Tuesday, February 24, 2009

Multipliers and Statistics

So, the recent mega-spending stimulus package is supposed to return every dollar spent back to the economy at a rate of 1.59 dollars. That is, it's a 59% return on investment. Based on this, we are dumping some 700 billion dollars, figuring it will increase our GDP by over 1.1 trillion due to what is termed the multiplier effect. To my understanding, this is based on past research dealing with the impacts of government spending.

Here's a few things to know, based on my understanding of the research, although I confess to not being an expert in this field.
  1. A 1.59 multiplier is not a fact, it's a statistic. Statistics and facts are, in my humble opinion, not the same thing. Statistics are more like educated guesses. The government has never spent this much money all at once ever before. Therefore, there is no precedent on which to predict its effect. To think that past estimates of a 59% return on investment will continue to hold true is to commit a grievous extrapolation error. That is, some studies suggest we get 59% on small spending packages, but studies say nothing about large spending packages. It's very possible that small and large packages have very different effects.
  2. If we really get $1.59 back for every $1 the government spends, why in the world are we in debt at all? It's because it depends on what you spend the money on. Precisely what it needs to be spent on is extremely unclear. What does seem to be clear is that it needs to be targeted very carefully. This is not a target I trust the special-interest-influenced political process to hit very accurately.
  3. The multiplier of $1.59 says nothing about the time it takes to realize the return. If it takes 50 years, then it doesn't really matter to our immediate financial crisis. I don't know how long it takes, but I suspect it's not a short period of time. Although, this is an aspect of the research I have not read thoroughly.
  4. There is also plenty of evidence to suggest that deficit spending hurts our economy pretty bad as well. So which effect wins out? The multiplier or the negative impact of a deficit? I guess we'll have to let the statistics continue to argue this one out.
At the end of the day, I only trust a statistic about as far as I can throw it. This recent spending spree is catapulting the numbers far out of reach. $700 billion is a lot of faith in a statistic. A wise man once said, "There are 3 types of lies in this world: lies, damned lies, and statistics." Now, if you'll excuse me, I have a sizable check to write to the government to make good on my 2008 tax liability. I hope you're reading this, Mr. Geitner.