A widely held belief: "[The poor and unemployed] will spend a large fraction of any aid, and therefore transfers to that group will have a much bigger multiplier effect than, say, tax cuts for the rich." The exact words are from Professor Krugman, but many others believe it.
Where is the research that supports the claim that transfers to the poor and unemployed have a multiplier effect on GDP?
Where is the research that supports the claim that transfers to the poor and unemployed have a multiplier effect on aggregate employment?
Empirical research would be best. A theory would be interesting too, as long as the theory were complete in terms of recognizing that the funds have to come from somewhere.
Commenters please let me know. To get you warmed up, let me note some irrelevant replies:
- Irrelevant Reply #1. Theoretical research by Woodford, Rebelo, Werning, Krugman, Eggertsson, and others on what they call the "government spending multiplier". Those authors really mean government purchases, which are quite different from the transfers I'm asking about. If nothing else, GDP by definition includes government purchases but does not include transfers.
- Irrelevant Reply #2. Empirical estimates of the "government spending" multiplier. As far as I know those studies measure government purchases (esp Department of Defense purchases), not transfers, and purchases are quite different from the transfers I'm asking about.
- Irrelevant Reply #3. Empirical estimates of the consumption behavior of the unemployed (this one is a classic). I am not asking whether the poor and unemployed spending their money differently than everyone else does -- they do. I am not asking whether aid to the poor and unemployed expands the markets for the things the poor and unemployed tend to buy. I am asking about the effects on aggregate GDP and employment, including all of the sectors -- even the sectors that do not disproportionately serve the poor and unemployed.
Interesting Reply. This new Keynesian model addresses the question I am asking. Not surprisingly, it finds that the "Keynesian aggregate demand effect" is trivial. The model also features a wealth effect of transfers by assuming, without explanation, that the poor and unemployed's labor supply is less sensitive to transfers than everyone else's labor supply.