public-policyWikipedia’s article on fiscal multiplier highlights a disagreement between Economy.com’s Mark Zandi, who says
A $1 increase in food stamp payments boosts GDP by $1.73.
and Harvard Professor Robert J. Barro, who says
I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. … I have not seen serious scientific research by Ms. Romer on spending multipliers, so I cannot understand her rationale for assuming values well above one.
Of course different methods can yield different results, but Zandi’s estimate of 1.73 isn’t even in the same ballpark as Barro’s estimates of 0.4 or 0.6. So here’s my question: Is there an agreed method to measure the multiplier effect of government spending? If there is an agreed method, whose answer does it support? Or if there isn’t any agreed method, why not?
There are always a number of assumptions to be made about any calculation of a fiscal multiplier; in essence, the question is: what would have happened economically in the absence of the fiscal expenditure, relative to what actually happened in its presence?
There is no reliably meaningful control case for any fiscal experiment, so any calculation is inevitably based on a lot of suppositions about what the counter-factual case will have looked at. Any comparisons between countries or years need not provide a meaningful control case, because there are always exogenous factors that vary between countries and between years.
As this is such a politically hot topic, what often happens is that seemingly-objective analysis tends to be based on a set of assumptions that were selected to reflect the analyst’s preconceptions about what the answer “should” be.
The calculations are sufficiently sensitive to the subjective assumptions, that it is possible to get anywhere within a huge range of answers, encompassing and exceeding these ranges of 0.4 - 1.73 that you’ve found, just by varying the assumptions one makes about the counter-factual case.
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