Home > Facts and Figures, Solution-Problem, The Outsiders > The incredible vanishing multiplier, and economics as a science

The incredible vanishing multiplier, and economics as a science

Here is a blast from the past. In this .pdf file, economist Robert Barro talks about the Keynesian multiplier in 2009. 2009, as we recall, was the edge of the precipice. This article was published in February of that year, concurrently with the passage of the “American Recovery and Reinvestment Act,” commonly known as the first stimulus, which granted roughly $800 billion of taxpayer money to political cronies.

Here is an excerpt:

If the multiplier is greater than 1.0, as apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the government spending is a good idea even if the bridge goes to nowhere or if government employees are just uselessly filling holes. This free lunch would make Charles Ponzi proud. If the deal is genuine, why stop with only $1 trillion or so of added government purchases?

It seems as though the best way to judge macroeconomic predictions is with the benefit of hindsight. Indeed, when economists using the same data set come up with estimates that vary by the trillions, one must wonder whether foresight per se exists at all.

With the benefit of hindsight, it is clear that the stimulus did not stimulate. Many excuses have been made for the poor performance of ARRA, but the fact remains that it has failed.

In my view this is not surprising. Most economists, whether classical, monetarist, Keynesian, or whatever else, have been consistently missing the point for decades. They have become so caught up with making their math look legitimate that somewhere along the line they forgot that it should have some connection to the real world.

Perhaps when applied to mainstream macro, “voodoo economics” is a tautology.

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  1. December 26, 2012 at 1:07 PM

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  2. December 27, 2012 at 8:23 PM

    You are very kind; thank you!

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