Multipliers are everywhere. When an entrepreneur acquires a loan, this individual hopes to invest this loan in such a way that this loan is repaid with some profit left over. Therefore, this investor slash business person is expecting a multiplier above one.
This business person can in fact put money into a failed project and thus produce a multiplier less than one or zero. Essentially, what has determined the so called multiplier of this loan? Has this entrepreneur produced something that is: 1 - in demand, 2 - profitable, 3 - and capable of creating some network or positive externality worth more than the amount of the loan.
Does the story necessarily change with government expenditure? We can ask a more sophisticated question: is there really a source of Barro-Ricardian Equivalence that neoclassical economists speak of? Essentially we are asking the questions regarding the second paragraph: if the government borrows money will it be in demand, will it be profitable, and will it produce positive externalities.
When you go through the Obama Stimulus package ask yourself the important question: what are the preferences of the consumer - will they use this bridge? If we, the government, build this bridge, will it be a bridge to nowhere - thus producing no returns greater than debts. Lastly, will this bridge at least increase efficiency of the economy - can people get to the store quicker; will workers sleep more because the bridge cuts traffic and therefore time, thus making people more productive?
To say that Barro-Ricardian Equivalence holds for this bridge project, is to suggest that it will produce none of the effects described above, and that the government may have to pay for these projects through increasing taxes, printing money, or just borrowing more money.
All of this implies that there is a theoretical possibility that the government can put its money in the right places. It's not like the government hasn't done it before. Hasn't your local government put up a bridge or fixed a high-way that made your life easier. So what makes some economists so skeptical of these projects?
It's pretty simple. The project either violates one of the three ideas above (each which seem extremely difficult to estimate if a market isn't in place to determine demand), or the time frame for the projects is just not feasible.
This is one of the many problems with a government stimulus. The money just doesn't get out there quick enough. Who has ever heard of a comprehensive and smart spending plan with hundreds of billions of dollars being put to use in a matter of weeks. For that matter, all billionaires ought to have taken 5 years as opposed to 30 to get to their position.
Last but not least, ask yourself as a big government supporter, if you are one, this question: can the government really determine what 300 million people need. Will the government spend it the same way as any entrepreneur, who by evidence of the success of the market system, produce the greatest multipliers with their loans? For business plans, it takes patience and the drive for profit to be properly implemented. Do you really think that government employees have those same incentives?
My honest opinion, or better yet, judgment call, on that question is: NO!
In conclusion, I too believe in Barro-Ricardian Equivalence for massive stimulus projects such as the one put forth by Obama - and probably for most infrastructure projects as well.
©2009 Jeff Peters, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Friday, March 6, 2009
Last modified: Monday, May 4, 2009
The views expressed in this article are those of Jeff Peters only and do not represent the views of Nolan Chart, LLC or its affiliates. Jeff Peters is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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