This is the Cato Daily Podcast for Thursday, January 29th, 2009.

I'm Caleb Brown.

Economists use multipliers to estimate the impact of various policies on economies.

In the debate over public work spending versus tax cuts,

the multiplier idea may be one that is ill understood and abused.

Cato Institute adjunct scholar Arnold Klein comments.

Let me talk about the concept of a multiplier effect

because the intuition of that makes sense, although it gets deceptive.

A multiplier effect simply means that if I give you a job and I pay you and you were previously unemployed, well now you have money to spend and then you spend that money and that maybe increases demand somewhere else and someone else gets a job and so on and so the economic activity multiplies on itself.

That's the ordinary intuition and in an economy that's in a recession or deep depression that intuition makes a lot of sense.

But realize that there has to be a limit to that.

We can't, you know, you can't go beyond full employment.

So we know that that process is not unlimited.

And so often in policy discussions, they'll talk about the multiplier.

For example, Christina Romer and Jared Bernstein said, we assume that the multiplier is 1.57 for government spending.

And immediately you know that's wrong because it can't be a constant because if the government spent $ hundred trillion dollars that wouldn't create

an all of a sudden create an economy of 157 trillion dollars.

I mean, it would be wonderful if it did,

but we know that it can't.

In fact, if the government were to spend

100 trillion dollars, given that our GDP is one-fifth of that, that would be a Zimbabwe strategy.

It would be hyper-inflation.

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