I found this article to be interesting. Some highlights:

Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called “multiplier” effect of government spending on economic output is greater than one — Team Obama is reportedly using a number around 1.5…

The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services…

What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system…

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP — consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one…

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier…

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero…

More… (source)

In short, it seems to me that the maximum amount of increase you could hope for from government spending is an increase consistent with the unemployment rate (unless you want to force all homemakers into the workforce – but that would not sufficiently recognize the extremely valuable work that homemakers do).

At some point, the government cannot do any more in its monetary policy to help the economy. There is a limited amount of productivity increase that can be stimulated by government spending (via the Keynesian model). If the government spends much more than can be generated via it’s economic stimulation there will be a cost in the future that may be difficult to pay up in the end. This is not to say that government spending is not at all useful in aiding an economic recovery – it is – but it must be spent wisely with an aim to promote growth and productivity and not push the government into a debt load that cannot itself be recovered from by assuming that the stimulus can do too much.

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