Finally, someone asks the right question about the stimulus

A former advisor to George Bush has written a piece in the New York Times that finally asks the question that conservatives have wanted someone with influence to ask of the incoming administration:Is Government Spending Too Easy an Answer? HOW MUCH BANG FOR EACH BUCK? Economics textbooks, including Mr. Samuelson’s and my own more recent contribution, teach that each dollar of government spending can increase the nation’s gross domestic product by more than a dollar. When higher government spending increases G.D.P., consumers respond to the extra income they earn by spending more themselves. Higher consumer spending expands aggregate demand further, raising the G.D.P. yet again. And so on. This positive feedback loop is called the multiplier effect. In practice, however, the multiplier for government spending is not very large. The best evidence comes from a recent study by Valerie A. Ramey, an economist at the University of California, San Diego. Based on the...(Read Full Post)

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