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
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’.
‘new’ labour’s hidden extra £350
billion tax just this year
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
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
- 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
rich’, to pay it back - or perhaps the next generation
(see also inflation).
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
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
“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.”
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’
“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.”
The new 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
“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
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
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.”
“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
“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
Grand Central Publishing, 2009
- Fiat money
is the usual term for monetary systems that are not backed
by real assets.
- The multiplier
(or multipliers) is a useful, but difficult and unstable,
concept used by Keynes. It should not be confused with the
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”.
- 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.
is another example on which you can practise.
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.)”
the web address for this article is
why reducing income taxes works - laffer curves
A neat little article on the Laffer curve and the relationships
between tax rates, growth effects and tax returns in relation to Brown the Clown’s
latest class war spasm, increasing basic tax to 50% for those earning over £150,000.
“Well, it's a textbook example of the famous
Laffer Curve - the idea that beyond a certain point,
increases in tax rates will reduce tax revenue, as individual
taxpayers change their behaviour to escape the higher
rates. In the words of the Institute for Fiscal Studies,
higher income tax rates incentivise taxpayers to "work
less, retire earlier, emigrate, contribute more to pension
or charity, convert income to capital gains, incorporate,
and invest in tax avoidance".” [Quoted from
Laffer chart based on 2009 UK budget.
Image: Institute for Fiscal Studies [IFS]
The Laffer Curve is based on logic and empiric
experience. It is an attempt to estimate government tax takes
from various tax regimes. Logically, it is obvious that the
tax take will be zero if tax rates are zero, whereas if tax
rates are 100%, people will not bother to work for (declared)
wages. In the graph above, the blue line represents the government
tax take for ever-increasing tax rates if there was no behavioural
As we can see in the graph, whereas the IFS
(Institute for Fiscal Studies) places the peak of the Laffer
Curve for high earners at a marginal income tax rate around
40%, the government places it at well over 50%.
The red line is typical of economic real-world wisdom. But in Britain we have mad socialists
running the government, thus they try to convince themselves, and the people, that can go on
increasing the tax rate beyond 40% and still obtain increasing tax. They do this in order to
hide the reality that their objective is to pander to the envy of their supporters.
The reality, as you can see from the red curve in the graph, is that government tax income
will actually drop as tax rates are pushed much above 40%. But as usual for socialists, despite economic
damage, dogma and perception trump reality.
Notice that this graph applies to income tax rates on incomes exceeding £150,000
per annum, no where near the greatest source of government revenues. Similar curves may be estimated
for corporation tax, value added tax and other regimes subject to behavioural change, for
example how much work your husband will do for a given return!
See also socialist
‘new’ labour’s hidden extra £350 billion tax just this year.
And three short films on the Laffer Curve (20+ minutes
total) from the Centre for Freedom and Prosperity and
the Cato Institute.
the web address for this article is