Thursday, August 18, 2011

Samuelson and stimulus

Back when I went to college, we all took one course in economics and the textbook was a thick brown volume by Samuelson. That text covered a lot of stuff, starting with the law of supply and demand and then the famous "multiplier effect". Samuelson stated that money spent in an economy doesn't stop with the first payment, he claimed that the recipient of the money went on to spend it, and those recipients would spend it yet another time. He claimed that a single dollar spent, would be multiplied as it rippled across the economy.
Of course Samuelson never wrote about the numerical value of the "multiplier". Was it 1.1? 2.3? or larger? We never learned that.
Now, all those college students exposed to Samuelson and his multiplier effect are grown up and running the government, and they all believe that spending is good for the economy, and the way to spend is to borrow, spend, and pay it back later.
Now I can see the multiplier effect for something like the purchase of airplanes for the Air Force. Boeing gets the contract and then turns around and orders parts. Probably 90% of the cost of a new Boeing goes into parts that Boeing buys from suppliers. This is how we got out of the Great Depression. World War II started and massive orders for everything from B17's to army bunk beds made the US economy perk right up. Paul Krugman said as much when he suggested in the NYT that an invasion of space aliens would be good for the economy. I think Krugman was speaking in jest, but you never know.
So, money given to corporations to make things probably does multiple some. But money given to individuals is different. People use money to pay down their credit cards and pay their mortgages and pay their taxes, none of which multiples at all. Sure people buy groceries and clothing, but that's a much smaller percent than Boeing shells out for parts.
Now take Obama's Porkulus, $ 1 trillion in "stimulus" money. Did it go for buying things? No, it went to state governments who used it to meet payroll and make unemployment payments as their taxes dried up and their unemployment rolls grew.
Very little multiplier effect. It did consume the credit of the United States, so we cannot borrow that much again. The Porkulus didn't work and we are still stuck in Great Depression 2.0. Obama and his friends are now reduced to saying that the Porkulus would have worked if it hard been bigger. Right. We drop $ 1 trillion into the economy and nothing happens. Do you really think $2 trillion would be much different, if we could lay out hands on $2 trillion?

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