Lacy Hunt on Negative Multiplier of Government Debt

by Mike ‘Mish’ Shedlock
Mish Talk

In Hoisington’s Second Quarter Review (not yet posted online), Lacy Hunt takes on the widespread Keynesian belief that government spending boosts real (inflation adjusted) GDP.

Hunt states the multiplier is negative over time and short-term gains are an illusion. Here are a few key snips from an excellent report.

Deficit Spending Restrains Economic Growth

Negative multiplier. The government expenditure multiplier is negative. Based on academic research, the best evidence suggests the multiplier is -0.01, which means that an additional dollar of deficit spending will reduce private GDP by $1.01, resulting in a one-cent decline in real GDP. The deficit spending provides a transitory boost to economic activity, but the initial effect is more than reversed in time. Within no more than three years the economy is worse off on a net basis, with the lagged effects outweighing the initial positive benefit.

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