Wednesday, September 7, 2011

The Myth of the Multiplier - Reason Magazine

I have written in the past that I doubt the "multiplier" effect some economists and politicians cite when promoting federal spending. I believe this column makes several good points:

The Myth of the Multiplier - Reason Magazine

There are "indirect" multipliers, which I do believe are real — though not perfect. Money spent on roads and highways, for example, enables transportation of goods. The problem is, even spending on transit systems is seldom wisely managed.

Government is not efficient. Even what it should do, such as providing for the national defense, it does inefficiently. I admire the military, but it isn't efficient. Any "multiplier" effect from military spending is long, long term and often hard to quantify versus the waste.

NASA has created technologies that do provide economic benefits, certainly, but the NASA of today cannot even replace the space shuttle program in a timely fashion. The private contractors linked to NASA have developed inefficient habits, too. If there is a negative multiplier, NASA has become such a problem.

The university where I teach is private, but it depends on federal student loans and grants. As a result, it has developed inefficiencies. Worse, loans saddle students with future obligations diminishing their future savings (and consuming). A student with $36,000 or more in debt has to deal with that burden instead of buying new things. There will come a time when education spending, in the form of federal subsidies for loans, becomes a negative multiplier.

What government spends comes from taxes. Those taxes come from private individuals who might otherwise spend that money on new products or invest in new ideas. Whether you are paying down student loans, other personal debts, or paying taxes — that is money not spent on new and better ideas.

Creating more government employees is not stimulative. If anything, it causes drag in an economy.

Liberals argue that "Government employees pay taxes, too." That's absurdly misleading.

Let us consider a teacher, one liberals will claim was a "job saved" by Washington spending. The example teacher earns $50,000 and receives another $35,000 in overall benefits (about $10,000 in immediate benefits and the reminder over a lifetime). These are numbers from the BLS and Dept. of Labor.

Let us now assume average property taxes going to schools in a city are $800 of a $1200 tax (based on a New York Times estimate for 2010). That means that one teacher in a school district supported by local property taxes requires 106 households or a mix of about 80 households and 15 "average" businesses. The only "option" to save the teacher's job is higher taxes, which in turn drives residents and businesses out of a region. That kills any "multiplier" of saving the teacher's job.

My wife and I moved out of a high-tax city. That means the city loses us as taxpayers and as potential innovators. Any "multiplier" of paying that teacher? We cancelled out the benefit to saving the jobs of some teachers in shrinking school districts. And why are the schools in our former city shrinking and closing? Because families are leaving — due to high taxes caused by spending.

My wife and I earn slightly more than the teachers we help pay. Our taxes pay a small, small portion of the annual costs to employ one teacher, though. Moving away, someone will have to make up the difference.

That "multiplier" didn't work. Saving local teaching jobs with federal money? We're gone, so the remaining taxpayers will eventually be asked to replace the federal dollars. Many of them will likely leave, too.

I don't believe, overall, there is a net multiplier from our current federal spending. Government has expanded so much, it is probably a drag on the economy. Counting government spending towards GDP and other statistical tricks merely mask the opportunity cost of spending.

Yes, the federal government could "save" every local government job. But for how long? An artificial increase in GDP via such stimulus will be offset once the local taxes have to rise and some local government spending will have to be cut.

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