Friday, July 9, 2010

Flashback: Model of Zero Multiplier

Professor Krugman and Delong are again trying to perpetuate the myth that a multiplier less than one is inconceivable for today's stimulus and today's economy.

In fact, there is a very simple story of how the multiplier would be zero (and, of course, zero is less than one). Namely, in the model, the government buys things that are so useful that citizens would have purchased them on their own. Once the government comes along and buys such things on behalf of its citizens, the private sector stops buying them, and total spending is unchanged both in total amount and in terms of the types of goods purchased.

This is not the only model of fiscal policy that economists use, but it is used a lot, so I am surprised that Professors Krugman and Delong overlook it so often (I wrote about this earlier this year, when Professor Krugman also seemed to forget).

So it's clear that we have models with multiplier less than one. Moreover, the Obama administration claims that its stimulus really did purchase things that are useful. So the possibility that the multiplier is less than one cannot be dismissed solely on the basis of logic.


TGGP said...

I would think a multiplier of zero means that the expenditures bring zero value. A multiplier of one usually means having no effect in math.

TGGP said...

Robert Barro seems to agree with me, since 0.8 is a "dampener":