An temporarily absent-minded Thomas wrote:
For the specifics, you can search the Web for "LS-IM model".
Typo on my part: I meant the IS-LM model, of course.
I should also comment on georgeob1's point about economists dismissing the Keynesian multiplier on government spending. (I meant to, but my last post was too long already.) Even Keynesian economists would agree with George if---repeat if---the economy operated workably close to full employment. The American economy has been operating in this condition for maybe 75 of the last 100 years. In those normal times, expanded government spending crowds out business investment or consumer spending, leaving no net effect stimulating the economy.
But after the financial crisis of 2008, the state of the American economy has fallen into the high-unemployment regime that characterizes those other 25 percent of times. That's where Keynesians and non-Keynesians differ on the size of the fiscal multiplier. Conservative economists, usually on the basis of some rational-expectations model, think that nothing changes, because they believe recessions are the economy's rational response to something real. Keynesians, by contrast, think that recessions represent a particular kind of market failure. They predict that government spending will not
crowd out private spending. Instead it will mostly re-mobilize idle resources such as unemployed workers, empty houses, and shut-down factories.
Fortunately, we needn't go into the conflicting theories behind the disagreement, because the past four years have given us empirical data on the actual size of the multiplier. The International Monetary Fund, hardly a gang of pinko iconoclasts, discussed the question in detail in its World Economic Outlook
. It found that fiscal multipliers were much higher than estimated based on previous data, and that Wetern-hemisphere governments do grow the economy by more than the amount of their spending.
Summing up, the Keynesian multiplier is small in normal times. But we're not living in normal times right now. We are living in times of prolonged involuntary unemployment, times where zero percent interest isn't enough to recover employment. And these are exactly the times where Keynesian multipliers matter a lot.