Pragmatic Capitalism

Capital for Living a More Practical Life

Government Expenditure (Fiscal Policy aka Helicopter Money) Multiplier: -0.01

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Yep, just like the monetary policy multiplier mirage, we can now put the fiscal policy multiplier mirage to bed also.

So for every $1 of deficit spending, it reduces GDP by $1.01 based on empirical observations. That’s not so surprising since “island time” government (composed of unelected bureaucrats, career politicians and others of that ilk) is an absolutely terrible resource allocator for society compared to the “profit motive” of the private sector, but what is surprising is that this negative fiscal multiplier persists despite the positive income flowing to the net financial assets held by the private sector. Here’s some supporting literature (h/t to Stansberry & Hunt):

Estimating the effects of fiscal policy in OECD countries

An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output

How big (small?) are fiscal multipliers?

Government Spending Might Not Create Jobs Even during Recessions

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Posted by MachineGhost
Posted on 10/08/2016 10:47 AM
Private answer

This research seems to paint with a pretty broad brush. How can we analyze govt spending as one homogeneous thing? For instance, building a bomb and blowing it up in the middle of Nevada obviously has a much different multiplier than building a cancer research center that cures cancer. Not like we can quantify what that multiplier is in the first place. I mean, a bomb that blows up Hitler is obviously different from a bomb that is just exploded for testing purposes….

This sort of research is just noise in my opinion. No one could possibly analyze all of this data in such a way that results in real empirical results. It’s literally impossible if you ask me….

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Cullen Roche Posted by Cullen Roche
Answered on 10/12/2016 1:39 AM