Nope, doesn’t understand the multiplier either

That is not true of a government for two reasons. First, government spending is national income. Cutting it does then only increase the chance of balancing the books if the spending adds less to income than it incurs in costs (meaning in economists’ terms that the ‘multiplier’ is less than one). This is what the Office for Budget Responsibility has always assumed, except for investment. They are however wrong; when there is underemployment there is now a mass of evidence, from the IMF and others, that the multiplier is well over one. In other words, spending more than pays for itself and cuts impose more harm than the initial sum supposedly saved reduces spending by.

He’s looking at this as if the multiplier is the relationship between spending and tax revenue. So, more spending in a slump means more revenue, the revenue pays for the spending.

But that’s not what the multiplier is. It’s that GDP rise by more than the spending, not that tax revenue does. No, he can’t say that eventually everything becomes tax either. Because we’re already including all those iterations of respending in calculating our GDP multiplier. Given that governments tend to get 40% of GDP in tax revenue therefore the tax multiplier is about 40% of whatever he’s assuming the GDP one is. Almost certainly less than unity that is.

Sigh.

Nope, he’s not got Baumol either.

This we knew though. Let me now add in something many are less familiar with. This is Baumol’s law. What William Baumol suggested in the 1960s was that salaries in jobs that have not experienced growth in productivity increase in response to rising salaries in jobs where there has been productivity growth. So, for example, automation in manufacturing might increase productivity, and wages rise with it, but the salaries of string quartet players also rise as a result and there is no productivity gain to be had from playing a string quartet movement written to be played in six minutes in four minutes: in fact, you ruin it if you do. The example is of course contrived: the reality is that string quartet players have increased productivity through better transport, distribution methods and recording techniques. But the fact remains that their core product can’t be compressed in time scale.

Nor, once admin gains are won, can policing, education, nursing, social care, social work, the justice system and many other services be compressed and still function. In fact, because they require face to face contact you ruin them if you do that. But the government, dedicated to an austerity programme that demands increasing productivity, demands that we do crush the time spent on these services, which undermines their value, and that the wages of those undertaking them be cut to break the relationship Baumol observed.

You can indeed compress nursing, as an example. Old treatments for headaches were a cold compress lathed upon the forehead by a nubile maiden. Now we have aspirin, we’ve automated nubile maidens. We have and do in fact automate parts of all of these and thereby increase the productivity of the resultant labour. Baumol isn’t about it being impossible to increase services productivity, it’s about it being more difficult to do so, no more.

BTW, he other leg of Baumol’s work is on innovation, the method by which we increase productivity. Markets. Definitely markets. So, the more difficult it is to increase productivity in nursing, police etc, the more they need to be subject to market incentives so as to increase productivity. But, of course, he’s never bothered to read around the subject to find that out, has he?

The model we’re using is one that says the state has a limit to the size it can be in proportion to the private sector. And it says the state can supply all the services we need despite this constraint, even if Baumol’s law applies. And that model is wrong. We cannot do that. What Baumol’s law actually implies is that as we get richer in terms of the productivity of some labour (which, because of robotics, is likely to continue to grow even as total employment falls) the price of public services will rise and that we must accept the growth in the size of the state sector that follows if we are to still enjoy those services we once thought of as basic.

No, that’s Wagner’s Law, long before Baumol too. And see above about how we increase productivity in services.

And of course, that means we will pay more tax too. But that tax will be paid out of the proceeds of the spending, because as I argued yesterday, spend comes first and tax comes second, and unless there is full employment at fair pay (which there clearly is not in the UK) the spend does not result in inflation.

How did “fair pay” sneak in there? There’s nothing even in his own misunderstandings of the model which implies that.

Sigh.

9 comments on “Nope, doesn’t understand the multiplier either

  1. Tax me at 75%, and it will all come back to the economy.

    I don’t give a shit about the economy. Taking 75% of what I get is not a good thing. I will leave, and you’ll get nothing.

    There are indeed limits.

  2. “They are however wrong; when there is underemployment there is now a mass of evidence, from the IMF and others”

    I presume it’s a waste of time going over there to look for links to the evidence so we can see for ourselves and that his blog remains a citation free zone?

  3. Given we are borrowing money hand over fist and spending it like drunken sailors on shore leave into the economy, why is tax revenue not zooming through the roof then? Why is all the spending we are already doing now not resulting in extra tax revenue, but somehow magically if we borrow and spend even more it will generate extra tax revenue?

    All this passes for the thoughts of a professor these days? My dog could come up with a more coherent economic theory than this.

  4. You can’t increase the productivity of a string quartet?

    Go to youtube.com type “string quartet” at the search bar. The first thing to pop up is “Beethoven – Complete String Quartets”. It shows 679,457 views.

    Without the technology, that string quartet can play to maybe 1000 people at a time (I’m assuming sound amplification already exists and a big auditorium). That’s a 679x multiplier right there.

    And phonographs, audiotapes and CDs have been doing that since before the Internet existed.

  5. More and more he comes to resemble Tony Hancock’s tragicomic character.

    “Are you a doctor then?”
    “No, I never really bothered.”

  6. Funnily enough I had a beer tonight with a bloke who teaches economics at the equivalent of Islington Tech near where I live. He had a Murphyesque grasp of the basics. I despair! At least he didn’t believe in the MMT.

  7. Gamecock

    As I said to a Corbynite relative, ‘There’s no limit’ at least according to Dance act, 2 unlimited – upon whose 1993 hit the entirety of Murphyite/ Corbynite taxation economic policy seems to be based….

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