The Downward Economic Multiplier

Hello,

With the just released national unemployment figure of 10.2% for the month of October, 2009, it would be wise to look at the Obama’s administration basic philosophy to drive down unemployment and get the economy moving.

Their basic assumption is that for every $1.00 they spend on domestic spending will add $1.50 to the GDP.  In other words a 1.5 multiplier.  Post World War II experience teaches a different story.  Research into the effects of government spending shows the the best multiplier in the post WWII period was  .80.   Anything less than a 1.0 will lead to negative effects on economic and employment growth.

The more the government borrows to finance their wasteful spending, the more liquidity and capital they suck out of the private economy.  Government spending is alway less efficient than the spending by the private sector.  Therefore, the multiplier will always be less than 1.0.

The important point is–YOU CAN NOT SPEND YOUR WAY TO PROSPERITY. 

Be Solvent and Prosperous,

Sanford Kahn,  Business Author/Speaker