Farce Multiplier

"Team Obama's claim that each dollar of stimulus spending will create more than a dollar of GDP took a beating yesterday at a forum organized by the Council on Foreign Relations in New York. An economist from the Federal Reserve Bank of Minneapolis reported that according to models relied on by the central bank, stimulus spending costs far more than it delivers in economic growth.

"The source of this critique is especially damaging to the administration's position. Obama economic advisers Christina Romer and Jared Bernstein argued in a recent paper that a dollar of stimulus spending yields $1.60 of economic output. The authors say they reached their estimate largely by relying on macroeconomic models used by the staff of the Federal Reserve in determining this 'multiplier' for stimulus spending. White House economic policy chief Lawrence Summers has also suggested that government stimulus yields roughly $1.50 of GDP for each dollar spent.

"During yesterday's panel discussion in New York, Ellen McGrattan, a monetary adviser at the Minneapolis Fed, said that models consulted by Fed staff suggest not a multiplier of 1.6 or 1.5, but something 'closer to zero.' Ms. McGrattan, who earned her economics Ph.D. from Stanford, also serves as a research economist for the National Bureau of Economic Research. Joining her on the panel was NBER colleague Anna Schwartz, who in her storied career collaborated with Milton Friedman on A Monetary History of the United States. Ms. Schwartz attacked a 'mystical belief' in fiscal stimulus and said that there was no economic analysis behind claims that government spending can restore economic growth.

"Ms. Schwartz noted that 'fiscal stimulus did not end the great contraction' that began in 1929, nor did it work for Japan in the 1990s. Speaking of the Japanese, she added that 'they paid lavishly' for stimulus programs, and the principal result wasn't economic revival, but massive government debt."

-- James Freeman, Wall Street Journal