Our government is once again making economic decisions based on age-old economic fallacies. In particular, it is saying that money spent by the government will bring about returns greater than the initial amount spent. The Associated Press explains the Multiplier Effect, as it is known in economic circles, thusly:
That money ripples through the economy, into supermarkets, gasoline stations, utilities, convenience stores. That allows those businesses to hire more people, who, in turn, spend more money.
The Congressional Budget Office says every $1 spent on unemployment benefits generates up to $1.90 in economic growth. The program is the most effective government policy for generating growth among 11 options the CBO has analyzed.
Mark Zandi, chief economist at Moody’s Analytics, puts the bang-for-a-buck figure at $1.61, and a recent Labor Department study estimates it at $2.
This multiplier is currently being used to justify the extension of jobless benefits by a number of sources including Nancy Pelosi who is insisting that, “For every dollar the federal government invests in unemployment benefits, the return is $1.73 in economic growth.” Unfortunately, reality does not jive with Nancy Pelosi, the CBO, or the Labor Department’s numbers. The Multiplier Effect is a Keynesian invention and it is based on economic fallacy from top to bottom. As a matter of fact, economically speaking, spending based on this myth tends to be losing propositions.
Let’s conduct a praxeological experiment here. Imagine that Retailer X takes a dollar out of it’s till and hands it to Person A. Person A then takes the dollar and spends it with Retailer X. Retailer X now services Person A, incurring all of the costs associated with that service (perhaps a new shirt and the labor cost of a retail employee). Looked at this way, Retailer X, in the end, didn’t have a dollar returned to him, he had a dollar MINUS THE COST OF THE SERVICE.
Those who peddle this myth would have you believe that because Retailer X needed to hire a new employee, that somehow Retailer X has benefitted from the transaction. Nonsense! Aggregate this effect over the entire economy and what you get is not economic stimulus, but rather a cycle of diminishing returns.
I might add to this commentary that extending the jobless benefits has the effect of keeping the unemployment rate down, as it keeps a segment of the unemployed from looking for jobs. Through the magic of government statistics, people who are not looking for jobs are not counted amongst the unemployed, keeping the rate at a politically manageable 9% or so. Your government hard at work!