Valerie Ramey on Stimulus and Multipliers

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🗓️ 24 October 2011

⏱️ 62 minutes

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Summary

Valerie Ramey of the University of California, San Diego talks with EconTalk host Russ Roberts about the effect of government spending on output and employment. Ramey's own work exploits the exogenous nature of wartime spending. She finds a multiplier between .8 and 1.2. (A multiplier of 1 means that GDP goes up by the amount of spending--there is neither stimulus nor crowding out.) She also discusses a survey looking at a wide range of estimates by others and finds that the estimates range from .5 to 2.0. Along the way, she discusses the effects of taxes as well. The conversation concludes with a discussion of the imprecision of multiplier estimates and the contributions of recent Nobel Laureates Thomas Sargent and Christopher Sims.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty.
0:12.6	I'm your host Russ Roberts of George Mason University and Stanford University's Hoover Institution.
0:18.5	Our website is EconTalk.org, where you can subscribe, find other episodes, comment on this podcast, and find links and other information related to today's conversation.
0:29.7	Our email address is mail at econtalk.org. We'd love to hear from you.
0:38.6	Today is October 11, 2011, and my guest is Valerie Ramey, Professor of Economics at the University of California, San Diego.
0:47.6	Valerie, welcome to Econ Talk.
0:49.3	Thank you for having me.
0:51.0	Our topic for today is the effect of government spending on output and employment,
0:55.5	the effectiveness of what has come to be called stimulus. You've done a lot of important work
1:00.0	in this area, including a very thorough and useful survey of past work done by yourself and
1:05.5	many, many others, and you lay out the range of effects that people have found. We'll put a link up to that paper as well as to your other work on the impact of spending and military spending in particular on the economy.
1:18.6	Let's start by talking in a very general terms about a term that I think people hear all the time, certainly in the economics literature, but it even comes into the everyday language
1:28.6	of the press occasionally, which is the multiplier. What do people mean by the multiplier when they
1:35.7	use that term? And what are the relevant magnitudes that interest us in policy?
1:42.9	Well, the multiplier is a concept that comes from the good, old-fashioned,
1:48.0	traditional Keynesian model that many people may have seen in their first course in macroeconomics.
1:54.2	And it's simply asking the following,
1:56.6	if the government increases its spending by $1,
2:05.5	how much will overall GDP or output increase?
2:13.3	So a multiplier of one means that if the government increases its spending by $1, GDP will increase by $1.
2:21.3	If we have a multiplier of $1.5, it that an increase in government spending of $1.50 or of $1 will increase GDP by $1.50.
2:26.0	Which is glorious.
	...

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