Why Government Spending Multipliers Are Smaller Than You Think

Economist John Cochrane argues that fiscal stimulus has a lower multiplier than most policymakers assume. This episode drills into one overlooked mechanism: when the government borrows to spend, it crowds out private investment by raising interest rates. We walk through a concrete example from the 2009 Recovery Act and explain why the CBO's multiplier range of 0.5 to 2.5 is so wide. Lucas shares a paper by Valerie Ramey showing that defense spending multipliers are consistently below one. Luna pushes back with evidence from state-level studies where multipliers hit 1.5 during recessions. They reconcile the two views by looking at monetary policy response: when the Fed holds rates near zero, crowding out is weaker. The episode closes with a question about how fiscal rules like balanced-budget amendments change the game. No hot takes, just a clear walk through the mechanism that divides economists. #FiscalPolicy #GovernmentSpending #MultiplierEffect #CrowdingOut #JohnCochrane #ValerieRamey #RecoveryAct #CBO #StimulusDebate #InterestRates #MonetaryPolicy #Recession #DefenseSpending #Econometrics #PublicFinance #FexingoBusiness #EconomicsPodcast #BusinessPodcast Keep every episode free: buymeacoffee.com/fexingo