Stimulating Long Term Costs
by Ashley Muchow Long has it been the case that Washington politicians turn to the Zandi multiplier to justify stimulus spending under the conjecture that such spending triggers economic growth. Mark Zandi, of Moody’s Economy.com, is regularly consulted by politicians and the press for his “Fiscal Economic Bang for the Buck” chart postulating that spending initiatives, such...
by Ashley Muchow
Long has it been the case that Washington politicians turn to the Zandi multiplier to justify stimulus spending under the conjecture that such spending triggers economic growth. Mark Zandi, of Moody’s Economy.com, is regularly consulted by politicians and the press for his “Fiscal Economic Bang for the Buck” chart postulating that spending initiatives, such as food stamps and unemployment benefits, increase GDP. Examples of such statistics include results showing that each $1 spent on food stamps and unemployment benefits boosts GDP by $1.73 and $1.62, respectively. Zandi’s predictions provided significant fuel for passage of the American Recovery and Reinvestment Act (ARRA) early last year; totaling $787 billion in spending.
But a study completed by University of Chicago’s Harald Uhlig, and his University of London collaborator Andrew Mountford, find (referencing their 2005 working paper) that $1 in deficit spending yields $0.44 in GDP within one quarter after such spending is carried out. Three years down the road, that $1 in spending produces only $0.29 in GDP. These multipliers are hardly snowballing GDP; government spending would have to reach $2.72 to pump out $1 in GDP in one quarter, and $3.45 in spending for $1 in GDP in three years. Uhlig and Mountford find that deficit spending stimulates the economy for the first four quarters, but weakly compared to that from a deficit financed tax cut. In their study, deficit-financed tax cuts were found to be the best fiscal policy for stimulating the economy.
Uhlig and Mountfords’ research is of great pertinence, now more than ever. Zandi and like-minded researchers have energized Washington politicians with convincing numbers; numbers that assist their aim to stimulate economic recovery by throwing tax dollars and the eminent tax revenues of future generations at an economy that hasn’t shown strong signs of revival since the enactment of ARRA.
Zandi states in his most recent work, “more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing.” An astonishing claim considering the questionable outcomes of his recommendations and research.
Judging from the BEA’s GDP estimates from quarter one of 2009 to quarter two of 2010, the Zandi and similar multipliers, such as those from Romer and Bernstein, overstate the return on government spending significantly. While we cannot determine a counterfactual if ARRA would not have passed, we do know that since January 2009, 3.8 million jobs have been lost. A Mercatus Center study, worthy of a gander, makes the case for this shake-up in the type of research considered in fiscal stimulus decisions.
As Alan Reynolds, a senior fellow at the Cato Institute, explained in the National Review early last year; “One person’s spending is another person’s income, but that does not mean the mere act of spending money creates real income. If that were true, then every poor country could become rich by simply dropping money from helicopters. Government purchases of real resources absorb labor, land, equipment, and materials, and thereby raise the cost of production for private businesses, damaging the profitability of private investment. Government transfer payments are a disincentive for those who receive the benefits and for the taxpayers who pay.”
It’s time to question Zandi’s research and the politicians that have been running with his numbers for the past two years.