Collective Conscious

New Fed research says yes, but:

[E]ven if the mul­ti­plier is high for small increases in gov­ern­ment spend­ing, it may decrease sub­stan­tially at higher spend­ing lev­els [because] dura­tion of the liq­uid­ity trap … depends on the size of the fis­cal stimulus.

Why? Small stim­u­lus is highly effec­tive because it does not crowd out pri­vate invest­ment by affect­ing inter­est rates. Suf­fi­ciently large stim­u­lus has impacts on the inter­est rate itself, so it ends the liq­uid­ity trap sooner than expected and there­fore removes the very mul­ti­plier effect that helped jus­tify it in the first place.

Note that this is not in any way, shape, or form an argu­ment against mas­sive stim­u­lus spend­ing. It only reem­pha­sizes the power of large fis­cal stim­u­lus in return­ing the econ­omy to the nor­mal state, whether or not the spend­ing is jus­ti­fied on a “mul­ti­plier” basis.

(Photo: emdot)