on stimulus spending and multipliers
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introductory
A lot of what pretends to be economics is not economics
at all, it is the politics of power. It is a rhetoric
designed to obfuscate, and often involves the psychology
of incentives.
understanding economic
multipliers
‘stimulus spending’,
a recipe by fools and crooks - you’re being
conned!
Brown the Clown and Obama are continually (either
foolishly or dishonestly), constantly confusing bank
bail-outs (and/or liquidity provision) with ‘stimulus’.
“Never let a crisis go to waste.” Rahm
Emanuel
A huge hidden agenda among socialists is to use claims
of ‘stimulus’ as a means of grabbing ever
more power for government. Of course, you have the
Brown the Clown’s lying claim, that ‘everyone’/governments
(other than David Cameron) believe the only way to
deal with the banking clag-up is huge government ‘borrowing’/spending.
In fact, it is government’s wish to grab more
power - they want this spending through huge increases
of real taxation. It is government that claims to
believe the country/people ‘want’/‘need’
more ‘spending’.
socialist
‘new’ labour’s hidden extra £350
billion tax just this year
why
reducing taxes works - laffer curves 
These schemes are almost entirely power grabs by
socialist governments, not genuine responses to a
‘crisis’.
‘Stimulus’ spending should be assessed
by entirely different criteria than keeping the banking
system liquid.
stimulus
When politicians use the word ‘stimulus’,
it tends to cover a multitude of different sins.
- Printing money, that is inflation.
Inflation steals money from people with savings
and those on fixed incomes, and gives it to someone
else, mostly the government.
- Borrowing money
This shifts money from the future to the present.
It means increasing your debt in the future when
you may well have to pay it back. Socialist governments
tend to use this process to buy votes, especially
when near to election time. They often hope that
they can get someone else, like the ‘the rich’,
to pay it back - or perhaps the next generation
(see also inflation).
- Coercion
You can build a big pyramid or start a big army
with conscription. It keeps the nuisances off the
street, keeps them busy, gives them basic bedding
and food, and stops ‘the unemployment problem’.
(See also citizen’s
wage.)
As you will see, all these methods of so-called stimulus
tend to transfer wealth from one pocket to another.
There is not much evidence that they actually produced
more, unless you think that having a big pyramid is
a cool thing, or even giving your unemployed and their
unemployed a useful job shooting at each other, or
smashing up houses and factories so that you can rebuild
them, thus providing still more employment.
Stimulus is far more relevant applied, as Keynes recommended:
“The important thing for Government is not
to do things which individuals are doing already,
and to do them a little better or a little worse;
but to do those things which at present are not
done at all.” [1926]
Employing the unoccupied to weatherproof a million
houses, or to build 20 nuclear power stations is suitable
‘stimulus’, giving them billions to sit
around is a more dubious enterprise akin to Keynes’
satire.
“If the
Treasury were to fill old bottles with banknotes,
bury them at suitable depths in disused coalmines
which are then filled up to the surface with town
rubbish, and leave it to private enterprise on well-tried
principles of laissez-faire to dig the notes up
again (the right to do so being obtained, of course,
by tendering for leases of the note-bearing territory)
there need be no more unemployment and, with the
help of the repercussions, the real income of the
community, and its capital wealth also, would probably
become a good deal greater than it actually is.
It would, indeed, be more sensible to build houses
and the like; but as there are political and practical
difficulties in the way of this, the above would
be better than nothing.” #1936]
The book, End
the Fed by Ron Paul,
is a very useful primer on the connection between
taxation and government power grabs. in my view, Paul
is an extremist and a gold nut, but he does understand
the nature of government money cartels and the inflation
tax. Thus the first 131 pages are a useful source,
but the rest should be read with caution and plentiful
salt.
The gold standard, such as Paul dreams of re-establishing,
has very dangerous downsides best understood by anyone
who has ever played Monopoly. Governments are about
the centralisation of power.
“During the time men live without a common
power to keep them all in awe, they are in that
condition which is called war; and such a war as
is of every man against every man.
[Hobbes, 1651]
Sane governments protect you from warring princes
and local mafias, but of course governments can be
among the worst dangers and oppressors. The trick
is to keep governments accountable and under control.
Fiat money is one of the basic/central
mechanisms by which government monopolise power. Ron
Paul seems to realise this but despite Paul’s
romanticism, the alternatives are no guarantee of
a new, garden of eden.
Keeping government accountable is your prime duty
and survival prerequisite. Gold will not do that for
you, any more than socialism will rescue you from
your duty.
“The condition upon which God hath given
liberty to man is eternal vigilance; which condition
if he break, servitude is at once the consequence
of his crime, and the punishment of his guilt.”
[Curran, 1790]
R.J. Barro
“If the multiplier is greater than 1.0, as is apparently assumed by
Team Obama, the process is even more wonderful.
In this case, real GDP rises by more than the increase
in government purchases. Thus, in addition to the
free airplane or bridge, we also have more goods
and services left over to raise private consumption
or investment. In this scenario, the added government
spending is a good idea even if the bridge goes
to nowhere, or if public employees are just filling
useless holes. Of course, if this mechanism is genuine,
one might ask why the government should stop with
only $1 trillion of added purchases.”
—
“A much more plausible starting point is a
multiplier of zero [he
means one]. In this case, the GDP is given,
and a rise in government purchases requires an equal
fall in the total of other parts of GDP -- consumption,
investment and net exports. In other words, the
social cost of one unit of additional government
purchases is one.”
—
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“I have estimated that World War II raised
U.S. defense expenditures by $540 billion (1996
dollars) per year at the peak in 1943-44, amounting
to 44% of real GDP. I also estimated that the war
raised real GDP by $430 billion per year in 1943-44.
Thus, the multiplier was 0.8 (430/540). The other
way to put this is that the war lowered components
of GDP aside from military purchases. The main declines
were in private investment, nonmilitary parts of
government purchases, and net exports -- personal
consumer expenditure changed little. Wartime production
siphoned off resources from other economic uses
-- there was a dampener, rather than a multiplier.”
—
“... In any event, when I attempted to estimate
directly the multiplier associated with peacetime
government purchases, I got a number insignificantly
different from zero.” [Quoted from wsj.com]
 |
End the Fed by Ron Paul
£14.39 [amazon.co.uk] {advert}
$12.86 [amazon.com] {advert}
Grand Central Publishing, 2009
ISBN-10: 0446549193
ISBN-13: 978-0446549196 |
calculating
multipliers
Remember where we came in:
A lot of what pretends to be economics is not economics
at all, it is the politics of power. It is a rhetoric
designed to obfuscate, and often involves the psychology
of incentives.
The
multiplier (or multipliers) is a useful, but
difficult and unstable, concept used by Keynes. It
should not be confused with the similar fractional
banking multiplier. Essentially, the meaning of
the multiplier is the idea that if you spend money,
it becomes income to the person receiving it. In normal
events, that person will spend the money again, and
it will become income to a third person. The parable above of the buried notes is a good first step to
grasping the idea.
It is vital, when handling any such concept, that
time frames be carefully defined and attended. Another
useful concept in the present kerfuffle over ‘stimulus
packages’ is the looming question, “Can
governments really spend your money better, more usefully
or more effectively than yourself?” Naturally,
socialists invariably claim that they can, and usually
waste, or pilfer large proportions of any tax for
their own back pockets.
What is ‘waste’? It is probably a bit
like a weed, a plant growing where you don’t
want it. Considering the multiplier in the context of government spending of your money,
the measurement often favoured is “For every
pound taken from you and spent by the government,
what is the end effect on a country’s GDP?”
- If the effect of the government spending one
pound is a one pound rise in GDP, then the multiplier
is said to be one, which can translate into “The
government has done no better and no worse than
if it had kept out of the road”. Who
ever heard of a government scheme that wasn’t
mired in corruption and waste?
- If the multiplier is less than one, then the
GDP will have been damaged by the government interference.
- If the multiplier is greater than one, then the
taxation may be justified under some judgments.
Now note that the time frame in which the multiplier
is assessed is a matter of arbitrary judgment, and
there are constant concerns regarding what would have
happened if the government had not interfered. Also
note that a multiplier can also be assessed betwixt
competing ‘investments’, and that the
idea of a multiplier is also related to the idea of the
velocity of money.
Here
is another example on which you can practise.
There is often talk of economies running at under-capacity,
by which tends to be meant factories with machinery
standing idle, empty office space, or people unemployed.
This is another parameter that resides between the
dubious and nonsense. The factory may be able to produce
more plastic rubbish, even though nobody can be found
who wants it, let alone who will buy it. Introducing
a 16-hour, 7-day week, counting blades of grass would
certainly increase employment.
Just to extend confusion, government shills continually
talk of stimulus increasing employment. It is bad
enough trying to estimate changes in GDP through government
stimulus, but estimating its effect on ‘jobs’
is even more dubious.
Is the objective to increase a dubiously
measured GDP, or is it to increase employment?
Obviously, banning the use of heavy machinery in motorway
construction, and issuing picks and shovels - or even
toothpicks - will increase employment, as will building
large standing armies by coercion. Incidentally, these
are all Luddite tricks that have been used by National
Socialist and International Socialist governments.
Or is the increase of flat-screen televisions and
motor cars the objective? Whence the more highly you
automate your factories and reduce employment, the
better. (See also a
citizen’s wage.)
If you don’t know where you are going, you
sure as hell ain’t going to get there.
end
notes
- Fiat
money is the usual term for monetary systems
that are not backed by real assets.
- Taken
from a very neat review
of Keynes’s general theory. You will see
the calculational form of Keynes’s multiplier is similar.
“And here is the tricky part: the increase
in income brought about by an investment is greater
the higher the percentage of income that is spent
rather than saved. Spending increases the incomes
of the people who are on the receiving end of the
spending. This derived or secondary effect of consumption
is greater the higher the percentage of a person's
income that he spends, and so it magnifies the income-generating
effect of the original investment. If everyone spends
90 cents of an additional dollar that he receives,
then a $1 increase in a person's income generates
$9 of additional consumption ($.90 + $.81 [.9 x
$.90] + $.729 [.9 x $.81], etc. = $9), all of which
is income to the suppliers of consumer goods. If
only 70 cents of an additional $1 in income is spent,
so that the first recipient of the expenditure spends
only 49 cents of the 70 cents that he received,
the second 34.4 cents, and so on, the total increase
in consumption as a result of the successive waves
of spending is only $1.54, and so the investment
that got the cycle going will have been much less
productive. In the first example, the investment
multiplier--the effect of investment on income--was
10. In the second example it is only 2.5. The difference
is caused by the difference in the propensity to
consume income rather than save it. (No one today,
by the way, thinks that investment multipliers are
that high.)”
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