DeLong posted the following blog material http://delong.typepad.com/sdj/2009/01/matthew-yglesias-vs-robert-barro.html on the fiscal "multiplier" from stimulus - an issue gaining notoriety since Romer's half-backed defense on the Obama-Biden Plan.
Delong posted (and I actually think he is complimenting Yglesias):
Matthew Yglesias vs. Robert Barro
One of these people is a tenured university professor. The other is a juicebox-drinking basement-dwelling bathrobe-clad weblogger.
Robert Barro writes:
Multipliers and Diminishing Returns: What do the data show about multipliers?... [T]he best evidence comes from large changes in military purchases.... The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists. World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier...
Matthew Yglesias responds:
I think this is running together two separate issues. One is “whether a large multiplier ever exists” and one is whether such multipliers suffer from diminishing returns. World War II spending was enormous relative to GDP. Wartime spending on that kind of scale goes way beyond the conversations we’re having right now about fiscal stimulus—the equivalent today would be something like a $5.2 trillion package rather than the $800 billion or so we’re talking about. And to get spending up to that level the government had to resort to quasi-forced savings (”war bonds”), rationing, etc.--deliberate efforts to direct production away from where demand was highest and toward the national objective of military production. The 0.8 multiplier is probably the result of diminishing returns. The question is whether you got a decent multiplier out of the first 5-10 percent of GDP you spend on stimulus. It shouldn’t surprise us if it turns out that defense spending eventually got somewhat higher than would be economically optimal in the middle of the largest war in history.
My comment on the above I left on DeLong's blog:
I think the multiplier issue is almost a red herring in regards to Keynesian measures required when savings rate soar (out of classic expectations or "forced" via war measures with lack of things to buy)and consumption dives. Obviously WW II spend "worked" - end of argument, and the size of fiscal stimulus FDR applied in peacetime did not do the trick, though important constitutional mandates were determined, rule of law via organizations like the SEC, and agencies to apply investments were initiated.
A far better example of Keynesian fiscal stimulus applied and the utility and "multiplier" it generated is the 1956 "Federal-Aid Highway Act of 1956" which created from scratch the Interstate Highway system. Avoiding for now chatting about cars and global warming - this was a massive undertaking which ended with a total $425 billion (2005 $) fiscal stimulus, unquestionable multiplier (most studies have it producing $1.5 and higher GDP per $1 spent)and had massive secondary and tertiary effects one cant account for such as auto industry growth to Howard Johnsons to...and so on. The project was solely conceptual in the start and certainly not "shovel ready".
Rather than worry about multiplier and whether or not it is "shovel ready", worry about making sure the project has utility and a long duration. Market pricing and the "rent" schedule will make for an almost immediate impact on GDP via first adjusting various market prices and then later with actual cash spend. The "shovel ready" is not required, only the certitude that the project will occur.
That's the trouble with abstracts or conceptual fiscal stimulus such as education or "green" technologies - the abstract nature will make for the GDP impact to not occur until actual cash flows are experienced .
So hard boundaried non-abstract projects which only a nation-state can budget for should be sought and declared. My call is the $600 billion high speed rail system nation wide. Or re do of the St Lawrence Seaway. Or rebuild every bridge over 20 years old (I am nervous driving over the Tappan Zee now). Or.. It has to be non-abstract and certain in public utility and it has to be not additive to existing programs and processes but be projects which the scope and size defy any budget unit but the federal.
The interesting question to ask is that if such projects are required, if we do not supply this fiscal spend in an obvious developing Fisher debt deflation spiral and if the USA as a power unit has any power or capability, that size of fiscal stimulus will occur. Sort of a weird supply side type thinking, voo doo I guess, but I think one can muse or even state that because FDR could not provide the fiscal stimulus outlined above, the fiscal stimulus did occur in a form that was politically applicable: war.
We will get our fiscal stimulus equal to the drop in consumption and investment and the rise in savings - one form or the other. I would prefer peace and the ability to drive over the Tappan Zee Bridge without thinking of the impact of water at such a height and the winter temperature of the Hudson.