Expansionary fiscal contraction

So what is the problem? It’s threefold. First, the IMF and OECD are still really wedded to the idea of expansionary fiscal contraction. This is the notion that the economy always works at full capacity and that the state and private sector compete for scarce resources and that as the private sector supposedly always uses them better it must make sense to cut the state as this will boost growth. The argument is, of course, wrong.

Well, yes, it is wrong. Because that’s not what expansionary fiscal contraction is at all. What that idea is is that monetary policies, at least some of them, can be sufficiently expansionary that they can overcome the effect of fiscal contraction and thus we can indeed have fiscal contraction but also economic expansion.

It’s toss all to do with always being at full capacity nor even is it about private sector, government or crowding out.

For example, early 1930s, UK govt cut spending, put the budget into surplus, during a time of severe economic down turn. They also came off the gold standard and had a large fall in the value of the £. The monetary effects of the latter overcame the contractionary effects of the first and the downturn lasted about 18 months. about the best anyone was going to do in the circumstances.

Seriously, a professor, even a 0.2 of one, should know this stuff. Candidly.

9 thoughts on “Expansionary fiscal contraction”

  1. oh I though there was also an argument that expectations of future public financial crisis could be depressing activity, so changing those expectations could offset negative impact of fiscal contraction.

    (should I be surprised to see you even acknowledging that fiscal contraction does in isolation depress economic activity? why that’s almost Keynesian)

  2. I’m fine with the basic Keynesian idea. I have political objections to it (because we always seem to create new permanent spending, rather than temporary, also, Keynes himself came to believe that lowering NICs temporarily was the way to do it) but not economic.

    And note that your point (which exists but I regard as secondary) still isn’t about crowding out.

  3. “the private sector supposedly always uses them better “.

    Why supposedly?

    Can we also stop calling this moron a professor? My grandfather was a professor of history at the College de France, with several research books to his name. It is insulting to call that other twat anything other than a twat. Or a moron.

  4. The basic Keynesian idea is wrong. The economy is not driven by money, and you cannot write some simple relationship between aggregate money and aggregated output. Because there is no aggregated “output” in this context. While you can add up apples and oranges, they are not an aggregate in the economy.

    This is basic stuff. Say’s Law and all that.

    If money drove the economy, Zimbabwe would be a luxurious paradise.

  5. Ian B

    But Say was a neoliberal troll and was of course part of the widely discredited discipline of ‘conventional economics’ that Murphy’s ideas have debunked….

    I have also seen a platoon fo flying porcines just outside my window!

  6. I actually have to give Murphy credit as a professor. Because his statements are obviously contradictory I have to learn why he is flat out wrong. The future world’s top economist may very well be in his class simply due to the fact his sheer ignorance forces students out of the normal walled garden that is higher education.

  7. His title is practicing professor which best I can tell is really just a lecturer/teacher
    Usually someone with professional experience of a topic that teaches and doesn’t take part in research.
    When I did tax one of the lecturers was a retired tax accountant who did a couple of days a week, most probably for something to do or the extra cash or both, he didn’t call himself a professor though

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