Spending During a Recession Is an Even Better Idea Than We Thought

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.


Matt O’Brien points today to a new paper that tries to estimate the value of the fiscal multiplier during recessions. The multiplier is a number that tells us how effective government spending is. For example, if the government spends a dollar on donuts, and then the baker uses part of that dollar to buy sugar, and then the sugar distributor uses part of that to pay her truckers, then the original dollar of government spending might spur total spending of more than a dollar.

On the other hand, if government spending simply takes a dollar out of the pockets of taxpayers, the net effect might be zero. Total spending might not change at all.

The value of the multiplier during the Great Recession has been a subject of considerable dispute over the past few years, but a new trio of researchers has produced an estimate higher than most previous ones:

Riera-Crichton, Vegh, and Vuletin took this analysis a step further. They focused squarely on countries that, between 1986 and 2008, had both been in a recession and increased spending. This last point is critical. Stimulus, remember, is supposed to be countercyclical: the government spends more when the economy shrinks. But historically-speaking, countries have actually cut spending about half the time that they’ve been in a slump. So counting all that austerity as “stimulus,” as most do, gives us a misleadingly low estimate of the multiplier, something like 1.3. But it turns out, based on this new better sample, that the multiplier is really around 2.3 during a garden-variety recession, and 3.1 during a severe one.

Hmmm. I can’t say that I understand this. Every estimate of the fiscal multiplier I’ve seen acknowledges that it’s different during recessions. And why would previous research have included countries that cut spending during a recession? This is a bit of a mystery. Nonetheless, if this new paper really does do a better job of estimating the multiplier, then it makes a very strong case that stimulus spending during a recession—especially a severe one—is critical to recovery. America’s obsession with austerity starting in 2011 is probably a big reason our recovery was so weak, and cutting spending now, as the eurozone is doing even as its economy decays yet again, is the worst thing they could do.

More infrastructure spending, please. After all, why not do it now when it’s practically a free lunch?

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate