Economists like to talk about the multiplier effect of government spending. The theory is that if the government spends a dollar buying products, services, or even spending it on welfare, the money is transmitted through the economy many times over when the original recipient buys things which then put extra money in the pocket of another recipient, who then buys things, and so on.
Keynesian estimators of the multiplier effect often focus on the spending and thus only predict a positive multiplier. This, however, analyzes only one half of the equation: ”that which is seen,” in the words of Frederic Bastiat. That which is unseen is where the money came from. In the case of government spending, it can only come from higher taxes, meaning that someone else is unable to spend himself that which the government spent, or from higher borrowing, meaning that someone else in the future is unable to spend the amount of money borrowed plus interest. The multiplier effect, therefore, can only be positive when viewed through the double entry accounting method, if the government spending today has a higher multiplier than the multiplier effect of private spending, whether today or in the future. Depending on their political stripes, economists latch onto data that buttress their belief that government spending is more or less efficient than private spending.
Today comes data that point substantially in the direction of anti-Keynesians who argue that government spending is a bigger drag on the economy than if the spending decisions were to be left in private hands.
The ranking member of the Senate Budget Committee produced this chart showing that over the last two years, the government added $2.4 trillion in debt and saw GDP increase by only $1.2 trillion. Keep in mind that government spending is part of the equation used to calculate GDP. So this chart implies a negative multiplier of 50%–meaning that for every government dollar spent through debt, the economy shrank 50 cents. Even if we were to use the pre-2009 deficit of $400 billion a year as a baseline, this would mean that the extra government deficit spending of $1.6 trillion over the last two years resulted in a GDP increase of only $1.2 trillion and a negative multiplier effect of 25%.
No company in the world would borrow money if they expected a negative return on investment as this chart implies. And yet we are told again and again that the economy will collapse if we don’t extend what is clearly counterproductive deficit spending.
MORE: This chart dovetails nicely with John Tamny’s column from yesterday:
“First off, there’s no such thing as fiscal stimulus of the spending kind. Though it’s well known at this point, governments can only spend money they’ve first taken from the private sector. In short, governments can at best merely steal demand from certain economic sectors in order to fund generalized waste and a bigger state. There’s no economic growth to speak of, rather there’s decline.”
Read the whole thing.