Many times when listening to politicians talk about why we need to keep certain programs or expand government spending they bring up the multiplier effect. For those that don't understand what that is, it is essentially the growth in GDP caused by the increased federal spending. For example, if the multiplier effect is 1.5x then if the government spends $100 the reverberation of that throughout the economy will equal a $150 in GDP growth. Pretty simple right? Here are some examples of politicians and government agencies citing the multiplier effect for justification of their decision: Nancy Pelosi and the Dept of Agriculture: Obama admin Also reading the quote above will show that economists don't often agree on the multiplier effect and its direct number. The economy is much too complex a thing to calculate the multiplier effect accurately. So what would any intelligent person do? Well we can look at historical numbers... Now of course the economy has not been anything like this for most of that time, so using that coefficient as the end all be all would not be right. But even so this coefficient shows that previous government spending has not been a very efficient way of increasing GDP. Probably because a central controlled economy doesn't have enough information to use resources in the most efficient manner... but I digress. When we look at recent federal debt to GDP we get another part of the picture... Here are some fancy charts to visualize these numbers: Another thing to note is that our debt to GDP ratio is now over 100%. This too has ramifications on our economy... My point is that economist can't agree, politicians use phoney numbers, government spending increases, and it has a real detrimental effect on real GDP growth. We need to stop relying on politicians and experts to fix the economy for us. We need to have government stop borrowing, pay off our debts and let some economic freedom back in the game.
Nice post, but you won't get many responses because you're using your brain and evidence. Sorry, it's democracy.
Yeah I know, but I'm bored at work and figured I would let some of the rants in my head out onto the unsuspecting masses of the PF. If this was a post about how Romney smells like cabbage and that means hes going to give $1 trillion to big agribusiness or Obama used to put flypaper in the shoes of other kids at school and that means he is a dirty commie I would have 5000 replies by now even though the post is a few minutes old.
The OP should have quoted the source he got the charts from. http://www.zerohedge.com/news/total-us-debt-soars-1015-gdp Maybe he didn't because the author says that neither Presidential candidate knows what to do about the debt problem. A year and a half ago the ratio was 69.4%, a year ago it was still only 76.5%, so why are we now at 101.5%? This is not a sustainable level of debt accrual: the economy really needs to rebound (without cutting government tax revenues, Mitt) and/or the expenditures have to be cut.
The "multipliers" are nothing more than a fancy way to fudge the numbers. Even the CBO admits it cant estimate the multipliers because the govt gets its money through taxation (with a lost opportunity cost and a decrease in personal wealth), borrowing (with the cost of repayment with interest), and printing (with a cost of inflation and other effects). All of those costs are difficult/impossible to quantify and are generally ignored. Also govt spending has a crowding out effect which the CBO admits is significant but not quantifiable. For example, if a company is going to hire a new employee in plant A, but can hire a less needed new employee in plant B and have that person paid for through govt spending/stimulus, the company hires in plant B and not A. A person is hired, but productivity suffers. A similar example, if the company was going to hire the plant B employee anyway but lets the govt pay for it, then there is no net gain. These activities cannot be measured and accounted for. Read the CBO reports about the impact of the stimulus. All you hear is that it created 'X' million jobs, you dont hear all the caveats and assumptions that make the analysis totally worthless. People also forget a very basic fact in this multiplier arguement - multipliers apply to private sector spending as well as govt spending. If I spend a dollar to buy a car, in terms of economic activity resulting from that transaction its no different from the govt spending a dollar to buy that same car. The only difference is the source of that dollar - it was either spent by me voluntarily or it was spent by the govt with the additional cost of taxation/borrowing/printing. The ONLY way the multiplier arguement works is if the govt takes a dollar that was not going to be spent and spends it in a way that creates more activity (i.e., creates wealth) than the cost required for the person to replace that dollar. There is very little evidence that the multipliers are >1. Studies before Bush '43 (before the dems needed an excuse to spend like loons) indicate the multiplier is negative in peacetime and positive (ranging from 0.4 to 0.9) in wartime.
The charts I got in the OP are on the link I posted.... http://www.zerohedge.com/news/q2-america-added-233-debt-every-100-gdp It was just kind of hidden, look at the sentence: in my OP, you can click on picture and it gives a link to the graphs as well as the quotes. This is not a link to my graphs. As you can see, one of them is close, but the others are not. I did have a link... you missed it. As for the presidential candidate, I didn't even mention them in my OP, why because they are both crap and don't have a any intentions of dealing with deficits year one of their new administrations. I am not voting for either. Gary Johnson 2012. As the link in the OP stated over the last 2 years debt has outpaced GDP growth by 2.4x, thats why. Also as debt goes over 90% GDP growth slows in all historical examples. Doesn't take a genius to figure it out. I agree, I would agree with any debt accrual at this level of debt is unsustainable. As the study of historical examples in my OP shows, debt to GDP ratios over 90% have limited or stagnated economic growth, so its no surprise we are suffering from it now. This makes it tougher for the economy to rebound. It doesn't help that our fed thinks the key to rebounding is to flood the market with more paper money, which would cause inflation if the velocity of money was up. And most likely will when it does happen, causing more economic damage. I don't give a (*)(*)(*)(*) about Mitt's or Obama's tax plans, neither would close the deficit so they are both pointless things to argue about, as for expenditure cuts. Both candidates have offered nothing substantial, once again a horse a piece when choosing between refuse.
