Commentary: Multiplying government spending doesn't add up
This article first appeared in the St. Louis Beacon, June 15, 2011 - Growing up in a small town in southeast Missouri, life often felt painfully slow. Amusement was limited to the bowling alley, the skating rink and four movie screens. At least twice a year, however, a carnival passed through town. I found the mixture of bright lights, rickety rides and sugary concoctions nearly intoxicating, but the games were my real vice.
The calls of carnival barkers played to my pride and greed. Toss a ring around a bottle and win a bunny? It looked so easy. No 9-year-old could resist. It took a few years and several dozen wasted dollars, but eventually I discovered that I'd been had. Time after time, I was suckered into throwing good money after bad. My naivete was regrettable, but to be expected from a child.
Less excusable are the actions of supposedly wise politicians who lay down billions in tax dollars in the vain hope of hitting it big with a stimulus or economic development bill. We are promised that a dollar in government spending will create more than a dollar in economic growth.
This idea, known as the fiscal multiplier, has never been borne out by evidence. When the actual results of government spending on the economy are examined, they show lackluster or even negative returns. However, that has not stopped proponents of greater government spending from using the multiplier to promote everything from the federal stimulus bill to state and local subsidies for warehouse construction around Lambert-St. Louis International Airport.
The multiplier is based largely on the work of economist John Maynard Keynes, who argued that higher government spending combats people's propensity to hoard money in a recession and puts unemployed people and resources to work. As the spending ripples across the economy, a dollar in government spending should cause substantially more than a dollar in economic activity.
The Barack Obama administration invoked multiplier theory to promote the $787 billion federal stimulus package. The president's economic advisers assumed every dollar spent by the stimulus would add $1.50 to gross domestic product. In a March 2 column for the New York Times Economix blog, University of Chicago economist Casey Mulligan showed that stimulus spending did not boost GDP and may have caused it to shrink.
Nor has stimulus spending delivered the bounty of jobs that its supporters promised. Obama claimed that the stimulus would prevent unemployment from exceeding 8 percent, yet it hit 10 percent and now remains stubbornly stuck at 9 percent.
Others have taken this idea a step further, claiming a still bigger multiplier effect for specific projects -- thinking, just as I did in my youth, that it must be easy to toss the ring around the bottle.
When final plans for Ballpark Village were announced in 2006, the St. Louis Regional Chamber and Growth Association estimated that Phase I of the project would cost $387 million, but generate $273 million annually -- paying for itself in a year and a half. Of course, this assumed that everything would go as planned.
Almost five years later, construction has not started and the investment has been downgraded to $155 million, with at least $57 million of that coming from various levels of government. Furthermore, Ballpark Village is primarily shuffling existing businesses around instead of attracting or creating new ones. Stifel Financial Corp., the village's largest future tenant, will move all of seven blocks.
Despite these failures, politicians of every stripe recently trotted out the multiplier to support subsidies for warehouses around Lambert, through "Aerotropolis" legislation. Although the precise equation behind it remains shrouded in oracular mystery, an RCGA study predicts that $300 million in public funding will lead to almost $34 billion in private economic activity over 20 years, suggesting a truly absurd return of more than 10,000 percent. Here, the Keynesian multiplier has itself been multiplied by the central planner's conceit of being able to pick winners successfully -- truly a sucker's game.
The government cannot create resources from thin air. It must take them from taxpayers through taxation or borrowing. Resources used by the government therefore cannot be used by the private sector. Increasing government spending does not in itself increase the country's capacity to produce -- it just shifts existing production away from goods and services that consumers demand, and toward those demanded by politicians.
The multiplier is a lie, but an attractive one, luring the listener like the familiar siren song of my youth: "Ring the bell, win a prize!"
John Payne is a research assistant with the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.