Business economist Justin Wolfers (who previously published an amazing refutation of the Easterlin Paradox) challenges the economist that Bernie Sanders (pictured above) cited recently. UMass professor Gerald Friedman published a paper recently that claimed that Sanders' economic plan will generate immense, sustained economic growth. I can't cite that article because the article says explicitly that it's a draft and forbids unauthorized citing. But I'll give a link to Wolfers' recent article, entitled "Uncovering the Bad Math (or Logic) of an Economic Analysis Embraced by Bernie Sanders," because that does cite the article to refute it (which is Fair Use).
Wolfers bases his article on another article written by Christina and David Romer of UC Berkeley. The whole center of contention is that Friedman assumes that government stimulus growth stays in subsequent years even after the government stops injecting money into the economy. In other words, to many economists, if you stop injecting fuel into the economy, the government-created growth will go away. Sanders' plan's growth potential gets drastically exaggerated because economist Gerald Friedman made a naive assumption.
Here's the key paragraph in Wolfers' article:
The multiplier is a number that quantifies how strongly government spending influences output. [Friedman] relies on the Congressional Budget Office for estimates of the multiplier, and shades them a little, which makes them appear conservative. The multiplier he uses is on average 0.89. In the Congressional Budget Office models that he’s drawing from, this means that if the government spends $100 more today, output will rise by $89 this year, but when that stimulus is withdrawn next year, output will then fall back to its earlier level.
Why don't we look at something even more fundamental than whether the "multiplier" stays in subsequent fiscal years. If the multiplier is really 0.89, that means $100 dollars of government stimulus loses $11 dollars every time ($89-$100)! I applaud the US CBO for being honest because similar institutions in non-Western countries would totally fudge it to make themselves look good. But why would we want more fiscal stimulus knowing the facts? It's a net loss. Can someone explain to me what I'm missing here?
If the Government (G) multiplier does not yield any long-term gain (besides short term dissuasion of doom to consumer spending, which may increase short term consumption and investment), AND it comes out a net loss that gets passed onto future taxpayers, why do we even think fiscal stimulus is a good idea? It still doesn't make sense...