The Multiplier Myth

How do I know someone is either lying or doesn’t understand basic economics? There are a lot of ways to do it, but use of the term “multiplier effect,” particularly when associated with government spending, is one of the best ways to root out economic ignoramuses and liars. For more details on why the “multipler” doesn’t work, check out this excellent article on the Obama “stimulus.”

So, it was no surprise that half-way through an opinion piece in this morning’s Albuquerque Journal, the author (who defended the film industry and its subsidies), cited a mysterious three to one multiplier.

Then there is the issue of extending federal unemployment benefits — an issue that Congressional Republicans seem willing to capitulate on in order to continue the Bush-era tax cuts. Some seemingly credible economists claim that extending such benefits has a “multiplier effect.” Of course, the only “multipler” I’ve seen from expanding unemployment benefits is that we have multiplied the number of folks who have been unemployed for more than a year. It also multiplies the deficits of state unemployment funds.

How do we know that the multiplier effect is bogus? Economics is about creating wealth with limited resources. The use of government force to take resources from one person or group to another person or group does not confer upon that money any greater power than it had before. In fact, as humans, we have a proven track record of caring less about things that we don’t deserve and receive through inappropriate means than we do about what we have worked hard to gain ourselves.

In the meantime, keep your eyes out for the mythical “multiplier.”

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