Mulitplier Effects Part 2

I mentioned yesterday that we should evaluate the effects of any stimulus package through the lens of the ‘multiplier effect’. The notion is that any money spent by the government passes through several pairs of hands as it circulates the economy. Spending creates demand which creates jobs and thus more demand. And so on.

One result of this I did not mention is that the multiplier also increases the taxes that the government will collect exactly because it has increased incomes. So some of the stimulus will be paid for by that tax revenue income. Consequently a stimulus of $1 trillion will end up costing less as the tax revenues flow in. Take this into account and the multiplier is even more magnified. Furthermore, the differential between ‘good’ stimulus a like direct spending and ‘bad’ stimulus like tax cuts is amplified, undermining the case for tax cuts even more.

Here’s the blog link where this idea is explained in more detail: Multiplier Explained