Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion–quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do–but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
That’s Dani Rodrik and do read the whole thing, if only to see where the title of this post comes from. I may be reading him incorrectly, but I believe he is claiming that a complete ban on imports would raise U.S. gdp by trillions.
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
Addendum: Rodrik responds: "I am writing all this partly in response to Tyler Cowen’s comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory." I would not use the word "any," but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong. I am well aware of the hypothesis that import substitution, during WWII, helped Mexico recover from the Great Depression and I do not attach it zero credence. But I still think, to quote myself, that: "this is the worst policy idea floated in recent memory." It is important not to let Rodrik change the terms of debate by ascribing the "any" position to me.