Multipliers, yet again

In a recent paper assessing the likely impact of President Obama and Mitt Romney’s budget plans if they became law, we applied standard macroeconomic multipliers to estimates of each plan’s fiscal impulse.

As always, the very term “multipliers” brings out critics, and the ones we used for this study (and have used often in the past)—those from Moody’s—seem to bring out even more. This is all very odd.

We often use the Moody’s multipliers because they’re transparent and slightly more detailed than many others that have been published. But, what drives our results in determining whose budget plans provide a bigger economic boost is simply the relative ranking of these multipliers; specifically the estimate that tax cuts (particularly for high-income households) provide less dollar-for-dollar economic support than do spending increases. This is not controversial at all. Both the Congressional Budget Office and the Council of Economic Advisers make similar relative judgments (see the tables here), and the general view that government purchases’ multipliers will lie above tax multipliers during economic circumstances like the present is buttressed by a number of academic papers in recent years, as well as by models used by central bankers and international economic  institutions (see table below from a Congressional Research Service report that summarizes the results of a recent paper surveying a number of macroeconomic models used by such central banks and institutions).

In short, the relative ranking of multipliers really isn’t much of an ideological issue—it’s essentially just a fact for those whose salaries depend on actually knowing what affects the economy.

For those who (a) deny the existence or importance of multiplier effects, and (b) think we should focus on reducing budget deficits as the most pressing economic priority, I’d ask why aren’t you willing to say that no part of the “fiscal cliff” (actually, a terrible metaphor, it’s really a fiscal “obstacle course”) should be addressed in 2013? If no portion of the “fiscal obstacle course” is addressed, we’ll see a very rapid reduction in the budget deficit and, if multiplier effects don’t exist, we’ll see no impact at all on the economy.

Of course, most experts (including private-sector forecasters), and even Romney,1 don’t agree that we can ignore the fiscal obstacle course with no ramifications. Turns out that belief in multiplier effects is much more widespread than is often portrayed.


1. His exact quote was “Now, I’m not going to cut a trillion dollars in the first year. And I heard a question. Why not? And the answer is: taking a trillion dollars out of a $15 trillion economy would cause our economy to shrink and would put a lot of people out of work.”