Stimulus Multiplier Effect

This next article is absolutely priceless.  Coming from the most secretive administration that won't release Obama's birth certificate, or even his college records, here demands to see Romney's tax returns.

• Carney 'Responsible' Candidates Release Documents - Huffington Post

In this article, Art Laffer discusses the correlation between the amount of stimulus governments tried and their real GDP from 2007-2009.

• The Real Stimulus Record - WSJ (Laffer)

As a follow-on to this article, I wanted to attach an image.  This is a snapshot from the plotted datapoints provided in Laffer's article.  As you can see I had Excel throw in a trend line and formulate the equation for the trend line.  Here's the image, then let's take a look at what the equation tells us.

First, we need to go back to 6th grade algebra and recall the linear equation:
           f(x) = mx + b;

As you recall, m is the slope of the line, b is the y-intercept. So now let's look at the equation returned from this line and see what its telling us.
           f(x) = -1.4710241035x - 0.0382080897

The first thing to note is the value of b is a negative number here. So, assuming that national governments didn't increase spending at all from 2007-2009, this implies that their real GDP would have still been negative. This implies that the world's economy during this stretch stunk... and I think we all knew that already.  The number that jumps out here though is that the slope, m, is a negative number.  This says that as a government increased stimulus spending over this 3 year period, there was a muliplying NEGATIVE effect on real GDP.  For every $1 the government "stimulated", they actually reduced production by $1.50.  That's even more incredible when you consider that government spending IS factored in to the GDP number. 
So the next time you hear a Keynesian talk about a "multiplier effect", you can agree with them.  This shows however that the multiplier is negative.


In other news that is worth a read:

• Four Little Words - WSJ (Strassel)
• Slow Recovery or Failed Agenda - WSJ (Lazear)