Nov 24 2008

## The Multiplier Effect as it applies to the Obama camp’s fiscal stimulus proposal

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Below is the explanation of the “Multiplier effect” from our class wiki, as explained by my Econ students:

Multiplier = 1/(1-MPC) = 1/MPS
Multiplier = change in real GDP/ initial change in spending
Change in GDP = mutlplier x the initial change in spending

Rationale: The multiplier is explained based on the following facts:

• The economy supports repetitive, continuous flows of expenditures and income
• Any change in income will vary both consumption and saving in the same direction as, and by a fraction of, the change in income
• Initial change in spending will set off a spending chain throughout the economy
• Chain of spending, although of diminishing importance at each successive step, will accumulate and result in a multiple change in GDP

Harvard Economist Gregory Mankiw has applied the concept of the spending multiplier to the proposal coming from Barack Obama’s economic transition team to inject as much as \$700 billion of goverment spending into the economy to stimulate aggregate demand and help America escape its recession. Mankiw quotes today’s Washington Post:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as \$700 billion over the next two years….Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

Mankiw, the Econ teacher that he is, applies the basic formula for the Spending Multiplier to the numbers coming from the Obama camp, and finds the following:

Dividing one number by the other, that (the \$700b of government spending) works out to \$280,000 per job.

What is going on here? Logically, it must be one of three possibilities:

1. The fiscal stimulus is going to be much smaller than is being reported.
2. The new administration is setting a low bar for itself when it comes to job creation.
3. The Obama team believes in very small fiscal policy multipliers.

Let me amplify the last point. The average weekly earnings of production and nonsupervisory workers is about \$600, or about \$60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix.

So let’s say each job created means \$100,000 of extra national income. If we are generating \$100,000 of income with \$280,000 of government spending, the multiplier is only 100/280, or 0.36. Traditional Keynesian models suggest a multiplier closer to 2.0.

What Mankiw has found, using simple economic analysis understood by anyone who has studied AP or IB Economics, is that if we believe in the numbers given by the Obama camp itself, then government spending package of \$700 billion will result in roughly \$250 billion of new income for the nation.

How did we find this? Simply by applying the forumula given on our wiki above: Multiplier = change in real GDP/ initial change in spending, and plugging in the numbers calculated by Mankiw:

• Multiplier = 0.36.
• Change in spending = \$700b.
• Therefore, the change in national income (or GDP) equals \$700b x 0.36 = \$252 billion

Perhaps Mr. Obama needs to consider the basic economic principle of the Spending Multiplier before he goes around throwing out numbers about the jobs that will be created or preserved from a new fiscal stimulus package. Clearly, 2.5 million jobs grossing an average of \$100,000 each over two years, while SOUNDING good, in reality represents a truly unbelievable squandering of wealth and income by the US government.

Nov 05 2008

## Yes we can… Obama wins!

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And this is what he said to the world.

…This election had many firsts and many stories that will be told for generations. But one that’s on my mind tonight is about a woman who cast her ballot in Atlanta. She’s a lot like the millions of others who stood in line to make their voice heard in this election except for one thing – Ann Nixon Cooper is 106 years old.

She was born just a generation past slavery; a time when there were no cars on the road or planes in the sky; when someone like her couldn’t vote for two reasons – because she was a woman and because of the color of her skin.

And tonight, I think about all that she’s seen throughout her century in America – the heartache and the hope; the struggle and the progress; the times we were told that we can’t, and the people who pressed on with that American creed: Yes we can.

At a time when women’s voices were silenced and their hopes dismissed, she lived to see them stand up and speak out and reach for the ballot. Yes we can.

When there was despair in the dust bowl and depression across the land, she saw a nation conquer fear itself with a New Deal, new jobs and a new sense of common purpose. Yes we can.

When the bombs fell on our harbor and tyranny threatened the world, she was there to witness a generation rise to greatness and a democracy was saved. Yes we can.

She was there for the buses in Montgomery, the hoses in Birmingham, a bridge in Selma, and a preacher from Atlanta who told a people that “We Shall Overcome.” Yes we can.

A man touched down on the moon, a wall came down in Berlin, a world was connected by our own science and imagination. And this year, in this election, she touched her finger to a screen, and cast her vote, because after 106 years in America, through the best of times and the darkest of hours, she knows how America can change. Yes we can.

America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves – if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?

This is our chance to answer that call. This is our moment. This is our time – to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American Dream and reaffirm that fundamental truth – that out of many, we are one; that while we breathe, we hope, and where we are met with cynicism, and doubt, and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people:

Yes We Can. Thank you, God bless you, and may God Bless the United States of America

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