Cowen on the Multiplier: Is it Really "Worth"?
By David Henderson
Tyler Cowen recently wrote:
So, in these cases [a government giving aid to to another government], a multiplier of one means that a dollar of aid–the alternative to the fiscal consolidation–is worth a dollar. I find that easy to believe. It’s not really a claim about fiscal policy or Keynesian economics.
It is a claim about economics. And it’s a mistaken claim. “Worth” has to do with, well, what something is worth. Worth has to do with value, something economists have thought long and hard about. If a government gives another government a dollar and that dollar is totally wasted, that is, spent on something worth zero, then the value, which means the worth, of that dollar is zero, not one dollar.
I’m not claiming that all government expenditures are wasted in that extreme sense. What we do know, though, is that there is no market test and so the odds that the expenditure will be wasted are quite high. Also, economists in the economic development literature, starting, I believe, with the late Peter Bauer, have found that government to government aid is the least efficient form of aid.
Treating a dollar of expenditure by government as being worth a dollar, regardless of context, is an instance of what I call “GDP Fetishism.”