Which Sign is the Multiplier?

Bloomberg writes,

More than $1.6 trillion has been erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse.

Let us say that 50 percent of the loss in wealth reflects the market's reaction to the stimulus plan.  That would be $800 billion.  A standard assumption is that the marginal propensity to consume out of wealth is 5 percent.  That would mean $40 billion less in spending.  Then there is the effect on investment of the drop in Tobin's q (the ratio of the market value of capital, reflected in stock prices, to the cost of capital goods).  These effects kick in immediately, while much of the stimulus will not kick in until next year.  So is the multiplier for the stimulus positive or negative? 

Presented by

Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.

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