The Balanced-Budget Multiplier
By David Henderson
In the “Letters” section of the Wall Street Journal today, Ball State University economics professor T. Norman Van Cott, in praising a recent WSJ critique of Keynesian economics by Allan H. Meltzer, adds to the critique, writing:
Particularly egregious is something labeled “the balanced budget multiplier.” To wit, an equal increase in government expenditures and taxes leads to an increase in national output equal to the additional government expenditures and taxes. Mr. Samuelson, et al., gives the notion a scientific aura by packaging it in equations and graphs.
Economic surrealism? You bet. Note that national output and taxes rising by the same amount means producers’ after-tax incomes are unchanged. How or why would producers produce more for no increase in after-tax income? Hint: They won’t. Never mind the smoke screen of graphs and equations.
I had never heard Van Cott’s particular criticism of the balanced-budget multiplier. It got me thinking and I’m genuinely not sure.
So my question for Keynesians and non-Keynesians alike. Is Professor Van Cott’s criticism correct? As co-blogger Bryan would say, please show your work.