Saturday, January 24, 2009

On the Relevance of Wartime Multipliers

Someone asked about the relevance of wartime multipliers. Just to be clear:

  1. I have written a lot about crowding out, and little of my analysis relies on wartime observations.
  2. It used to be said that the wartime spending pulled the U.S. out of Depression. Given that President Obama is telling us that he'll pull us out of recession, it is of some relevance that the wartime spending still crowded out private spending. Thus my link to Professor Barro who, incidentally, "wrote the book" on how government spending affects GDP.
  3. Even if it were true that the U.S. economy was at full employment before WWII began -- in which case it might not be a valid comparison to 2009 -- I have already directly addressed (in at least two different ways) -- the myth that the stimulus plans in Washington would actually utilize currently unemployed resources.
  4. Conspicuously absent from the commentary of those who claim that public spending would stimulate private spending are actual examples in which that actually occurred. [Admittedly, those economists (are there any besides Professor Krugman?) are vastly outnumbered and therefore need more time to put their case together]


Don said...

I'm not quite sure what you're arguing. The idea of the stimulus rests on the idea that certain social factors, like unemployment, effect the spending of actual human beings. If people are loathe to spend in a downturn, the idea is that the government will do it for them, hoping to create the appearance of an upturn in people's minds. I suspect that the real fears about government spending acting as a stimulus, which I share, are:
1) In order to actually effect people's perceptions and behavior, the amount will have to be massive, and we will simply trade one set of problems for another.
2) The money will turn out to be poorly spent in a hurry, leaving us with more and more spending down the road.
One argument for bringing on inflation, from my point of view, is that deflation is very disorienting to most of us, and so the negative aspects of it are multiplied. A multiplier effect, if you will.

Don the Libertarian Democrat

Tino said...

Even Hitlers famous depression era spending boom on military and infrastructure crowded out private consumption. In 1932 private consumption was 39 billion Reichmaks out of a 43.1 billion economy (1913 fixed prices), by 1935 it was only 40.5 billion of a 57.8 billion economy.

You would have think total income went down significantly, since people were also working more hours.

My guess is Obama is betting this massive bill make him appear to be “doing something”, at a time where the public is panicked and forgives deficit spending. Once the economy automatically recovers around 2010-2011 the spending will help overheat it and re-elect him.
He better be careful. If the underlying economy recovers too early this thing will burn out too early.