The Multiplier

The entire debate about the economic stimulus packages debated by Congress during this recession ought to come down to one key number: the Multiplier. This particular multiplier (there are others) represents an ad hoc estimate of the effectiveness of government spending. What we really want to know is whether the multiplier is significantly larger than 1, significantly less than 1, or approximately equal to 1.

A note of caution before proceeding: the Multiplier has no basis in economic theory. It can be backed out of a number of models, but it would almost never be constant. Theoretically based macroeconomic models - both Keynesian and Neoclassical - will deliver a multiplier less than 1 unless they are specifically built to generate large multipliers. The models used by government economists are ad hoc models, which treat macroeconomic movements like Newtonian physics, rather than more complex general equilibrium models which are currently used for most research.

The Multiplier represents the sum of billions of decisions and interactions that result from government fiscal policy. When the government spends money, it borrows or taxes from some people and gives the money to others, either freely or in exchange for goods and services. This may increase total economic activity (a multiplier greater than 1), decrease it (a multiplier less than 1), or leave it essentially unchanged. Each person and firm is going to react differently to the government's borrowing-and-spending. One firm might find loans for investment unavailable because the government has sucked up all the available funds; another firm might be able to keep its factories open because the government places a huge order for widgets.

We cannot count or measure those billions of decisions, but we can estimate, roughly, the size of the Multiplier. Team Obama is acting under the assumption the assumption that the Multiplier on spending is 1.57 and on taxes 0.99 (source).

This is not without support: Valerie Ramey estimates a multiplier of 1.4 in a recent paper (source).

But Hall and Woodward use wartime data to estimate a multiplier on spending near 1, and the Romers find a tax-cut multiplier of 3! In the most exhaustive study, Barro estimates that the multiplier on spending is 0.8, and near zero for non-wartime spending.

Thus, the Obama team is overshooting the most sanguine estimate of the multiplier on spending, and unaccountably ignoring its own CEA Chair's high estimate of the tax-cut multiplier.

If they are correct, then the spending is a good thing for most Americans. However, the plan still harms some groups: most significantly the young, who will pay the interest on this debt for the rest of our lives. There is no economic theory that suggests government stimulation is helpful for long-run growth - usually, the opposite is true - so we, the young, will be earning less during our lifetimes, and paying higher taxes.

If Team Obama is incorrect, and the multiplier is about 1, then it is spinning its wheels and redistributing income away from the young and toward the old and favored. Perhaps that is good politics, since the young don't vote, and won't see these tax increases until Obama is in the history books.

However, if the administration is drastically wrong, and the multiplier is 0.8, or 0.5, or even lower, as Barro's research suggests, then the government is heavily complicit in worsening the recession. A multiplier as high as 0.8 would still mean that of $1 trillion spent, $200 billion disappears. That would represent a loss of 1.5% of GDP, equal to the entire aggregate loss of GDP from the fourth quarter of 2008. The cure is worse than the disease!

We can - and should - argue about the size of the multiplier. We can cite Nobel prize-winning economists on both sides. But until we have real intelligence about the size of the multiplier and the severity of the punishment on future taxpayers, isn't it irresponsible to be pushing a huge spending package? Remember the last time a president pushed a major spending and policy action on cherry-picked intelligence? How well did that work out?

Atheists for Jesus

Matthew Parris, a "confirmed atheist" (but perhaps something of a heretic) writes in the Times of how much Africa needs Christianity. That is, a sincere faith in a God in whom Parris does not believe. His prose is glowing:

Now a confirmed atheist, I've become convinced of the enormous contribution that Christian evangelism makes in Africa: sharply distinct from the work of secular NGOs, government projects and international aid efforts. These alone will not do. Education and training alone will not do. In Africa Christianity changes people's hearts. It brings a spiritual transformation. The rebirth is real. The change is good.

Parris parries the cant criticism of Western postmodernism ably as well:

There's long been a fashion among Western academic sociologists for placing tribal value systems within a ring fence, beyond critiques founded in our own culture: "theirs" and therefore best for "them"; authentic and of intrinsically equal worth to ours.

I don't follow this. I observe that tribal belief is no more peaceable than ours; and that it suppresses individuality. People think collectively; first in terms of the community, extended family and tribe. This rural-traditional mindset feeds into the "big man" and gangster politics of the African city: the exaggerated respect for a swaggering leader, and the (literal) inability to understand the whole idea of loyal opposition...

Christianity, post-Reformation and post-Luther, with its teaching of a direct, personal, two-way link between the individual and God, unmediated by the collective, and unsubordinate to any other human being, smashes straight through the philosphical/spiritual framework I've just described. It offers something to hold on to to those anxious to cast off a crushing tribal groupthink. That is why and how it liberates.

I will criticize Parris from the opposite angle. Of course he is critical of tribalism; he grew up in a society founded on the liberation of "Christianity, post-Reformation and post-Luther". Parris' freedom to be an atheist is a direct outgrowth of the worldview he ascribes (correctly) to modern Christianity. Prior to the Reformation, a heretic could not live safely in any society - Socrates was poisoned, Buddha was outcast, Jesus was crucified. Parris finds the older, collective society anathema; the newer, individualistic society is his home.

This does not explain the difference between Christian and secular NGO workers - that difference should give Parris pause. Nor will I here take a position on how accurately the post-Reformation worldview reflects Biblical Christianity.

Hat tip to Inos for the link.

D.C.

A few photos from a recent visit to the capital (though not my most recent!)

Spring Training

As Spring creeps northward, Beth gets grins with anecdotes about Dustin "The Destroyah" Pedroia.

New Bank Czar?

According to Drudge's big headline today, "OBAMA MOVES TOWARD 'SWEDISH MODEL' FOR BANKS". Swedish model? Really? Well, I'm sure she'll be better looking than Greenspan.

Casseling to protect the King

The Patriots are holding onto Matt Cassel for the pricetag of $14 million in order to hedge against Tom Brady's recovery. But they must have a "Plan A" that doesn't involve handing $14 million to a backup if Brady stays healthy, right? Here's my theory:

If Brady is delayed in returning, Cassel starts the season. Even if Brady looks fine, keeping Cassel around for a few games isn't a terrible idea. But then Brady looks strong and is chucking two or three TD's a game by late September when Matt Ryan/David Garrard/Eli Manning/Joe Flacco/Ben Roethlisberger/etc. goes down with a season-ending injury. (Alternate ending: rookie QB has 4 TD's and 12 INT's after four games). Then the Patriots trade the idle Cassel to a team whose season is in the balance for a few key pieces elsewhere on their team, perhaps also dictated by injury. With that amount of salary moving, and with Cassel's stats this year, his trade could land the Pats a top-notch linebacker or a few proven roleplayers, depending on their need.

Does that sound plausible? In Belichick we trust.

Pun

Thank you, xkcd.