Intredasting article, although it isn’t discussing a liquidity trap.
This just plain doesn’t necessarily follow. Increased consumption can increase aggregate demand as long as there isn’t an offsetting decrease in demand elsewhere.
Thanks for the chart Mustang 19.
The chart does not make a clear distinction between the positive multiplier of government spending and the negative multiplier of government taxes. The chart seems to specifically be restricted to the positive multiplier of spending without any consideration of the taxation required to support that spending. But if I make assumptions based on the positive multipliers, then the negative multiplier should be a mirror image of the positive.
According to the CEA if the government makes a public investment and pays for it with higher taxes on individuals, do I detract 0.8 from the 1.5 in order to obtain the resultant 0.7 economic impulse?
According to the CBO, if the government increases infrastructure spending and pays for it with an increase in corporate taxes, do I detract the 0.4 from the 1.8 in order to obtain the resultant 1.4 economic impulse?
And if government attempts to pay for additional spending through inflation, what negative multiplier do I use to account for inflation ???
James, the mutliplier on an exogenous tax increase- filterting out statistical noise, like the pre-tax change business cycle- is about -0.5. The De Long paper posted earlier shows how the long run effect of the stimulus will likely be to retain skill levels in the economy, and the stimulus will mostly if not completely “pay for itself” compared to a baseline where the stimulus did not occur and unemployment was allowed to remain high. However, if one were to ignore these effects, then, yes, it makes sense to subtract 0.5 or 0.8 from the multiplier.
Inflation is already included in the fiscal multipliers in the table- all else equal, a spending increase not accompanied by tax cuts will require borrowing and will be slightly inflationary. With interest rates so low and excess liquidity so high, though, so the inflationary effect of the ARRA was not likely very large.
mustang : “My response is immediately after the post you linked to.”
So what ? You simply ignore the papers I referred to. And you haven’t answered my question yet. Next time, I would not bother to respond. I already show you that funds were disbursed too late to make keynesian “stimulus” effective. With ARRA, there is job creating, but also job shifting. Evidence show us that some of the money has been wasted.
A better way to get out of the crisis : cut back on regulations.
“As shown in Table 2, curbing regulatory spending can have substantial effects on the economy. For a 5% reduction in the regulatory budget, the increase in GDP is $376 billion (in present value) over the five-year window. On average, the $2.8 billion reduction in the regulatory budget generates $75 billion in additional GDP per year, implying a $27 gain for every $1 decline in the regulatory budget. A 10% cut in the regulatory budget — or about $5.6 billion — provides for an additional $149 billion in GDP annually over the five-year window. A pro-rata budget balancing cut of 16% — about $9 billion — results in a present value gain of over one trillion dollars ($1,189 billion) over five years, or about $238 billion annually. Whether or not the regulatory budget could be cut responsibly by 16% is beyond the scope of this paper.”
“The impact on jobs is also impressive, as shown in Table 3. For a relatively small budget cut of 5%, the increase in private jobs is about 1.2 million annually (on average). In the final year of the simulation, there are 1.3 million new jobs due to the reduced regulation. A 10% reduction in the regulatory budget, which implies a return to 2007 levels, leads to an increase of 2.4 million new jobs annually, and nearly 3 million jobs in the fifth year. A pro-rata cut in the budget produces a sizeable 3.75 million jobs per year (on average), with 4.2 million jobs in the fifth year. The reduction in regulatory agency jobs resulting from the budget cuts are provided in the final row of the table.”
It is worthwhile to recall that the Keynesian multiplier does not exist. From Hazlitt :
“Let us try to look at one probable origin of the concept. If a community’s income, by definition, is equal to what it consumes plus what it invests, and if that community spends nine-tenths of its income on consumption and invests one-tenth, then its income must be ten times as great as its investment. If it spends nineteen-twentieths on consumption and invests one-twentieth, then its income must be twenty times as great as its investment. If it spends ninety-nine-hundredths of its income on consumption and invests the remaining one-hundredth, then its income must be a hundred times its investment. And so ad infinitum.
These things are true simply because they are different ways of saying the same thing. The ordinary man in the street would understand this. But suppose you have a subtle man, trained in mathematics. He will then see that, given the fraction of the community’s income that goes into investment, the income itself can mathematically be called a “function” of that fraction. If investment is one-tenth of income, income will be ten times investment, etc. Then, by some wild leap, this “functional” and purely formal or terminological relationship is confused with a causal relationship. Next, the causal relationship is stood on its head and the amazing conclusion emerges that the greater the proportion of income spent, and the smaller the fraction that represents investment, the more this investment must “multiply” itself to create the total income!”
Some articles of interest.
Chapter 1 Examination of Keynesian Multiplier Effect Theory
§6 A Flow-Chart to Disprove the Keynesian Multiplier Effect Theory
§3 Examination of the Keynesian Multiplier Effect Theory
§7 Past difficult problems relating to Keynes’s investment multiplier
§4 Answers to My Questions for My Claim that the Keynesian Multiplier Effect Theory is Wrong
Alright. But your studies look at spending during the postwar period and not specifically during the recent recession. Fiscal stimulus is only intended for recessionary periods.
The multiplier is about aggregate demand, not the relative share of investment and consumption. During a liquidity trap, not all savings are channeled into investment.
Although there may be many wasteful regulations, an across the board cut to all of them is not a good idea either. For instance, the Clean Air Act has reduced mortality and improved the environment.
That suggests a 100% reduction of the regulatory budget would create 24 million jobs annualy. If the average unemployment rate over the period studied is 6% in a labor force of 154 million, then eliminating the regulatory budget would reduce unemployment to -9.5%.
mustang → “But your studies look at spending during the postwar period and not specifically during the recent recession.”
You’re wrong. Re-read again please.
mustang → “Although there may be many wasteful regulations, an across the board cut to all of them is not a good idea either.”
You should read the article, especially their conclusion (p. 18/20) : “In fact, very little regulation in the modern economy is aimed at expanding economic output. Nevertheless, regulation may have benefits, so it is best to think of it in terms of some optimal level of regulation, where the marginal benefit of intervention equals its marginal cost.”
Page 19/20 : “Furthermore, regulations are heterogeneous, with some being more costly than others, and some being more beneficial than others.”
One thing you should keep in mind is that economic freedom highly correlates with economic growth (even if economic performance is linked to national IQ). Look at page 55 (figure 5.3). A correlation of 0.67.
The blogger “Minarchiste” did a good work too (link); GDP per capita vs Gvt Size, Gini index vs Gvt size, Life expectancy vs Gvt size, Corruption index vs Gvt size, Environmental performance vs Gvt size, etc…
I did. Stimulus behaves differently during recessions and that is not mentioned.
It depends on the particular category of economic freedom. Evidence on government spending, for example, is mixed.
Sorry. It is mentioned. It does not specifically cover the recent recession, however.
If Keynesian exonomics works so well I would like to understand why Zimbabwe is not a world super power? Why not Nazi Germany? Weimar? Surely the Confederate South would have won the Civil War if they just printed a little bit more money?
The Keynesian theory can sound as good as the theory of gravity but at what point do you believe real life? Let’s apply the theory to a pride of lions on the plains. Ok, we’re going to take one large herd of zebras and split it into five different herds so as to create more demand for zebras from the lions. The lions will see that there are more zebra herds and begin making more baby lions. Before there were 20 lions per herd and now there are only 4 lions per herd. We ceated wealth Keynesian style with a multiplier of 5!
If that doesn’t work we can always destroy the herd to create jobs for the lions. Now they will have to spend more productive time looking for a different herd of zebras!
Joseph Stiglitz said the following in an article:
But it was not until government spending soared in preparation for global war that America started to emerge from the Depression.
http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
So if you extract an enormous amount of wealth from a society, and employ people in that society to systematically destroy it overtime, that society becomes relatively wealthier as a result.
a country to be “freer” economically not to say anything about the level of civil and political freedom of its citizens. Therefore, Hong Kong and Singapore are now the “most free” in this sense in the world, but at the same time, its citizens not only have no guarantee of many basic rights, but also see them being repeatedly violated by the state. There are these two city-states complaints of abuse of law which we know only in the regimes of Cuba and North Korea.
Also, you say the state to protect private property and require debtors to honor their debts, whatever the cost over the life of defaulting, is a matter of “justice.” First, the definition of justice is controversial among lawyers - so it is very hasty and naive on their part have to say what she means so compelling. Moreover, unlike what happens in socialist or theocratic tyrannies spread around the world, in developed capitalist democracies and developing the notion of justice that has been most widely accepted is the one given by John Rawls: do justice seen as promoting equity .
Another thing: it would be a matter of “fairness” to the state the debtor pay what you owe, even taking her home where she lives to pay off the debt, the same should apply in relation to business owners who owe the state. This would be “justified” in taking them ALL to cover his tax debts, right?
Picking up the rankings, you say the countries with the highest rate are precisely those that the state does not have great strength, unlike countries with high levels of poverty where there is corruption and attacks on civil liberties.
Dude, you gotta be kidding, right? Or brainwashing cult Misesian is even worse than I thought. Countries with better HDI are also “more free”, according to the Index of Economic Freedom?
While in the place IEF “freer” the world is Hong Kong - where, in many respects, it is less civil and political freedom than Chavez in Venezuela, and corruption is no less evident - in the HDI index, the first Norway is the country (40th in the rankings of the IEF): a state of social welfare, which is not exactly the model that the cult of Saint Von Mises argues. A country that has several rigid labor laws, various social programs funded by the State based on the collection of taxes etc..
According to the ranking that you even suggested (apparently without analyzing it without the gauge of the faith), is in this country (Norway) that lives longer and better than in Hong Kong (13th in the HDI ranking) or Singapore (26th .)
Then come Australia (more consistently in 2nd in HDI, 3rd in IEF) - a country that in recent times, ended the spree of farmers and other “entrepreneurs” advancing over the aboriginal land, giving protection to these lands of natives, which implemented in recent decades a system of universal free health care, funded by an increase in income tax levied in the country, and where there is public funding of programs that reduce drug prices for the population as well as the price of the consultations medical.
Then we still have, in 3rd place ranking in the HDI, the Netherlands (15th in ILE). Let’s see the other state welfare, which guarantees the fundamental rights of its citizens, provides broad protection to workers (even regulating the profession of a prostitute, who must have a formal contract, working hours respected and all) and so on. Since the Netherlands is followed by the United States in the HDI. And this country is in 10th place in the ILE. The U.S. has no free health service, while fragile labor laws (which allow someone to be fired without difficulty, even when you’re on the verge of retiring, which badly affect the retirement plans of workers), among other points that, in regard to social rights, are seen as negative.
really do not know how you are repeating the mantra “The best places are exactly the freest economies”, where:
1) That is wrong;
2) there is no clear relationship between greater economic freedom according to the criteria of the Index of Economic Freedom and the best Human Development Index. (The U.S. and Norway, p. Ex., Despite being so close to the HDI - and adopt models of state so different - they are separated by dozens of homes in the ranking of Economic Freedom, the last place in the 1st being that other ranking .)
This thread is funny. Actual Keyniasnism has been dead since the 70s. Liquidity traps don’t actually exist ala Krugman - central banks can easily use NGDP targeting to boost AD. Empirically fiscal policy has little effect on the economy - countercyclical monetary policy is the only real tool to smooth over recessions.
That’s like saying “the perfect storm doesn’t exist.”
It’s a matter of degree. The effectiveness of monetary policy can be constrained in high liquidity preference periods (like recently).
A recent, very interesting study :
The aim of this paper is to assess the short-term effects of social spending on economic activity. Using a panel of OECD countries from 1980 to 2005, the results show that social spending has expansionary effects on GDP. In particular, we find that an increase of 1 per cent in social spending increases GDP by about 0.1 percentage points, which, given the share of social spending in GDP, corresponds to a multiplier of about 0.6. The effect is similar to that of total government spending, and it is larger in periods of severe downturns. Among spending subcategories, social spending on health and on unemployment benefits have the greatest effects. Social spending also positively affects private consumption, while it has negligible effects on investment. The empirical results are economically and statistically significant, and robust.
…
We also estimate the impact of government spending in nine different social policy areas: old age; survivors; incapacity related; health; family; active labour market programme; unemployment benefits; housing; and other policy areas.
The results suggest that social spending has a significant short-term effect on output. In particular, we find that an increase of 1 per cent in social spending increases GDP by about 0.1 percentage points after one year, which, given the share of social spending in GDP, corresponds to a multiplier of about 0.6. The multiplier is only slightly larger than the one obtained using the same empirical approach for total government spending. While one could expect a significantly higher multiplier for social spending, the results suggest no significant difference. The reason is to be found in the large heterogeneity in the components of social spending and their effects on output. In particular, among the nine different policy areas considered, only health, unemployment benefits and survivors have statistically significant effects.
We also find that the effect of social spending on output is larger in periods of severe downturns, while it is similar between countries with low and high debt-to-GDP ratios, and between countries with large and small levels of trade openness.
First, I have no reason to believe that social spendings on unemployment benefits should be advantageous.
A study by Brigitte Dormont, Denis Fougère and Ana Prieto, “The Effect of the Time Profile of Unemployment Insurance Benefits on Exit from Unemployment,” cited in “Le chômage, fatalité ou nécessité ?” written by Cahuc & Zylberberg, focusing on the french labor market during the late 1980s and the 1990s, indicates that the exit rate from unemployment is accelerating with the approach of the end of the ‘rights’ to unemployment benefits, and that this exit rate from unemployment was considerably higher for individuals with higher earnings. These data strongly suggest that people take advantage of the system by not seeking a job.
… if the debt-to-GDP ratio is high, agents can expect future consolidation measures and therefore reduce current consumption in response to an increase in government spending. To test this hypothesis, we re-estimate equation (8) by constructing 0+ (0–) as a dummy variable that takes the value 1 when the debt-to-GDP ratio is above (below) 60 per cent, and 0 otherwise. The results are reported in the third column of Table 4 and suggest that the effect of social spending on output is not statistically different between countries with high and low public debt.
Also, I’m not convinced by the use of such dummy variable as a reliable method. Any thoughts ?
Page 6:
Assuming positive values
for δj, equations (2) and (3) produce opposite signs in the correlation of
social spending and growth, which implies that the simple OLS estimates of
δj are likely to be biased downward. In other words, the OLS estimates of
equation (1) may suggest there is no significant effect of social spending on
output, even if theoretically the effect is present and positive. To deal with
this endogeneity issue, we try to identify government spending shocks by
estimating a policy rule for social spending.
Put into simpler words, as presented by a dialogue between the ao-authors:
IMF guy 1: We will bravely go where the data leads us, come what may.
IMF guy 2: None of this silly Austrian theorizing, no a priori blinders placed on our eyes.
IMF guy 1: I’ll drink to that.
[Time passes as powerful computers churn out results and the IMF guys sip champagne].
[The computer beeps. IMF guy 1 reads the output, turns pale].
IMF guy 2: Wazzamatter?
IMF guy 1: It says here that govt spending never helps the economy, even hurts it
IMF guy 2: But that contradicts our apriori theorizing.
IMF guy 1: Worse still, it means we lose our jobs if we let this secret leak out.
[ Dead silence. After a few moments, IMF guy1 brightens up].
IMF guy 1: We gotta reshuffle the equations till they give the right answer.
IMF guy 2: I’ll drink to that.
The problem is explained in the paragraph above the one you quote. A conclusion that surprises me is that “The results suggest that social spending has a significant short-term effect on output, especially during downturns” although the multiplier associated with social spending is 0.6. But a multiplier of less than 1 necessarily contradicts keynesian economics. So where’s the trick ?
Hi, nice to meet you.
I thought a negative multiplier was supposed to be the problem; less than one just indicates that private spending fell, while government spending is basically transfers to people and wages for government employees. Negative multipliers indicate falling income.
Slightly off-topic, but it’d be nice to have a ‘‘permanent marxism refutation’’ thread. Does one already exist by any chance?
My impression is that very few (if any) people here have actually read Marx. It’s kind of hard to refute someone that you haven’t read.