It's all a matter of multipliers
Shawkat Hammoudeh
Issue date: 2/13/09 Section: Ed-Op
Spending Multiplier and Job Creation
Some economists (including 2008 Nobel Prize-winner Paul Krugman and Obama's economists) estimate the spending multiplier to be about 1.5, implying that the designated hikes in government spending should contribute $820 billion to GDP over two years. If it takes a $275,000 increase in GDP to create one new job as suggested by the Republicans (which is really an inflated number and represents the worst case scenario) and if the multiplier is 1.5 as suggested by Krugman and others, then the increase in GDP as a result of spending alone would lead to the creation of three million jobs over two years.
If the multiplier is zero as suggested by Cochrane, then the spending stimulus will not create jobs. If the multiplier is one as suggested by Woodward and Hall, then the government spending hike should increase jobs by two million, which will be acceptable if the tax cuts are effective.
Based on this analysis, I am willing to bet that the government spending multiplier is greater than one, particularly because the economy is in recession with many idle resources. Overall, we need the spending multiplier to be greater than one to create the three million jobs promised by the president over two years, even without cutting taxes. No one has the exact answer in this liquidity trap.
Tax Multiplier
The debate on the tax multiplier is usually less sizzling, except these days because of Obama's expenditures-loaded package. There is recognition among some economists that the tax cut multiplier is greater than the government spending multiplier if the cuts involve marginal income, payoff and corporate rates; are not refunds and rebates; and are permanent in nature and/or their channeling mechanism goes through capital investment.
Christina Romer, chair of Obama's Council of Economic Advisers, estimates the tax cut multiplier to be around three because it raises capital investment; according to Harvard's Greg Mankiw, this is absent from the textbook Keynesian model, which relies on the disposable income-consumption channel. Economists, particularly those who are supply-siders, argue that tax cuts have more impact on employment than government spending. Using Romer's estimate for the tax multiplier and repeating the same calculation for the impact of Obama's designated tax cuts for job creation, we would have 2.9 million new jobs, which is almost equivalent to what we would have from the much larger government spending component in the package.
Some economists (including 2008 Nobel Prize-winner Paul Krugman and Obama's economists) estimate the spending multiplier to be about 1.5, implying that the designated hikes in government spending should contribute $820 billion to GDP over two years. If it takes a $275,000 increase in GDP to create one new job as suggested by the Republicans (which is really an inflated number and represents the worst case scenario) and if the multiplier is 1.5 as suggested by Krugman and others, then the increase in GDP as a result of spending alone would lead to the creation of three million jobs over two years.
If the multiplier is zero as suggested by Cochrane, then the spending stimulus will not create jobs. If the multiplier is one as suggested by Woodward and Hall, then the government spending hike should increase jobs by two million, which will be acceptable if the tax cuts are effective.
Based on this analysis, I am willing to bet that the government spending multiplier is greater than one, particularly because the economy is in recession with many idle resources. Overall, we need the spending multiplier to be greater than one to create the three million jobs promised by the president over two years, even without cutting taxes. No one has the exact answer in this liquidity trap.
Tax Multiplier
The debate on the tax multiplier is usually less sizzling, except these days because of Obama's expenditures-loaded package. There is recognition among some economists that the tax cut multiplier is greater than the government spending multiplier if the cuts involve marginal income, payoff and corporate rates; are not refunds and rebates; and are permanent in nature and/or their channeling mechanism goes through capital investment.
Christina Romer, chair of Obama's Council of Economic Advisers, estimates the tax cut multiplier to be around three because it raises capital investment; according to Harvard's Greg Mankiw, this is absent from the textbook Keynesian model, which relies on the disposable income-consumption channel. Economists, particularly those who are supply-siders, argue that tax cuts have more impact on employment than government spending. Using Romer's estimate for the tax multiplier and repeating the same calculation for the impact of Obama's designated tax cuts for job creation, we would have 2.9 million new jobs, which is almost equivalent to what we would have from the much larger government spending component in the package.
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rencontre
Tania
posted 2/15/09 @ 8:19 AM EST
It is all a matter of exponential DCF multiplier cashflows.
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