The predominant theory floating around the halls of policymakers (both state and federal) is that more government spending will result in a trickle-down effect that will trigger economic growth. The buzzword of the time is "multiplier," meaning that for every $1 spent by government, will result in about $1.50 of good to the economy. This is why you see efforts, again both on the state and national level, to increase government benefits in food stamps and unemployment insurance payouts. Those benefits are quickly passed on to others in the form of food purchases, rent payments, transportation costs, etc.

I've dealt with the fallacy of the "multiplier" effect in a previous post. But the government is back at it again, thinking that simply throwing more money around, even if to save pe! ople's homes from foreclosure, will "save" or increase the economy and economic growth.

This gives rise to the idea of "moral hazard." This is defined as a change in behavior that is detrimental to one of the parties that is in contractual agreement with another -- often as a result of the terms of the agreement itself. We saw this concern raised during the financial bail-out debate last year. Critics of the Troubled Asset Relief Program (TARP) worried that bailing out the losers of the sub-prime mortgage security strategies should not be rewarded using taxpayer dollars (AIG, Lehman Brothers, et. al.).

They also worried that bailing out the losers in the sub-prime arena might actually prompt further bad behavior by other players, knowing that there could be a system in place to bail out other insolvent banks as well if they failed. Proponents of TARP (including the previous administration) argued that the financial system itself was in p! eril and therefore the plan was worth the risk and just to! o important not to do. (where have we heard that before?)

Now that the American Recovery and Reinvestment Act has been signed, the administration is contemplating plans at helping those in trouble with paying their mortgages. Again, this sounds good on the surface, but the moral hazard concern is being raise yet again. (See today's Wall Street Journal)

Some frankly have had enough. Rick Santelli of the business cable news channel CNBC today shared some of his "concerns" in an enlightening video. Towards the end of the clip he makes a very salient point about higher government spending based upon the $1 = $1.50 multiplier effect,

So, I also throw out the question of, if the multiplier effect is so true, why isn't the government spending a lot more a lot faster? For every minute the government is not spending a trillion dollars, our economy is being held back. But as you can see in this chart , over the last three months that policymakers have been debating and passing the stimulus package, the market has not benefited (the dark line is the S&P, the lighter line the Dow Jones). Obviously, Wall Street hasn't put much hope on the stimulus bill actually stimulating anything.

Maybe we should file the "multiplier effect" under the "too good to be true" category and move on to embrace strategies that will actually grow the economy.