculous, to name just one example), or how it has been implemented.

Not to mention what soon to be very powerful special interest groups have tried but heretofor failed to get included in TARP.

Personally I think the US government should set up a temporary Sovereign Wealth Fund (SWF), funded as follows and managed by private sector professionals:

Issue new US Treasury debt (likely ~0.05% yield). Stick that money in SWF's that are chartered to be dedicated to be invested in fixed income securities with comensurate maturities. For total return only(!), as opposed to additional mandates for things that have alleged positive externalities, noting that these thing can and likely will be inefficient when decided upon by politicians.

Fund managers to be drawn from mutual fund land and money market fund land, depending on experience and (debt) maturity. Manager compensation to be similar to private sector.

Rinse and repeat until we run out of "mattress money", which is to say until T-bills, notes, and bonds have "normal" yields relative to corporates. Once this eventually happens, simply phase out the SWF's.

Three things will happen. Taxpayers make a juicy arbitrage profit. "Mattress money" gets soaked up. Businesses (and others, directly or indirectly via private sector arbitrage) pay lower interest rates than otherwise, which results in considerably more "green field" investments and hiring than otherwise.

All of which are likely (no duh) to be more efficient than sending it through the usual government pork grinder. Not to mention a different profit/loss sign for the government's (i.e. taxpayers) balance sheet.

@ Bob Murphy,

I am finding one multiplier that is working quite well. Since I noted commenters at another MR post writing that they were checking the comments only to see what you would say, I am finding I am checking the comments to find out what they are saying about you are saying.

You are your own multiplier effect, my man.

I think the value is much less than "one". Government bureaucracy is less efficient and less capable at creating value than competitive private industry. Thus, having more money go into government-directed programs will lead to less economic growth than if the money is simply returned to the tax payers as a rebate.

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