Adam Smith Institute - Latest Comments in Sorry, but the fiscal multiplier doesn't multiply

Re: Sorry, but the fiscal multiplier doesn't multiply

Felix Hemsted — Mon, 02 May 2011 17:35:39 -0000

May I point out - according to the European Central Bank Working paper no.849, all real terms increases in government spending result in a decrease in long-run GDP, by approximatley a 0.1% contraction in real GDP for every 1% expansion in real expenditure.

Re: Sorry, but the fiscal multiplier doesn't multiply

Guest — Mon, 21 Mar 2011 06:56:51 -0000

Hmmm. Interesting how Keynesian stimulus almost certainly saved the world from another Great Depression, yet the Free Marketeers are still ranting about it.

Re: Sorry, but the fiscal multiplier doesn't multiply

Charles Barry — Mon, 21 Mar 2011 05:53:17 -0000

As the paper itself says (in an unanticipated slap in the face to the ASI):

All in all, our findings suggest that drawing sweeping generalisations on the size of the fiscal multipliers is probably an exercise in futility.

Emerging countries, particularly large economies with some degree of 'fear of floating', would be well served if they stopped pursuing procyclical fiscal policies.

Re: Sorry, but the fiscal multiplier doesn't multiply

Charles Barry — Mon, 21 Mar 2011 05:50:07 -0000

While I'm not familiar with the details of this particular technique, if it's anything like Grainger Causality methods, that's still not causation proper.

And it's not necessarily useful for concluding any substantive policy implications.

As for "theoretical denial" of "dangerously simplistic Keynesianism", most people find it unconvincing because it relies on unrealistic assumptions, such as rational expectations or perfect Ricardian equivalence.

Re: Sorry, but the fiscal multiplier doesn't multiply

Charles Barry — Mon, 21 Mar 2011 05:43:29 -0000

Ugh. What a crass misrepresentation of the paper.

The paper can be basically distilled as "the fiscal multiplier can be greater than zero in many cases, so long as interest rates don't rise".

What is so hard to grasp about this? Keynesianism (or at least your caricature of it) isn't all SPEND, PRINT MONEY, SPEND MORE ALWAYS. The idea of fiscal stimulus is that governments can spend more or print money *in times of recession* to put the economy back on track, and then reverse course once the economy is growing again.

Of course if governments went on spending splurges or printed money when the economy is booming the fiscal multiplier would be zero or less, because the Bank of England would be forced to put interest rates up. This is obvious from A-Level macroeconomics.

This paper has almost no relevance to the current situation. The thing about now is that interest rates are at all times lows, *despite* huge increases in government spending and vast increases in the money supply.

So saying "on average, increased government spending with high levels of debt is counter-productive" (which is basically the paper in the nutshell) is totally irrelevant to today's situation, precisely because we're NOT in an average macroeconomic situation.

Again, why is this level of nuance so hard for the ASI to grasp?

Re: Sorry, but the fiscal multiplier doesn't multiply

jobes — Sun, 20 Mar 2011 20:17:11 -0000

We'd better join the euro, then, hadn't we? Get rid of exchange rate flexibility and make the fiscal multiplier work again.

Re: Sorry, but the fiscal multiplier doesn't multiply

Alimac — Sun, 20 Mar 2011 19:32:55 -0000

"he problem with discussing Keynes is that most of his ideas and theories are either misunderstood, or applied inappropriately, both by those who claim to support them and by those who vehemently oppose them."

So was Keynes calculatedly Delphic covering his back?

Confusing for his interpreders?

playing to popular politics given constraints of his time?

or like the rest of us a bit confused himself?

Re: Sorry, but the fiscal multiplier doesn't multiply

Phil — Sun, 20 Mar 2011 19:22:35 -0000

Thank you for confirming what I have always suspected namely that Gordon Brown and Ed Balls really are a pair of ignorant cretins.

Re: Sorry, but the fiscal multiplier doesn't multiply

Dr Geoffrey Wyatt — Sun, 20 Mar 2011 17:53:35 -0000

You can find a much extended summary of the paper at:

www.cepr.org/pubs/policyins...

It is an empirical study using vector autoregressions, and the time asymmetry between past cause and future effect to a large extent meets your objection about correlation not necessarily implying causation.

My problem with the paper is its apparent naïvity regarding macroeconomic theory, which actually implies all of the effects they claim to have found empirically.

But the paper does have the virtue that it is an "evidence-based" demonstration that the dangerously simplistic Keynesianism of Gordon Brown and Ed Balls is nonsense. Mere theoretical denial of the B&B assertions unfortunately fails to persuade most people.

Re: Sorry, but the fiscal multiplier doesn't multiply

Cantab83 — Sun, 20 Mar 2011 16:16:25 -0000

"There is no reason whatever, other than ideology, that the Bank of England should not create public credit on behalf of the Treasury and spend it on such investment rather than using it as QE to buy gilts."

Unfortunately most of it wasn't used to buy gilts, at least not directly. It was used to recapitalise the banks. As a result, instead of stimulating aggregate demand, all the BoE has done has been to shore up the balance sheets of commercial banks and (along with the Fed) stimulate another asset boom in equities. QE should have been given directly to the government and used to invest in productive assets such as housing and also used to support the knowledge economy via spending on R&D. That would have been the correct Keynesian response. Instead the BoE was (and still is) more concerned about supporting the housing market. This crisis is not over!

Re: Sorry, but the fiscal multiplier doesn't multiply

Cantab83 — Sun, 20 Mar 2011 15:48:49 -0000

"It was Keynes himself who remarked that people often find themselves in the grip of long dead economists to the detriment of their ability to do economics: M'Lord Keynes died in 1946."

And Adam Smith died in 1790. I wonder to whom Keynes was referring?

You see we can all indulge in cheap political point-scoring.

Actually the quote is: "...even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist".

On a more constructive note, the problem with discussing Keynes is that most of his ideas and theories are either misunderstood, or applied inappropriately, both by those who claim to support them and by those who vehemently oppose them. Even Keynes would have probably disagreed with most of the fiscal measures that have been enacted in his name over the last half-century.

Re: Sorry, but the fiscal multiplier doesn't multiply

Chris Cook — Sun, 20 Mar 2011 13:29:32 -0000

The more fundamental misconception, which is shared by Keynesians and most Monetarists, is that it is necessary for governments to borrow at all in order to invest in creating productive assets and the productive indiviiduals who create them.

Private banks create private credit/money and spend it on developing their business whenever they credit the accounts of suppliers, staff and management.

There is no reason whatever, other than ideology, that the Bank of England should not create public credit on behalf of the Treasury and spend it on such investment rather than using it as QE to buy gilts.

Provided public credit creation is professionally managed and adequately supervised by a monetary authority then the public credit may be retired and recycled either from taxation or from pension investment in the newly created assets, and there will be no inflation.

Re: Sorry, but the fiscal multiplier doesn't multiply

Alimac — Sun, 20 Mar 2011 13:28:38 -0000

Why limit your stricture to economists?

Are not most scientists the same including social and medical

Among interpreters of Keynes theory more spending increases demand employment and growth

but empiical tests raise doubts

Just like AGW theory and evidence

or smoking and cancer?

Re: Sorry, but the fiscal multiplier doesn't multiply

Dr. Adrian Wrigley — Sun, 20 Mar 2011 12:50:26 -0000

Of course the Keynesianists are talking nonsense. But a quick look at the paper suggests it is nonsense too, unfortunately.

"the impact of government fiscal stimulus depends on key country characteristics" "After analyzing a quarterly dataset on government expenditures for 44 countries (20 high-income and 24 developing) from 1960 to 2007, they conclude that the output effect of an increase in government consumption is larger in industrial than in developing countries."

The fiscal multiplier is all about cause and effect. If a government chooses what Keynesianists call "stimulus" to the economy, how would real GDP respond? This is what the paper purports to be about.

The paper seems to be about a completely different issue - correlation. Is there any observed relationship between GDP growth and "stimulus". Since we observe that a bad GDP outlook causes demands for stimulus, it seems perverse to infer anything of a possible causal relationship the other way round. Unfortunately I could only read the summary and abstract of the paper, but I assume these fairly represent the main work.

When will economists learn "correlation does not imply causation"?

Re: Sorry, but the fiscal multiplier doesn't multiply

Alimac — Sun, 20 Mar 2011 10:12:42 -0000

At last! Glad to have this paper brought to my attention

Reminds me of the days when some measured BC as benefits plus costs divided by costs

lets have some assessment here by those who can do the Math