mscbuck
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"You Would Have Been BALEETED..."
Posts: 3,897
And if you kept going in the macroecon path you'd realize that the fiscal mutliplier depends wildly on many many conditions :). Because of inability to borrow at this current time, a tax cut may end up with a higher multiplier effect!
Sometimes a tax cut CAN actually have a higher multiplier. But the problem with fiscal stimulus, especially incredibly large ones like Obama is proposing, is that there is going to be a bit of Ricardian theory going on. For the first time, actually, I have seen people adjust spending / saving patterns in anticipating of greater taxes (to fund the fiscal stimulus). Therefore the multiplier would be less than proposed. The theory has come under a lot of criticism, and does not have much support, but recent occurrences are starting to show some ground for the theory.
Currently, we have a very low interest rate, which was intended by the Fed to increase investment in the recession. That makes some sense, actually, because the problem was that people were so god damn scared to invest any money into an economy in freefall. If Obama manages to pass many of his plans, which cost up to trillions of dollars, that low interest rate is unsustainable. I'm pretty sure the last thing America would want is some mega inflation. Interest Rates will have to rise, and crowding out of private investment will occur. It's a real damned if you do, damned if you don't situation. Obama's projectors somehow think the interest rate will remain constant, therefore the multiplier that they project (1.6) will be constant. Other's project a lot less. We want people to start investing, but we are currently constrained by a near 0% interest rate (which really hasn't helped too much).
Fiscal stimulus has less of an affect on countries like the US, because a lot of the stimulus also can shift into the import/export sector.
Bottom Line: No one knows! But that doesn't mean just go balls out and start spending and hope for the best. Smaller experiments are needed before you jump head first. I would argue the first stimulus plan was that kind of experiment (rather a large one) and we've yet to see really anything substantial come out of it yet.
"His Will Was Set, And Only Death Would Break It"
"None knows what the new day shall bring him"