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Fiscal Multiplier

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In the article “Much Ado about Multipliers,” the author talks about the effects of fiscal stimulus such as tax cuts and increased government spending. In 2009, leaders of the G20 economic group met in Pittsburgh and introduced stimulus packages worth 2 percent of GDP in the year 2009 and 1.6 percent of GDP in the year 2010, as a means of boosting their economies (Much Ado about Multipliers). However, economists were divided concerning how well such stimulus packages would work in boosting the economies. Their argument centered on the scale of the fiscal multiplier. That is, how effective tax cuts and increased government spending are in stimulating output (Much Ado about Multiplier 3).

According to the article, the size of a multiplier depends on economic conditions. When an economy is operating under full capacity, the size of fiscal multiplier is usually zero. However, during the time of recession: when many factors of production are idle, “a fiscal boost can increase demand” (Much Ado about Multipliers). If the stimulus generates a fall in consumers and producers’ expenditure, the multiplier can be more than one. The type of fiscal action and people’s reaction to higher government borrowing also determines the size of fiscal multipliers. There are different assumptions concerning the effects of higher government spending on private spending and interest rates. This explains why economists in the Obama administration give different estimates of multipliers from today’s stimulus spending from those given by other economists such as Cogan, Cwik, Taylor, and Volker.

The author of the article states that in order to settle the debate about the effectiveness of fiscal stimulus, there is a need to analyze the fiscal stimuli applied in the past carefully. However, the author states that it is difficult to separate the effects of changes in fiscal policy. For example, microeconomic case studies indicate that in America, “permanent tax cuts have a bigger impact on consumer spending than temporary tax cuts” (Much Ado about Multipliers). Besides, the effects of fiscal stimulus have changed over time. In the past, government spending was channeled towards military activities but nowadays, government spending is channeled towards infrastructure development. Obviously, the effects of these spending are likely to differ. Therefore, economists should realize this and stop making blind judgments.

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