WSJ Slams Keynesian ‘multiplier’

When Bear Sterns failed around March 2008, I started reading NYT columnist Paul Krugman in hopes of somehow understanding the pending recession and possible solutions. I was in favor of the bailouts and economic stimuli that Bush and later Obama signed; these days, the results of those great Keynesian experiments are starting to show – partly in terms of low job creation, high market volatility, and what might end up as “stagflation” in the US Dollar if it weren’t for the plummeting Euro.

So, nowadays, the Wall Street Journal seems to have a much better grasp of what’s happening in the US economy:

Whatever happened to the great neo-Keynesian “multiplier,” in which $1 in government spending was supposed to produce 1.5 times that in economic output?

The multiplier is an illusion because that Keynesian $1 has to come from somewhere in the private economy, either in higher taxes or borrowing. Its net economic impact was probably negative because so much of the stimulus was handed out in transfer payments (jobless benefits, Medicaid expansions, welfare) that did nothing to change incentives to invest or take risks. Meanwhile, that $862 billion was taken out of the more productive private economy.

via Employers on Strike –

Although I agree with the general sentiment (the Bush & Obama stimulus packages merely moved around wealth instead of creating wealth), I think WSJ’s argument too readily combines the supposed causality of government spending with the complex network of incentives at work in corporations, banks & investment firms, and small businesses. We know a great deal about incentives, how they work, and how they have the potential to improve behaviors on both small and broad scales; however, we don’t know much about the supposed cause-effect relationship between the public and private sector.

So yes, I agree (thanks in part to Russ Roberts’ opinion on the matter) that the bailouts created perverse incentives among large investment firms and banks, but I’m not so certain that the redistributive portions of the stimulus (jobless benefits, healthcare, tax-breaks, government contracts, etc) have corrupted the broader economy’s incentive structures. Yes, it’s easier to be out of work for more than 6 months; however, more people have been out of work for six months than ever before. The causes for such terrible unemployment numbers are uncertain. Yes, people may be less reluctant to seek healthcare now that they have new pathways to that healthcare; but the WSJ cannot suggest we’re already seeing impacts of Obamacare nor can WSJ suggest healthcare-seeking behaviors create a drag in productivity. And tax-breaks and government contracts were – as I understand it – the major components of the WWII spending that lifted the US out of depression.

It will be a long recovery, and I think it best if we avoided both Keynesian and Libertarian quick-fixes. Personally, my only solution to the crisis is to work harder… which, ironically, creates barriers to lowering unemployment. Se la vie.


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