Sunday, May 8, 2011

The Spending Multiplier Was Negative?

It is already clear that the stimulus was a failure using Obama's own unemployment number predictions, but the extent of that failure may not yet be fully realized.

"In a new paper, “In Search of the Multiplier for Federal Spending in the States During the New Deal,” economists Price Fishback and Valentina Kachanovskaya look at the impact of federal stimulus programs during the Great Depression on a state-by-state basis. Matt Nesvisky, writing for the NBER Digest, summarizes their results:

They estimate that for personal income, which includes transfer payments, the multiplier ranges from 0.91 for a combination of government grants and loans to 1.39 when only grants are considered. The personal income multiplier for public works and relief was around 1.67. The multiplier for farm payments to take land out of production was -0.57, which implies that the program actually reduced personal income.

The multiplier for wages and salaries was substantially less than one, as was the multiplier for retail sales. Furthermore, the researchers find that the impact of the federal spending on employment was negligible and may have been negative. These results may help to explain why measures of income have recovered more rapidly than measures of employment in both the 1930s and in the current era.

How about the 2009 stimulus package? Fishback and Kachanovskaya conclude:

Given the differences in unemployment levels between the 1930s and today, we should anticipate that the spur to income and employment would be smaller in size relative to the stimulus in the 1930s. Our rough guess is that the current multiplier in the states would be around one or less for personal income, which includes transfer payments, and smaller for other measure of income. The absence of a private employment boost during the New Deal suggests that further stimulus packages would not likely translate into increases in private employment.

Basically, it is likely that, at best, for every dollar of government spending, we got a dollar or less in growth (when the economy didn’t shrink). Moreover, they suggest that more spending isn’t likely to change a thing.

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