Let’s suppose that President B. decides to put the country on “war-footing”. He convinces Congress to borrow money to build an arsenal of rockets which are assembled and stored. The company that builds the rockets and its employees get paid. In turn, they take their wages and plow most of that money back into our economy through the purchase of various needed goods and services. (1) Note, however, that the rockets are stored and themselves, have zero impact on the economy. They have to be launched and expended which, of course, sets up the need to replenish their inventory.
Now, imagine that President O. takes borrowed money and uses it to re-structure and re-boot a failing car manufacturer. That company resumes production and one of their vehicles rolls off the assembly line. Now look at what happens: the car must be sold, gassed, lubricated and otherwise maintained so that the auto itself, unlike the rocket, is having a direct and broad impact on the economy in the forms of job creation, and the payment of wages that get plowed right back into the economy much like those who built the rockets.
Both of these scenarios create an opportunity for the operation of what has come to be known as the “multiplier effect”; defined as an effect on the economy in which an increase in spending produces an increase in national income and consumption GREATER than the initial sum spent. So, if $1 million was borrowed, both to build the rocket and help the car maker, each must generate more than that same amount through a combination of national income and consumption in order to qualify as a “multiplier” per the definition.
The use of President “B” and “O” was intentional; a way of contrasting the disparate impacts of borrowing by GW Bush to finance two wars, and Barack Obama to get GM and Chrysler headed back towards profitability. Conservatives widely decried the latter as a “bailout” and contrary to free market doctrine that allows for only the survival of the fittest. Yet, it takes little reflection to see that the borrowing to bolster the car companies has a much better chance of becoming a real multiplier as compared to borrowed spending to finance wars. It is not as though there is no “return on the dollar” for wars conducted on credit. It’s that the return is greater when the borrowing promotes the production of something that, in and of itself, generates even more economic activity in the forms of adding jobs and accelerating consumption.
1. Allowance must be made for some percentage of wages that are saved and/or invested. But, the fact remains that most take-home pay is spent on necessities.