In most American families the bigger the purchase the moretime and effort that are spent to make sure it is a worthy investment. Youwouldn’t rush out and buy a house, a car, or even a computer without putting insome work on the front end to make sure the product you're buying is worth thecost. You would at least expect the same level of common sense out of thefederal government, who is not only spending billions of dollars, but spendingbillions of our dollars.
Sadly, when it comes to the $787 billion stimulus package,it appears that the federal government failed to do its due diligence. That’sthe conclusion of economists Ethan Ilzetzki, Carlos Vegh, and Enrique Mendozain their new paper How Big (Small?) are Fiscal Multipliers.
One of the key measures of the success of government stimulusis its fiscal multiplier, a ratio reflecting an increase in aggregate demand asa result of government spending. A multiplier greater than one suggests thatfor every dollar the government spends translates into disposable income gainsgreater than the original $1 dollar investment. The opposite is true fornegative multipliers.
Given the forceful arguments from many CongressionalDemocrats about the absolute need for a stimulus package, you’d have thoughtthere was some agreement among economists about the size of the fiscalmultiplier. You’d have been wrong. As noted by the authors of the study,estimates ranged from Robert Barro, who argued that fiscal mutlipliers inpeacetime were zero, to Christina Romer, Chair of President Obama’s Council ofEconomic Advisers, who used a multiplier of 1.6 to predict job gains as aresult of the stimulus.
So who was right? When it comes to a highly indebted countrylike the United States the researchers found that Barro’s zero multiplierprediction was accurate and possibly even on the optimistic side. The authors conclude that, “seeking theHoly Grail of fiscal stimulus could be counterproductive, with little benefitin terms of output and potential long term costs due to larger stocks of publicdebt. Moreover, fiscal stimuli are likely to become weaker, and potentially yieldeven negative multipliers, in the near future, because of the high debt ratiosobserved in countries . . .”
This new research suggests that the $787 billion stimulusmay have been a colossal waste of taxpayer funds that was destined to fail inits goal of boosting a struggling economy. In fact, it may have even held backthe recovery by crowding out private investment. There is simply no reason weshould be learning about the potential negative fiscal multiplier afterspending $787 billion in taxpayer dollars. Government spending has consistentlyproven to be the wrong answer, the fact that Washington passes enormousspending bills without even researching their effectiveness only highlightsthat point.