Friday, December 5, 2008

How Large of a Keynesian Multiplier Do You Want?

David Tufte is not happy with some claim that the multiplier can be as high as 5:

UB suggests that it has a multiplier of 5. If they did, this would be like the goose that laid the golden egg. My gosh, all they'd have to do is appropriate $140B to UB, and they could pay for the whole $700 Federal bailout ... A more telling multiplier is the economic impact divided by the whole UB budget of $832M, to get a multiplier of 1.8. I think that seems a lot more reasonable than 5 to 1.


A multiplier of 1.8? That is what Dani Rodrik comes up with if we keep our international markets open but:

The size of this multiplier depends in turn on three things in particular, the marginal propensity to consume (c), the marginal tax rate (t), and the marginal propensity to import (m). If c=0.8, t=0.2, and m=0.2, the Keynesian multiplier is 1.8 (=1/(1-c(1-t)+m)). A $1 trillion fiscal stimulus would increase GDP by $1.8 trillion. Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it. In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?


Maybe SUNY-Buffalo has figured out a way to make sure that its extra spending does not leak out into the surrounding communities – which would mean a multiplier larger than what David Tufte considers reasonable!

4 comments:

Ken Houghton said...

Given the surrounding (U.S.) communities of Buffalo, it's fairly easy to make the argument of your final paragraph.

Of course, Ontario (and by extension the rest of the GWN) might disagree, but is rather well-incented not to say so publicly.

TheTrucker said...

I'm just happy to see someone using the word "tariff" without crouching in a corner with index fingers held out in the sign of a cross.

I actually do understand comparative advantage. But it is a macro sort of deal in that the nations as nations are each better off (Wealth of Nations -- rah rah rah). And within the nations the owners of the means of production and political persuasion enjoy an advantage while the sweat hogs get the green weenie.

The typical neoconomist will claim that "the consumer pays more and that is heresy". This is a "Republican" sort of argument that assumes all tax revenue is burned in a furnace. I look at it and proclaim that so long as the consumer receives the proceeds of the tax then nothing has been lost or gained in the initial instance at the macro level. At the micro level the people that use goods produced here get a helping hand from the people that like Wall Mart. We can do tariffs and send the proceeds to the consumers and the burden of the tax WILL be born by the companies that have offshored all their manufacturing to Bimini.

If you want to get real fancy with it you could depend upon competition to grant the passing of corporate tax relief to consumers, and decrease corporate taxes by the amount you get from the tariffs. That keeps the corporate taxes low and keeps em here and stops the offshoring.

TheTrucker said...

I'm just happy to see someone using the word "tariff" without crouching in a corner with index fingers held out in the sign of a cross.

I actually do understand comparative advantage. But it is a macro sort of deal in that the nations as nations are each better off (Wealth of Nations -- rah rah rah). And within the nations the owners of the means of production and political persuasion enjoy an advantage while the sweat hogs get the green weenie.

The typical neoconomist will claim that "the consumer pays more and that is heresy". This is a "Republican" sort of argument that assumes all tax revenue is burned in a furnace. I look at it and proclaim that so long as the consumer receives the proceeds of the tax then nothing has been lost or gained in the initial instance at the macro level. At the micro level the people that use goods produced here get a helping hand from the people that like Wall Mart. We can do tariffs and send the proceeds to the consumers and the burden of the tax WILL be born by the companies that have offshored all their manufacturing to Bimini.

If you want to get real fancy with it you could depend upon competition to grant the passing of corporate tax relief to consumers, and decrease corporate taxes by the amount you get from the tariffs. That keeps the corporate taxes low and keeps em here and stops the offshoring.

rosserjb@jmu.edu said...

Why is Bob Hall claiming that "most macroeconomists" think the multiplier is somewhere between 1.0 and 1.5?