ML-Implode News - Is Government Spending Too Easy an Answer?

In practice, however, the multiplier for government spending is not very large. The best evidence comes from a recent study by Valerie A. Ramey, an economist at the University of California, San Diego. Based on the United Statesâ€™ historical record, Professor Ramey estimates that each dollar of government spending increases the G.D.P. by only 1.4 dollars. So, by doing the math, we find that when the G.D.P. expands, less than a third of the increase takes the form of private consumption and investment. Most is for what the government has ordered, which raises the next question.

This is a well-meaning article, but it really only barely scratches the surface of what is wrong with the "big spendin'" plan for economic recovery. In my mind the two biggest are (1) the fact that every dollar of stimulus spending increase has to come from additional borrowing; and (2) the fact that the labor force, managerial expertise, and physical plant no longer exists to match the needed developmental spending -- the real US economy has just eroded for too long. Mankiw betrays his establishment-economist biases by falling into the trap of an "econometrics-centric" debate, which tends to be endogenous (internal to the US), ignores non-numeric data (like the makeup of the labor force), and favors a very narrow set of measurements that economists have studied extensively (and believe they understand well and which are important, neither of which might really be true).

In sum, if you think the only question regarding stimulus spending is whether stimulus generates "more GDP per dollar" or whether tax cuts do, you are in the wrong century. And you're going to be horribly surprised by the outcome.

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Is Government Spending Too Easy an Answer?