Stimulus Is Not the Solution to Greece's Economic Woes

August 22, 2013

Economists often confuse economic indicators with actual economic performance. In myriad news articles, white papers and academic studies, they advocate for ways to boost gross domestic product (GDP). Although GDP may be the best of limited measures in assessing total economic output, it is only a proxy, and proxies are imperfect. Therefore, when economists treat GDP as the be-all end-all metric to evaluate economic performance, they often propose ways to improve GDP figures, rather than the actual economy, says Matthew Melchiorre, the 2012-2013 Warren T. Brookes Journalism Fellow at the Competitive Enterprise Institute.

Recently, several economists at the Levy Institute at Bard College made this blunder in a new report recommending a "Marshall Plan"-type fiscal stimulus for Greece's moribund economy.

  • The report compares the recovery times (the time it takes for GDP and the unemployment rate to return to pre-crisis levels) of Greece today and the United States following the Great Depression.
  • The authors argue that fiscal stimulus in the 1930s accounted for the United States' faster recovery, relative to Greece today. Therefore, they argue, Greece should be implementing fiscal stimulus, not austerity.

But America in the 1930s and Greece today are not comparable.

  • An increase in government spending cannot account for an effect on private investment over four times its size.
  • Fiscal multipliers represent the dollar-for-dollar effect on the economy from one dollar of government spending.
  • Keynesian arguments for fiscal stimulus rely on a positive multiplier effect greater than 1.00, which means that every dollar of government spending yields more than a dollar in economic activity.

Most New Deal programs had a multiplier effect on the private sector that was either small or sometimes even negative; it is between 0.5 and 1.5. In other words, each dollar of government spending led to an increase in private spending of $1.50 at the high end and sometimes even a decrease, depending on the program.

Pumping money into the Greek economy may boost GDP and even spur hiring for a short time, but it will not lead to self-sustaining growth driven by private investment over the long run. Only fundamentally reforming the Greek economy can accomplish that.

Source: Matthew Melchiorre, "Praying for Growth at the GDP Altar," Competitive Enterprise Institute, August 12, 2013.

 

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