What Multiplier Effect?

Robert Barro and Charles Redlick say that the Keynesians have it all wrong. Fiscal stimulus does not work; even in times of crisis, an increase in government spending does not increase GDP by the same amount. In fact, the authors say, there is evidence that tax cuts often work better than fiscal stimulus.

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.