I have heard a lot of chatter in the uninformed media about “economic multipliers.” I saw one particular commentator rant on for several minutes about how people who oppose the economic stimulus package don’t understand the impact of spending multipliers. The justification for government fiscal “stimulus” rests, to a large degree, on the theory of economic multipliers.
A brief explanation might help those who have started scratching their heads, asking, “Multiplier? What?”
A multiplier effect occurs in an economic system when new resources (usually in the form of money) enter the system from an external (exogenous, for systems freaks) source. This means that, if someone gives you $1,000 from outside your economy, you will spend most of it. The stores at which you spend this new found money will pay employees, suppliers, and maybe shareholders. Those people will, in turn, spend the money they receive at other stores. Those other stores will spend the money they receive in much the same fashion. When you sum the prices of all those transactions they will equal something more than the $1,000 that you originally received.
Now, some economist claim they can actually calculate multipliers based on who gets the money originally. If you got that money in the form of food stamps, some calculated that the economy would benefit by total spending of $1,670 (if my memory serves me.)
Sounds like a pretty good deal. Maybe we should keep stimulus going all the time. (Oh, sorry. I guess we do. We call it government spending.)
Whether you accept the multipliers calculated by economists, the whole theory suffers from one serious flaw: The government has no exogenous (external) sources for its money.
The government took the $1,000 that it gave to you from someone else in your economic system. This means that someone will not spend $1,000. The stores at which they do not spend the confiscated money will not pay employees, not pay suppliers, and not pay shareholders. Those people will, in turn, not spend the money they do not receive at other stores. Those other stores will not spend the money they do not receive in much the same fashion.
By taking money from the same economy they claim to stimulate legislators rob the economy of some unseen and unrealized benefit. (I have thought of referring to this as an “economic divider.”)
Politicians will probably argue that they can allocate resources more efficiently than that guy from whom they took the $1,000. Of course, they do not have to defend that statement. The losers cannot calculate the amount of their losses.
When I look at the track record of government spending, I continue to trust that unnamed guy who had his money stolen.