If you give somebody with a high consummate some extra money, most likely it will be spent. Having this spent for e.g. groceries this will make sales man, farmer, ... employed so they pay taxes are buy groceries for their own. How huge is the multiplicator on this for modern services oriented societies?

  • $\begingroup$ Note that irrespective of what the multiplier is, the answer still depends on whom you give an additional unit of income. Since social welfare functions are usually concave in the income of each individual, the net effect on social welfare depends on whom you give the money, what this person buys, what the income of each seller is and what these persons buy and so on.... $\endgroup$ – HRSE Feb 19 '16 at 12:37

Keynesianism (what you're apparently basing this on) is incoherent and relies on arbitrary eigenvalues such as "autonomous consumption". In real life the multiplier is small and inconsequential.

However, the multiplier may appear close to one or slightly above simply because GDP increases the instant the government approves spending in public-subsidised enterprises, due to the way GDP is defined. For example, let's say the government spends $1 to subsidize Fannie Mae and this is counted as a consumption item (for whatever reason). GDP immediately increases by a dollar. Now Fannie Mae spends this on some irrelevant bureaucratic expense (buying mortgage derivatives, legal fees, financial services etc). GDP increases by a dollar again. So we just achieved a multiplier of two while having absolutely no effect on the real world.

As you can see, measured GDP is subject to all sorts of random problems that make any attempt to calculate the multiplier pointless.

Furthermore, strictly speaking, the "multiplier" is only technically supposed to apply to government consumption, and not transfers as you are asking about.

  • $\begingroup$ Not talking about enterprises. Talking about health care, food etc. for "the poor". $\endgroup$ – frlan Feb 19 '16 at 7:09
  • $\begingroup$ That still doesn't work, for the reasons in the first paragraph. $\endgroup$ – D J Sims Feb 19 '16 at 8:45
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    $\begingroup$ this text is too opinionated to be a good answer. for example, new keynesian models are very commonly used in monetary policy where they are not coined "illogical". in the financial crisis multiplier arguments were used by a large number of economists to give policy recommendations. to make this a proper answer you should cite research papers which backup your estimate of the multiplier. $\endgroup$ – HRSE Feb 19 '16 at 12:32
  • $\begingroup$ It's not opinion, its all logic. The fact that central banks use Keynesian models to fail at preventing recessions doesn't make them valid. $\endgroup$ – D J Sims Feb 19 '16 at 19:28

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