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By Root 911 0

own in the first instance. Governments have to print the money, take the money in the form of taxes or borrow the money from their citizens or from abroad. Printing money can cause nominal growth, but it can also cause inflation, so that real growth is unchanged over time. Taxing and borrowing may enable the government to spend more, but it means there is less for the private sector to spend or invest, so it is not clear how aggregate demand increases. This is where the multiplier claims to play a role. The idea of the multiplier is that one dollar of government spending will stimulate more spending by others and result in more than one dollar of increased output, and this is the justification for taking the dollar from the private sector.

How much more output is yielded by one dollar of government spending? Put differently, what is the size of the multiplier? In a famous study written just before the start of President Obama’s administration, two of Obama’s advisers, Christina Romer and Jared Bernstein, looked at the multiplier in connection with the proposed 2009 stimulus program. Romer and Bernstein estimated the multiplier at about 1.54 once the new spending was up and running. This means that for every $100 billion in the Obama spending program, Romer and Bernstein expected output to increase by $154 billion. Since the entire Obama program ended up at $787 billion, the “extra” output just from doing the stimulus program would amount to $425 billion—the largest free lunch in history. The purpose of this stimulus was to offset the effects of the depression that had begun in late 2007 and to save jobs.

The Obama administration ran U.S. fiscal year deficits of over $1.4 trillion in 2009 and $1.2 trillion in 2010. The administration projected further deficits of $1.6 trillion in 2011 and $1.1 trillion in 2012—an astounding total of over $5.4 trillion in just four years. In order to justify the $787 billion program of extra stimulus in 2009 with deficits of this magnitude, it was critical to show that America would be worse off without the spending. The evidence for the Keynesian multiplier had to be rock solid.

It did not take long for the evidence to arrive. One month after the Romer and Bernstein study, another far more rigorous study of the same spending program was produced by John B. Taylor and John F. Cogan of Stanford University and their colleagues. Central to the results shown by Taylor and Cogan is that all of the multipliers are less than one, meaning that for every dollar of “stimulus” spending, the amount of goods and services produced by the private sector declines. Taylor and Cogan employed a more up-to-date multiplier model that has attracted wider support among economists and uses more realistic assumptions about the projected path of interest rates and expectations of consumers in the face of higher tax burdens in the future. The Taylor and Cogan study put the multiplier effect of the Obama stimulus program at 0.96 in the early stages but showed it falling rapidly to 0.67 by the end of 2009 and to 0.48 by the end of 2010. Their study showed that, by 2011, for each stimulus dollar spent, private sector output would fall by almost sixty cents. The Obama stimulus program was hurting the private sector and therefore handicapping the private sector’s ability to create jobs.

The Taylor and Cogan study was not the only study to reach the conclusion that Keynesian multipliers are less than one and that stimulus programs destroy private sector output. John Taylor had reached similar conclusions in a separate 1993 study. Empirical support for Keynesian multipliers of less than one, in certain conditions, was reported in separate studies by Michael Woodford of Columbia University, Robert Barro of Harvard and Michael Kumhof of Stanford, among others. A review of the economic literature shows that the methods used by Romer and Bernstein to support the Obama stimulus program were outside the mainstream of economic thought and difficult to support except for ideological reasons.

Keynes’s theory that government spending