Debate over multipliers

Date posted: November 24, 2011

One of the factors involved in the debate about the president’s proposed jobs plan is how the money will flow through the economy. N.C. State University economist Mike Walden discusses that factor.

“This is actually a long-standing debate. I say it’s at least over 80 years old. And it has to do with some concept called the multiplier. Multiplier simply says that if you spend a dollar in a local economy or national economy, that’s not the end of it. That dollar will be re-spent — re-circulated — many times through the economy. So initial amount of spending will actually cause there to be more spending throughout the economy.

“And, for example, if you look at the president’s plan, his economists have incorporated that multiplier into the plan, arguing, for example, that if the federal government spends, let’s say, $400 billion, that might result in a total of $600 billion to $800 billion being created in new spending in the economy.

“The debate here … is there’s a lot of debate among economists about how big that multiplier is and whether it exists at all. And you can find a well-credentialed, well-respected economist all over the spectrum. Some say the multiplier’s quite large — maybe two, maybe three. Others say, no, it’s probably simply one. And there are some who say that it is actually 0, because they argue that any spending that the federal government does is simply taking spending away from the private sector, so there’s a wash there.

“So, yes, some politics get involved in this, but obviously economics is the base, and we don’t really have a lot of agreement among economists about the size of the multiplier.”

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