Give me an S! Give me an M! Give me two O's . . . !!!
Dani Rodrik writes:
Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
Prompting Tyler Cowen to add:
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
If I read him correctly, Dani Rodrik is suggesting that Smoot-Hawley made the New Deal more effective. But of course, Smoot-Hawley was part of an ongoing round of trade contraction to which it both responded and contributed. If we tried the same trick again, we'd destroy the WTO, which would make global GDP shrink, not grow.
That it is stupid, does not mean that the government will not do it. But if Obama's team wants to raise tariffs in the name of enhancing the effectiveness of their stimulus package, I doubt they're going to be dissuaded by the possibility of possibly cutting an expensive side deal with every country in the developing world in order to get them to go along. Even if this were economically correct, it's politically tin-eared.