Ratio of change in national income arising from a change in government spending
This article is about the effect of spending on national income. For the multiplier effect in banking, see Fractional-reserve banking.
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In economics, the fiscal multiplier (not to be confused with the money multiplier) is the ratio of change in national income arising from a change in government spending. More generally, the exogenous spending multiplier is the ratio of change in national income arising from any autonomous change in spending (including private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports). When this multiplier exceeds one, the enhanced effect on national income may be called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.
The existence of a multiplier effect was initially proposed by Keynes' student Richard Kahn in 1930 and published in 1931.[1] Some other schools of economic thought reject or downplay the importance of multiplier effects, particularly in terms of the long run. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.
In certain cases multiplier values less than one have been empirically measured (an example is sports stadiums), suggesting that certain types of government spending crowd out private investment or consumer spending that would have otherwise taken place. This crowding out can occur because the initial increase in spending may cause an increase in interest rates or in the price level.[2] In 2009, The Economist magazine noted "economists are in fact deeply divided about how well, or indeed whether, such stimulus works",[3] partly because of a lack of empirical data from non-military based stimulus. New evidence came from the American Recovery and Reinvestment Act of 2009, whose benefits were projected based on fiscal multipliers and which was in fact followed—from 2010 to 2012—by a slowing of job loss and job growth in the private sector.[4]
^Snowdon, Brian; Vane, Howard R. (2005). Modern macroeconomics: its origins, development and current state. Edward Elgar. p. 61. ISBN 978-1-84542-208-0.
^Coates, Dennis; Humphreys, Brad R. (October 27, 2004). "Caught Stealing: Debunking the Economic Case for D.C. Baseball". Cato Institute Briefing Papers (89). Cato Institute. Retrieved 2011-10-10.
^"Much ado about multipliers". The Economist. Sep 24, 2009. Retrieved 18 October 2011.
^"A Labor Force Built to Last". United States Department of Labor. Archived from the original on 27 April 2012. Retrieved 21 February 2012.
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