So the GDP is "the market value of all the final goods and services newly produced on domestic soil during a given time period".

So if i buy from you a service and i pay you with a dollar, then that dollar gets accounted in the GDP. (BTW this would be accounted under "consumption" (C). If you sell the same service to a business it's called investment (I), if you sell it to the government is called government expense (G), and finally if you sell it overseas it's called net export (NX)).

If i give the same dollar to you as a gift then no, it's not part of the GDP. If i decide that digging hole is a service and you dig a hole for me and i pay you a dollar it does go in the GDP. And this is true whether i am the government, a business, a consumer, or a foreign entity.

So if I am the government and you dig a hole for me and i pay you then it goes into the GDP directly. When you spend part of that dollar on other things that part goes in the GDP as well. So the multiplier of digging holes cannot be less than one (if i am doing the math right, in this simple model is 1/(1-Cy) with Cy = dC/dY between 0 and 1).

If I the government give you money for free then it's called a tax rebate, you will spend part of that dollar, and (only) that part goes in the GDP.

So in that simple aggregate model the multiplier is Cy/(1-Cy), which is less then one if Cy is less than 0.5, basically depending if on average people spend that dollar right away or not.

Now, here is the important point, if you are not rich and are "budget constrained", chances are that you WILL spend almost the whole dollar right away on a car, a beer, or whatever is of value to you. So if i give 10$ to the poorest half of the population and they spend them right away on whatever is of value to them, then essentially those 10$ go directly in the GDP and if you consider that the liquor stores and car shops in turn spend part of that money then the multiplier is probably still greater than one.

Actually this has been a good exercise for me to think about this concepts in order to explain them. Thanks :)

Sorry for the late answer i had no time to pee in the last couple of days :)

You have to compare how much the government spent with how much the economy grew

Yes it is the G/GDP ratio, that is important, of course, and in fact that picture shows exactly the G/GDP ratio, and over the following few years the GDP increased largely beacuse of government demand, so ... I don't get what you are trying to say here.

Basic Macroeconomics theory is often wrong

Well you have to start from somewhere. Of course every theory gets refined to hopefully represent reality better. Besides saying that something is wrong without providing evidence that a refined model can do better is not really a constructive approach.
OTOH this is Slashdot so we can all get some slack here :)

But, are you saying that advanced macro says the opposite of basic macro ? I really don't think that's the case.

Your point #4 is called "crowding out" and it is considered in the ISLM model. It does decrease the effectiveness of the multiplier, but it's still greater than one. Also crowding cannot occur if there is a consistent excess of savings over investments as in this recession.

Taken to the extreme, if the government hires everyone to dig holes, nothing of value will be produced by anyone.

Yes but it won't hurt anyone either. In other words, in this simple model in which people don't need to eat or consume, G (government expenditure) = Y (GDP) = T (taxes) and the multiplier is exactly one, as a raise in G is equal to a raise in GDP. All income gets spent in taxes, and there is no real economy. There is a demand for holes, from "we the holediggers", which is met with a supply of holes, and holes would be all that is valued and produced in this kind of civilization.

As soon you get consumption into the equation, with the very reasonable and empirically proved assumption that C(Y) has positive slope (people consume more when they have more money to spend), then GDP = Y = G + C(Y-T) its easy to see that the multiplier is greater than one (solve for Y and get the derivative wrt G). Once you pull in also investments, savings and the LM equation you can see that the multiplier decreases, (in normal situations) because of crowding out, as you mentioned. If you allow for the government to run deficit so taxes can be deferred in the future, and account for inflation then the multiplier actually goes up again.

People trying to actually calculate the multiplier from data seemed to get a value of 1.3 or 1.37, i don't remember now, but i can look for the papers.

Anyway the bottom line is that if you hire unemployed people to do actually something more valuable than holes, and use money that are invested in low yield long term bonds (== sitting idle for all practical purposes), or even better not invested or spent at all, and allow for taxes to be paid later, maybe over 30 years, then common sense says that a lot of value is produced at a very small cost and the multiplier should be much greater than one.

I have no idea about the carter stimulus.

Basic Macroeconomics theory says that any spending in which the state intervenes on the market by hiring people to do some job has multiplier greater than one. of course how much greater depends on the job and the situation.

If you google around, actually see for example this:
http://www.wellesley.edu/Economics/weerapana/econ202/econ202pdf/lecture%20202-16.pdf
in page 2 the multiplier is greater than one because b is positive.

See also the equations in here, http://en.wikipedia.org/wiki/Fiscal_multiplier

This very basic models might be, and actually are, oversimplified, but during the crisis made correct prediction, e.g. about the rate while many other models had nothing to say or made completely wrong predictions.

By the way, see the bump in here: http://en.wikipedia.org/wiki/File:US_Federal_Debt.png
that was the spending for WW2, arguably while those were money spent to DESTROY things, it served to reboot the whole US industry, getting the US (and the whole world including especially europe) out of a depression/stagnation and arguably into 20 a path of 20 years of solid growth. I'd argue the multiplier was greater than 1 :)

I am not an economist but i have been studying economics (mostly basic Macro) during the last few years. Having a simple mathematical model such as IS-LM makes it a little easier to think clearly about this stuff.

I am not sure about the effect that you would expect from tax breaks, but consider that tax breaks are not exactly the same as "just paying people", because a lot of tax breaks go to people who don't really need to spend money right away (like for example the unemployed) and therefore get saved, so they don't contribute to increase demand. This was especially true in the Bush years.

Also consider that the Obama stimulus and federal tax breaks were (and still are) offset by a lot of cuts and layoffs at the state level. Still, things are very slowly getting better, so perhaps the worst part is over assuming Europe doesn't break down.

we could easily accomplish the same goal now simply destroying the infrastructure ourselves, and rebuilding it.

or by simply rebuild it. We in fact could, but as i said we have lost the political will to start these big scale projects.

we could just hire people to dig holes and fill them up

or simply pay people to do nothing at all. To be clear, that would be among the worst possible investments, but as long as people will readily spend those money that would create demand for products, and therefore business investments and everything else. In this economy, i maintain the overall effect would still be slightly positive. Of course there will also be a raise in inflation down the line, but we will be slightly better off by then, if anything because inflation will help with the debt (which will matter less).

Note that this would be actually bad for the people and institutions who own that debt, which they call in fact credit, because their assets would be devalued. Which in fact is the very reason why we are not politically capable of doing anything like that, while at the same time the government did not blink twice before handing over a trillion dollars to save the banks a couple of years ago.

Also note, the money base has nearly triplicated in these couple of years, (quantitative easing, stimulus package and so on). A lot of that money is in fact sitting idle in banks, or invested back in treasures, but it is NOT circulating, at least in the US, because business are not willing to borrow those money to expand their capability when they in fact face a shrinking demand for their products.

No the point is that that T$ would NOT get spent any other way but sit idle in banks (well, more or less) until we decide to start another war. OF COURSE it would be much better for the economy to have a 1T$ investment on, say, technology, without having to sustain the damage in the first place. But apparently we have lost the political capability of doing that after we landed on the moon.

I was half-joking in the original post, but if you think about it, either way you put it it would be a tremendous immediate loss of value, but it would then put everybody to work and cause some redistribution from people who have lost value to people that work for a living. And we will end up with a much better infrastructure at the end.

Actually a 1T$ investment to rebuild all the electrical infrastructure would be just great both for the infrastructure AND for the economy.

If that's what she said, it's tragic other than funny. This administration of sad clowns, old thieves, and incompetent assholes (except perhaps the finance minister) has to go. The sooner the better. And i say it as an Italian who lives in LA but goes back yearly and still loves his country.

You need to learn MATLAB early on, since MATLAB and Simulink are the tools that the automotive industry uses the most for engine modeling and control, and to generate the low-level code that ends up in the ECUs.

It's great that something can be disproved in physics these days, it means that physics it's still alive as a science. I hope it's true.

http://youtu.be/A3oIiH7BLmg

While the Chinese government IS corrupt and totalitarian, (and you might call it oligarghy), i would still classify it as a government that has big power, not as a corporation. They have 50 years economic deployment plans (no corporation usually bothers to do long-term thinking), and they seem (to me at least) to care about the well being and instruction of the people or things like growth and redistribution of resources, if anything for self preservation. E.g. they also do stuff like funding universities left and right, worrying about basic research and the like.

Heck, they actually own several corporation. The difference between to own and being owned is whether decisions are dictated by short term profits or not, and for now it definitely seems not. Actually i think the staggering success of the Chinese economics politics in the last decades is that they have made use of free market rules (capitalism, if you like that definition) BUT the government has serious power to dictate the rules and distribute the resources at will. Whether it will stay like that or even Chinese government will eventually be owned by corporations it's early to say.

The fact that human rights for common people in china are not existent or not enforced does not seem to play a big part one way of another. In fact while you can make the case that human rights are sometimes a limit to corporate behavior in the US, (but that is a very optimistic view IMO), you can also make the case that corporations in the US are treated as people, so they can also use "people" rules to have it their way, in addition to paying lobbyists to create the rules they want.