The Empirical Evidence for the Keynesian Multiplier (Updated)

In an op-ed in the Wall Street Journal Robert Barro and Charles Redlick review a subject near and dear to my heart, the empirical evidence for a Keynesian multiplier greater than one:

For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

The theory would have dictated a significantly larger increase. However, advocates for fiscal stimulus as a spur to economic growth can take heart:

Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.

In other words as the unemployment rate rises over 12% the multiplier will, indeed, exceed 1.0. The economic policies presently in place may well see to it that happens since they’re creating less economic growth than would otherwise have taken place. That’s what it means when the multiplier is below 1.0.

More evidence:

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

However beautiful the theory or splendid for your policy preferences it may be what really matters are the actual empirical results. The actual empirical evidence that deficit spending increases GDP more than it reduces it is slim to nonexistent.


James Joyner takes note of the same op-ed and conjoins it with a graph illustrating what most people think that the government’s interventions have accomplished. Mostly helping bankers and Wall Street investment companies. That may be because the government’s interventions since September of last year have mostly helped the big banks and the remaining Wall Street investment companies. Funny, that.

Update 2

Another take from Mario Rizzo:

At the outset of the Obama Administration, as Greg Mankiw reminds us, their economists laid out a series of predictions about where the unemployment rate would be with the stimulus package and without it. Currently, the economy is doing worse than their predictions of unemployment without the stimulus and, of course, much worse than the predictions with stimulus.


The stimulus apologists are ignoring the original prediction based on a model. By that prediction the stimulus is doing harm.

But it’s completely consistent with previous experience as the op-ed cited above demonstrates.

Update 3

John Carney retorts “but this is different!”:

According to Krugman’s view, our economic growth is stagnating because the global demand for savings has increased too rapidly. The supply of savings–the preference for holding money and its equivalents over investing and spending it–has grown to a level that the economy is under-performing, unable to operate near its existing capacity.

Krugman’s term for this is “a liquidity trap.” Under these circumstances, Krugman argues, even somewhat ineffecient government spending can increase the real GDP because it is actually bringing about new spending and investment rather than just crowding out private sector investment. So you get a benefit–even if there is no multiplier effect.

We’re instinctively skeptical about government spending problems, largely for a host of issues that have little to do with macroeconomics and more to do with political science. Government spending tends to b ewasteful because governmental authorities are captured by special interests and irredeemably ignorant about the unintended consequences of their programs. It almost certainly involves malinvestment in economically unsuitable projects, and can drive further malinvestment by “crowding in” private investment chasing government subsidies.

But Barro and Redlick’s analysis falls short of addressing one of the core arguments for fiscal stimulus, which means the title of their essay–“Fiscal Spending Doesn’t Work”–should at least be amended to read “except maybe in special circumstances such as the ones we face right now.”

This is burden-shifting. It’s not up to Barro and Redlick to provide evidence that the present situation is not different, it’s up to the proponents of fiscal stimulus via deficit spending to demonstrate that it can be effective using evidence of their own, not relying solely on theory. Theory can be wrong. It must be derived from evidence not the other way around.

8 comments… add one
  • Drew Link

    And of course the stimulus is temporary. Once you’ve dug and refilled thw hole a couple times you are left with no GDP, and more debt.

    Given that Christina Roemer is the author of the best work on the tax multiplier – if I recall corrrectly, putting it at 2.5 to 3 – one has to wonder why the current administartion chose spending as the fiscal stimulus of choice.

    It just might make you believe that those who claim that government control, political payoff and vote buying are the motivating factors shouldn’t be dismissed, as they are, out of hand.

  • Thank you for quoting and linking me above. May I suggest that your readers look at my new piece regarding the Barro article?

  • Hey Mario, do see the work of Dierdre McClosky, Arjo Klamer and others behind that post? You’re right, having a “good story”–i.e. a sound theory–behind the numbers is key. Without that, its an interesting result, but needs more work.

  • Brett Link

    Keep in mind that Barro and ilk aren’t just claiming that deficit spending is weak in terms of stimulus – they’re claiming that tax cuts are stronger in terms of stimulus. The burden of proof is on them for the latter claim, and its strength vis a vis deficit spending.

  • Lulu Wang Link

    While I have little to say about the relative effect of taxes v. spending, I just have two reminders:

    1) Sometimes, government spending is legitimately needed. Most microeconomists (liberal and conservative) would believe in the presence of an externality (e.g. pollution, noise, long term gains), the government should tax/subsidize accordingly for the good of society

    2) Yes, if the tax multiplier is higher then tax>spending. However, research shows it’s probably not as good as 2.5 or 3 (

    3) Even if, just make sure to recognize that the cost of a stimulus is still less than the total amount of the stimulus, because even a multiplier of less than one means gdp is still increased (, expanding the tax base and tax revenues, so it’s not a strict decrease in GDP.

  • Thanks for commenting, Lulu.

    1) Of course some government spending is legitimately needed. If you look at my various posts around here, you’ll see that I’m no minarchist. And the examples you give are good ones.

    2) More recent empirical research (which I’ve linked to around here at one time or another) suggests a multiplier significantly lower (roughly one-sixth) the size that’s been suggested previously.

    3) As I use the terms a multiplier of .8 (for example) results in 80 cents of growth for each dollar of spending. Whether that’s justified or not depends on the circumstances at the time, how far into the future the cost has been shifted, and how much interest you end up paying on the borrowed money.

  • Newlin Rankin Link

    Additional spending flows through the hands of government workers who are not compensated to be efficient or profitable. The result is misappropriated capital, resulting in a Keynesian multiplier that is always < 1.0. And after the fact, the populace has to "repay" the goverment actions through taxes paid for interest payments on the additional debt. The government can also inflate their problems away, reducing the purchasing power of bond holders while additionally taxing the so-called income "profits" on those very bonds.

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