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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: neolib who wrote (215881)	2/1/2007 6:21:22 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 281500

>> IMO, that makes it rather obvious that the multiplier effect is a rather bogus theory. I'd have to disagree on three basis: Firstly, the theory is based on marginal propensity to spend, which is a fact. Secondly, the theory states its assumption, that it only works if there are unused resources (e.g. unemployment) then the spending can help mobilize them (based on MPS). The theory is clear that if the economy is nearly fully utilized (e.g. the unemployment is only frictional or transitional), then the extra spending will only bring about increased inflation, rather improve production and productivity. Finally, and for the purpose of this discussion most importantly, it does not really matter if you believe in the utility of tax-and-spend as a way to improve the economy (which is how the multiplier got a bad wrap). Because of the way GDP is calculated, MPS will see to it that government spending increases GDP, no matter what. >> Did you ever wonder why it is Government dollars that get multiplied, and not anything else? This is simply untrue. The theory doesn't care who does the spending. But it does state that the spending is most effective if it is injected at the bottom of the economic food chain. Government is typically the only actor willing to take on this task, though I suppose it could also make legislation to make it easier for inner city residents to barrow (or create micro-loans). In conclusion, the economic multiplier does not claim/aim to be a perpetual motion machine, but rather a catalyst (a release mechanism, if you will) for unused potential energy within the system. BTW, I did a bit of reading since I made that post. It is likely that the actual multiplier is just over 2, which means it is likely that the government accounts for half of the US GDP...not as bad as 85% I had said, but still very very far from free markets. ST PS Any comments on the economic characterization in my second post?