Government’s marginal propensity to spend

Prof. Caplan makes an excellent point about standard spending multipliers:

It takes time and effort to figure out how to spend new money, you often need the approval of multiple levels of supervision to get started, etc. The standard Keynesian analysis essentially compares a conditional effect of government spending to an unconditional effect of tax cuts.

BTW, I checked with some finance people I know. It takes a long time to find good investments and to allocate a few billion dollars in funds. For example, a friend of my brother’s works in a successful PE firm with 20-25 fund managers. The firm runs a few billion dollar fund. My brother’s friend says it would take five years for his firm to invest $3B.

Assuming linear production functions, we’d need 50,000 fund managers to invest the $750B in time for it to matter. Investment production functions aren’t linear.

2 thoughts on “Government’s marginal propensity to spend”

  1. That’s assuming that you want ROI, if you don’t care where it goes you can spend (“invest”) preeety fast…
    Reading what Krugman has to say, it seems this option is not far from their minds..

  2. Yeah, returns aren’t the metric they’re optimizing over, but something must be.

    Here’s another bit of empirical Hayek: it took over 2 months for the banks to burn through half of TARP. All they had to do was change numbers in balance sheets.

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