It also hits the political economy of this on the head. If most right-of-centre politicians were to be believed every £1 that the government spends is paired into a black hole and we get not a penny’s worth from it. They try to describe it as waste.
But that’s not true, of course. The government does not pour money away. What it actually does is spend it for social purpose. What is more, its spending becomes someone else’s income. And it adds to the sum of well being as a result. Understanding by how much is key.
The rule is simple. If the multiplier is 1, the £1 the government spends creates £1 of new economic activity. If that pound creates less than £1 of new income then the multiplier is less than 1. And if it creates more than £1 of new income the multiplier is bigger than 1.
So, a multiplier of less than 1 does not look good, and a multiplier of 1 only looks OK, whilst a multiplier of more than 1 is beginning to suggest something good is going on.
Sigh. This is the fiscal multiplier. There is nothing specific to government spending about it. The same is true of higher private spending, of more exports and so on.
Further, what is the fiscal multiplier of government spending? Depends what they spend it on. Sometimes it’s less than one. Hmm, depending upon your views, perhaps often less than one.
Which brings us back to the truth. Some government is worth more than we spend upon it. Some isn’t. The trick is in the distinction.