The multiplier.

There’s an article in today’s Wall Street Journal which argues against extending unemployment benefits in the US. The article claims in connection with the multiplier that “This is the theory that you can increase employment by paying more people not to work…”.

No it’s not. If those writing for the WSJ studied basic economics, they’d discover that the multiplier is the idea that an initial bout of additional spending ultimately produces an amount of spending which is NOT THE SAME AS the initial bout. The ultimate addition to spending or aggregate demand may be more than or less than the additional bout.

Moreover, the ACTUAL NATURE of that initial bout of spending is near immaterial. That is, the multiplier works (or doesn’t) regardless of whether the initial bout of spending goes on unemployment benefit, law enforcement, new roads, you name it.

Or put another way, the first sentence of the Oxford Dictionary of Economics’s definition of “multiplier” is: “A formula relating and initial change in spending to the total change in activity which will result.”

For example, if recipients of the initial bout of spending save all the money they receive, there’ll be little or no ultimate increase in spending or demand. Conversely, recipients may spend all that additional money, and recipients of the latter spending may spend it all, and recipients of the latter spending may spend it all. You get the picture. And in that case the ultimate increase in demand will be far more than the initial bout.

The moral is: don’t believe anything you real in the Wall Street Journal or Financial Times.


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