Deficits ad Absurdum By Arnold Kling

Brad Setser writes,

Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]

That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, “It’s all fine so far.”

It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.

Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?

(a) $100 billion in spending above the baseline

(b) $1 trillion in spending above the baseline

(c) $100 trillion in spending above the baseline

If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.

So to talk about “the” multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.

The Obama Administration is being populated with outstanding academics, like Larry Summers and Cass Sunstein. It is not surprising that the academic world is expressing a lot of confidence in giving them huge amounts of power. These are people who are more than three standard deviations higher in IQ than average, but I still suspect that this leaves them more than three standard deviations below what would be needed to justify giving these technocrats $10,000 from every household in America to spend at the their discretion (I’m adding the remainder of the TARP to the stimulus, since it is getting harder and harder to distinguish the two concepts from one another). The folks working on the stimulus package are not people who have spent time in middle management in a large organization, where you see how life differs from a calculus problem or a term paper.

Right now, the typical academic cannot imagine Obama’s team doing anything stupid. The upper class in Britain felt the same way about its generals in 1916.