THE KEYNESIAN MULTIPLIER THEORY AS SEEN ON RICKARDS CURRENCY WARS

LUCAS F. AGUIAR

Abstract. Taken from the James Rickards book, Currency Wars: The Making of the New Global Crisis, 2012, p.185-186. This article also contains the sources used on the book.

Keynesian theory says that government can step in and spend money that individuals cannot or will spend, thereby increasing aggregate demand. The government spending can reverse the slide and contribute to renewed economic growth. The problem with this theory (Keynesian multiplier theory) of government spending to boost aggregate demand is that the governments have no money of their own in the rst 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. [. . . ] 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 justication for taking the dollar from the private sector. How much more output is yielded by one dollar of government spending? [. . . ] Christina Romer and Jared Bernstein estimated the multiplier about 1.54 once the new spending was up and running1. This means that for every $100 billion in the Obama spending program, Romer and Bernstein expected output to increase by $154 billion. [. . . ] In order to justify the $787 billion program of extra stimulus in 2009 with decits of this magnitude, it was critical to show that America would be worse o 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 study2, another far more rigorous study of the same spending program was produced by John B. Taylor and John E Cogan of Stanford University and their colleagues. Central to the results shown by Taylor and Cogan is that all
Date : November 3, 2013. 1 Christina D. Romer and Jared Bernstein, The Job Impact of the American Recovery and Reinvestment Pan, reporte prepared by the Council of Economic Advisers, January 9, 2009. 2 John F. Cogan, Tobias Cwik, John B. Taylor and Volker Wieland, New Keynesian Versus Old Keynesian Government Spending Multipliers, Working Paper No. 14762, National Bureau of Economic Research, February 2009, http://www.nber.org/papers/w14782.pdf?new window=1
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of the multipliers are less than one, meaning that for every dollars of stimulus spending, the amount of goods and service 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 eect 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 stimulus was hurting the private sector and therefore handicapping the private sectors ability to create Jobs. [. . . ] Empirical support for Keynesian multipliers of less than one3, 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. Keyness theory that government spending could stimulate aggregate demand turns out to be one tha Works in limited conditions only, making it more of a special theory the general theory he had claimed.

See Charles Freedman, Michael Kumhof, Douglas Laxton, Dirk Muir and Susanna Mursula, Global Eects of Fiscal Stimulus during the Crisis, International Monetary Fund, February 5, 2010; Robert Barro and Charles J. Relick, Macroeconomic Eects from Government Purchases and Taxes, Working Paper No. 10-22, Mercatus Center, George Mason University, July 2010; and Michael Woodford, Simple Analystics of the Government Expenditure Multipliers, paper presented at the meeting of the Allied Social Sciences Association, January 3, 2010.
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