The four effects of fiscal policy

Arnold Kling at the Atlantic business blog looks at the four effects of fiscal stimulus that some economists are debating. The first is the traditional Keynesian multiplier, the idea that additional government spending creates income, inducing the private sector to also spend more. The second is an offsetting effect he calls the household effect. When people are unemployed, they often use their time in some productive way or as leisure, which can also have value. So the additional output comes at some cost in lost household production or leisure. The third he calls the Galbraith effect. How much is extra government spending worth compared to extra private spending? Galbraith thought that extra government spending was vastly more valuable than extra private spending, so he advocated a shift of resources from the private to the public sector. Conservatives usually think that extra government spending is less valuable than extra private spending. The fourth and final effect is the Feldstein effect, and is the distortionary effect of the taxes that will eventually be required to pay for the spending or to finance the deficit.

It is an interesting way to look at the problem because, like cost-benefit analysis, it makes clear what people's assumptions are.