Rational Expectations vs. Obamanomics

By: Larry Walker, Jr.

“For every dollar a person receives in food stamps, $1.79 is put back into the economy.” ~ Nancy Pelosi (D – CA)

In Economic theory, the multiplier effect is a measure of how an increase in spending produces an increase in national income and consumption greater than the initial amount spent. For example, if a corporation builds a factory, it will employ construction workers and their suppliers as well as those who work in the factory. Indirectly, the new factory will stimulate employment in laundries, restaurants, and service industries in the factory’s vicinity.

Keynesian economists generally calculate multipliers that measure the effect on aggregate demand only. They blindly ignore the negative effects that their policies create in other parts of the economy, such as the effect that government borrowing has on the private sector, and the psychological effects on the general public.

According to the theory of rational expectations, it is impossible to calculate the effect of deficit-financed government spending on demand without specifying how people expect the deficit to be paid off in the future.

Thus, Nancy Pelosi’s rant, that “For every dollar a person receives in food stamps, $1.79 is put back into the economy”, and that, “It is the biggest bang for the buck when you do food stamps and unemployment insurance,” was nothing but pure disinformation (with a capital “D”). It’s disinformation because she purposefully omits the fact that the money being doled out is all deficit-financed. It is impossible to calculate the effect of deficit-financed government spending on demand without specifying how people expect the deficit to be paid off in the future.

Back in February of 2009, Justin Wolfers, a professor of business and public policy at Wharton, attempted to explain how the multiplier effect would work with Obama’s (failed) Stimulus Plan.

At the time, Mr. Wolfers said that Obama’s economic experts were estimating the multiplier would be 1.6 times the initial amount. He continued, “The administration’s talking about spending almost a trillion dollars. It’s hoping that’ll generate $1.6 trillion throughout the economy.” But Wolfers then cautioned that, “no one’s sure that’ll happen”.

In his conclusion, Mr. Wolfers stated, “In order to fund that bridge the government’s going to have to borrow money. If the government’s borrowing money it may be that there’s less money available for the private sector to borrow. And taking money out of the mouths of the private sector will crimp growth, which isn’t multiplying anything.”

It’s curious that the multiplier effect touted by the Democrats as justification for their failed stimulus plan was only 1.6 (i.e. for every dollar spent, $1.60 would be put back into the economy), and that was to be achieved by repairing roads, and bridges, etcetera. And now here comes Nancy Pelosi making the clueless proclamation that government spending on unemployment insurance and food stamps will have an even greater multiplier of 1.79.

What gives?

Did it work with the Stimulus? Nope.

Will it work with unemployment benefits and food stamps? Nope.

Is this my new reality? Not for long honey.

It appears the Democrats have given up ‘hope’ on job creation; I mean, since they now believe they can get more bang for the buck by simply paying folks not to work. In fact, according to Nancy Pelosi it will yield, “The biggest bang for the buck”.

Misinformation is false or inaccurate information that is spread unintentionally. It is distinguished from disinformation by motive in that misinformation is simply erroneous, while disinformation, in contrast, is intended to mislead. So was this mis-, or disinformation?

The time for change has come. Remember in November.

Addendum: It should also be noted that food, clothing and shelter are not discretionary items, and that discretionary spending is what drives our economy. Thus, the Pelosi Effect fails on all counts.