That though is because, as I explained this morning (and as, entirely coincidentally this morning, Paul Mason does here) the multiplier on government spending is often, and always right now, greater than one.

The multiplier depends upon what you spend on.

Employing Ritchie as Lord High Tax Denouncer on £1 billion a year would not have the same effect as spending that same £ billion on sorting out London Bridge railway station.

31 thoughts on “Nope”

  1. There is no multiplier. Just the usual rules of investment, which are a different thing entirely. Keynes’s multiplier is simply a fallacious arithmetical calculation predicated on several errors of both arithmetic and definition of terms.

  2. “. . . the multiplier on government spending is often, and always right now, greater than one.”

    He does understand that the multiplier is not some *automatic* effect that just is, right? That’s its explicitly dependent (even the guy who made this crap up said that) on the government correctly targeting poorly performing private industry sectors.

    Otherwise, if the multiplier were almost always greater than one, we *would* have twigged on to that fact a few generations ago and incorporated it into our daily work/save/invest habits.

    Meaning that people wouldn’t be looking at tax as a huge burden because TADA! every dollar you paid in tax would net you more than a dollars worth of government ‘services’.

    Private industry would have mostly dried up as the more profitable government took over and outcompeted them.

    Exactly the opposite of what happens EVERY DAMN TIME the government takes over private industry.

  3. Agammamon,

    “The multiplier” is an automatic effect as defined by Keynes (he actually got it from someone else whose name of forgotten, but Ritchie and everyone else got it from The General Theory.

    Which is why we have to be clear that “The Multiplier” doesn’t exist at all. It is the case that government spending can create growth if invested wisely (the economy knows not whence money came) but that is not “The Multiplier”. It’s not any sort of “multiplier”. It’s normal productive investment.

    “The Multiplier” is a purely monetary effect which (if you believe Keynes) creates more consumption (spending money) in direct proportion[1] to “investment” (government spending).

    You can invest and create production. But the Multiplier as described by Keynes and Lord Murphy Of Much Wittering simply does not exist.

    [1] Advanced Neo-Keynesian Sophists knowing that this is shit, pretend it’s some unspecified complex function to get out of their corner.

  4. Keynes says that to stimulate the economy the government should take some combination of two approaches:

    A reduction in interest rates , and Government investment in infrastructure.

    Its the *properly targeted* spending on infrastructure that provides the stimulus, it doesn’t arise automatically from government spending in general but only when properly targeted at the proper sectors.

    IOW – IRL the multiplier doesn’t exist and its just bog standard investment. Only this time with people who don’t know what they’re doing and have no money to lose (but plenty of money to gain in losing other people’s money) doing the investment.

    So: I agree that the Multiplier doesn’t exist, I disagree that Keynes didn’t say that the multiplier is automatic – even if he didn’t understand that himself, it implicitly backs all his work on the subject as he never, not once, adequately explains how ‘stimulus’ is different from ‘investment’.

    His basic assumption though *was* that ‘infrastructure spending’ was always the proper sector to stimulate – so I’ll grant that I’m probably not correct (and you are), just not completely wrong either.

  5. Not being an economist I’m not sure, but is this multiplier an empirical description of what is observed in practice rather than a mechanical prediction of necessary consequences?

    That is, am I right in thinking that saying infrastructure spending will automatically generate more than it costs so we should spend as much as possible is a bit like saying that, because under Moore’s Law computing power doubles every 18 months, we should sack all our R&D staff as computers will still get faster?

  6. No, it’s not an emprical observation (though there is a cottage industry among Keynesians in trying to measure it econometrically), it’s a prediction from some of Keynes’s jolly equations involving aggregate statistics.

    Agammamon’s caveats being valid to an extent- Keynes seemed to define what his stats meant differently every time he used them- it goes like this. You take income(Y) and separate it into two portions, consumption(C) and investment(I). That which is invested is savings at this point (that is, you get paid £100, you spend £90 and put £10 in the bank). Those savings are thus an investment (since they will be used for investing, in “simple banking” they are the same thing. Okay so far.

    Y=C+I or I=Y-C, etc.

    Keynes then decides, just for the shits and giggles, to declare that you should look at this as spending some proportion on consumption and the remainder on saving. So now, out of nowhere, C=kY, with k as the “propensity to consume”. So if you spend 3/4 of your income, your k is .75

    So now, after a few more drinks, he wrote that

    Y=I / (1-k)

    Which indeed gives the answer that your total income is 4 times you savings/investment portion (which is 1/4). At this point he has smuggled the reader into seeing Y as driven by I and k.

    The quantity 1/(1-k) is the Multiplier.

    At this point, the savings/investment portion mutates into “government infrastructure investment”, which equates to any government spending, and Keynes goes all calculus on us and declares that any increments will act similarly, that is

    dY = dI/(1-k).

    So any additional spending by the State (in our example, with a multiplier of 4) will produce an increased income (which is now national GDP) of 4 times the amount frittered, whoops, invested.

    It’s this formula by the way that produces the bizarre Keynesian conclusion that if the recipients of the State spending do not save any of it, but consume it all, the multiplier is driven up to infinity and the growth in GDP is unlimited. Which is why to this day Keynesian economists blame recessions on people not spending enough, and try to stop them doing so to “save the economy”.

  7. Ian B,
    We were given a simpler equation at school, which I’m struggling to remember. Something like:

    a) You stick 100 pounds into the economy
    b) You take away Tax, Savings and Imports (all bad)
    c) You add Something, Investment and Exports (all good)

    The better c) is relative to b), the better you multiplier.

    I could never understand the concept of some money just disappearing, or why true believers wanted (and want) higher taxes and hated Fatch.

    In the end, I just memorised it for the exam, so it hasn’t stuck.

  8. You can derive a multiplier from theory, Keynes had one such model, but you don’t need to believe that particular model to think that there might be a multiplier effect from increased government spending. One obvious theoretical determinant of the size of the total change in economic activity arising from an increase in government spending is how close we are to supply constraints. It is *not* just about the investment itself and whether it is good or bad. if you have a good project but you have to pull workers away from other things they would have been doing, the short-run net impact will be lower, and if output is supply constrained then you’d expect demand to feed into inflation. If on the other hand you have idle resources and spare capacity, then if you can bring them into use you are going to get a larger net short-run effect even if your are building something daft.

    right now in UK hard to say much slack on labour market side, what scope there is to increase output by raising productivity, under-utilised capital etc., is anyone’s guess.

  9. Ian you have managed to derive the government spending multiplier from a model without government spending.

  10. Am I misreading this ?

    So, if the goverment builds an 8 lane motorway from (say) Aberwystwyth to Lampeter (i.e. the middle of the mountains in Wales) this will always be profitable ?

    How does this work ?

  11. Paul,

    I think so – multiplier conventionally describes effect on level of economic activity, even unprofitable activities count as GDP. Over time you’d expect bad investments to have negative impact on economy (that’s a supply side plus possible finance problems argument) but in short run even building daft motorways pages wages, wages are spent etc.

    if spending is of dubious quality but there is also a large short-run impact on activity, you have the usual sort of economic trade off, some useful aspects of that (perhaps fewer unemployed people, they are happier) but it comes at a cost that might only emerge over longer run, so you need to evaluate net benefit.

  12. ‘The multiplier depends upon what you spend on’

    No Tim, not really at all.

    Eventually all of the ‘money’ gets ‘spent’ on what is needed.

  13. Paul and Luis,

    the 8 lane motorway is profitable if you have a load of navvies sitting around idle but not if they are already in the process of widening the M25.
    The pool of navvies is finite, the cost of a navvie is directly proportional to the demand, increasing the demand only increases the price of navvies and not their output. (eventually sufficient roadsweepers will be attracted to the navvie lifestyle resulting in navvie deflation and sweeper inflation)

  14. The multiplier is a factor defined as the ratio of the expected return on investments made by CourageousMurphCo to the return expected from the same investment by investors who know what they are doing because they do it for a living.

  15. Is this multiplier idea not a relic from the days of money being real stuff, (ie just cash or gold) and not numbers on a computer system? After all, Mr Moneybags Multimillionaire doesn’t have a Scrooge McDuck style treasure room full of gold and dollar bills. He has a deposit account, or an investment portfolio of shares, plus property etc etc. So any money he does have is sat in a bank which effectively means its lent to a bank which means its floating around the economy, not locked in a vault.

    Thus if you remove said money from him via tax, he has to remove it from the bank which somehow has to pay him, which means less money floating round the economy, and less economic activity. The State then spends it back into the economy, whence it continues to move around as before.

    So unless the State uses said money to create some super duper new productive technology, or build some much needed piece of infrastructure, that is more productive than the lending the bank was doing with Mr Moneybags money, the net effect is surely zero. Indeed it could be less than zero if Mr Moneybags was investing in something productive and the State gives all the money to asylum seekers to spend on iPhones and new trainers.

    Am I missing something?

  16. The multiplier is BS.

    The debate is always based upon an amount of government expenditure. MMT thinking shows this is putting the cart before the horse. Rather than saying how much output can we get for £10bn of government action, we should be saying given we have a GDP output gap of £80bn how much do we need to deploy on the various policies to get that – given the “multipliers” and savings/income distribution of those policies.

  17. Plus it biases the “multiplier” against tax cuts. The mathematics of the “multiplier” demonstrates that clearly. It’s standard knowledge in simple Keynesian Models that the tax multiplier = 1 – spending multiplier.

    So obviously the fiscal multiplier for a tax cut is going to be less than equivalent government spending. That’s because you are, as a matter of policy, allowing extra savings first before any consumption happens. Duh!

  18. “Its the *properly targeted* spending on infrastructure that provides the stimulus, it doesn’t arise automatically from government spending in general but only when properly targeted at the proper sectors.”

    Lol. What is it with economists and their obsession with ‘investment’?

    There will be little workers employed to build new roads and railways – because anybody who can do that is already employed by the construction industry doing other things.

    That’s why they are complaining about a lack of skilled workers.

    If you try to do ‘investment’ – which has a *specific National Accounts definition* – all you do is *drive up inflation*. Or your projects never get done. Why the fuck would you want to go back to the 1970s?

    This is precisely the problem with using 1930s ideas in the 21st century without actually understanding the situation in the 30s and the situation now and how they differ.

    Now we have a service economy and the low skilled people are employed in that. Unfortunately the jobs they do *do not fall* into the accounting definition of ‘investment’. But that actually doesn’t matter because they spend their wages just the same, and the investment is done by the people who receive that extra demand – to expand output to cope with the extra demand.

    “if the recipients of the State spending do not save any of it”

    Are you against saving for some reason?

  19. Luis, “I” haven’t derived anything. I just repeated what Keynes said. Or rather, wrote, in The General Theory.

    It was he who switched his definition of “investment” from “savings” to “government spending” half way through, not me, by simply labelling all government spending (at least, all Keynesian government spending) as “investment”.

    He did this kind of slippery changing of meanings a lot. For instance in the same argument, he started off with savings being investment (which is itself valid) but by the end saving had become simply “money hoarding” that takes money out of the economy and reduces the multiplier, which is why as I said Keynesians don’t want you to save anything.

  20. Bloke in North Dorset

    I thought the point of Keynes was that we spend during a recession and save when it isn’t. As I understand it we aren’t in a recession so WTF are we talking about increasing spending?Especially on Opex and wages ar always Oex.

  21. Isn’t this where Tim’s second law of economics rearms its head ? That is, Opportunity Costs, there’s always opportunity costs.

  22. I should also add that Keynes’s fiscal multiplier is nothing whatsoever to do with what the government money is spent on. Keynes recommends that it be spent on something useful like roads, houses, railways or art galleries, but that is not what generates the increased consumption; the utility of this infrastructure itself is a bonus. The Multiplier is entirely fiscal, which Keynes himself makes quite clear, saying that if there is nothing useful to build, the government can just as well build pyramids.

    The resulting fiscal Multiplier is entirely determined by the Marginal Propensity To Consume of those who receive the money (or Consumption Function if you add an epicycle or two), and not determined in any way by what it is spent on.

  23. “I thought the point of Keynes was that we spend during a recession and save when it isn’t.”

    Yep, BiND, you’ve pretty much explained why Keynes doesn’t really work. The government can’t be trusted with the saving part. Pretty sure our host has said the same previously elsewhere.

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