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Not Surprising: Government Spending Destroys Wealth

Via James Pethokoukis at AEI, a new study strongly suggests that the so-called fiscal multiplier for “stimulus” spending is less than 1, even in periods of high unemployment, meaning that even in a those situations where stimulus spending is supposed to do the most good, it still destroys vast quantities of wealth:

We have investigated the proposition that multipliers are greater during periods of slack using newly constructed historical data for the U.S. and Canada. Using Jordà’s (2005) local projection method, a threshold model based on the level of the unemployment rate, shocks to military news, and definitions of variables that obviate the need for ad hoc conversion factors, we find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010. In all states, multipliers appear to be between 0.6 and 0.7.

Given that most of the stimulus went to bail out state governments, I wouldn’t be surprised if the results in this last go-around were even worse.  Hari Seldon Paul Krugman, back to the drawing boards.

Posted in Economics.