Oxford’s Simon Wren Lewis writes about why you might expect a bump in consumption following a debt shock and then a government spending shock. Well worth reading and thinking about, especially in terms of our rebound in economic growth and the chances of that rebound being permanent (or even semi-permanent).
13 replies on “Multipliers from Eurozone periphery austerity”
Stephen –
Having read the article, I’m not sure I agree with your interpretation that it is an explanation for “a bump in consumption following a debt shock and then a government spending shock”.
SWL explicitly suggests that such an interpretation may point to the fact that the NK model is incomplete and then goes to show how the projection of a bump in consumption can be corrected with considerations of the impact of a govt debt shock.
So the end conclusion is that we should have a fall in consumption. This is surely correct – a fall in inflation in these circumstances is due to a fall in demand which is caused by cuts to the economy.
Small open economy. To an extent depending on how you model it, a large part of the bounce in consumption in Ireland can be traced to payroll and domestic economy expenditure of exporting companies, and their domestic economy multipliers.
The question that has to be asked, in thinking about the matter, is how relevant to the real world is this type of economic debate?
A more topical reference might be the link below.
http://norden.diva-portal.org/smash/record.jsf?pid=diva2%3A701898&dswid=2840
Since this was published, Sweden has been through a political process which bears an uncanny resemblance to one with which we are becoming familiar.
https://en.wikipedia.org/wiki/2014_Swedish_government_crisis
Courtesy of the EU, we have an ersatz version of the domestic Swedish budgetary procedure which enabled the political parties to arrive at a satisfactory conclusion and to keep the show on the road aka “Keep the Recovery Going”.
Those participating in the debate about “Dáil reform”, especially the politicians supposedly capable of implementing it, appear to have only the vaguest idea of what they are talking about. If they had, all would be concentrating on its essential function i.e. to approve a budget.
The debt shock hasn’t finished. Neoliberalism cannot generate 2% inflation anywhere. Central Bankers like Carney and Fischer end up talking BS. The GOP has lost its political voting base which followed the pied piper of Trump. Income inequality is the big issue in the US election. Real median wage is 10% lower than the 70s. Over in Europe Switzerland is in full monty deflation mode due to the weight of EZ capital looking for a safe chalet.
The system is breaking down. Anyone predicting milk and honey for Ireland given the global context needs a dose of reality.
From the Philip Lane 2010 paper.
“Although the optimal conduct of monetary policy also requires serious revision, it is important to devote serious research attention to fiscal policy.
The heated debate during the crisis across the different schools of macroeconomics about the conceptual foundations and empirical magnitudes of fiscal multipliers underlines the limited knowledge and understanding in the economics profession in relation to the potential effectiveness of fiscal policy. Moreover, fiscal policy is especially important in environments in which monetary or exchange rate policies cannot be effectively deployed. This applies to members of a monetary union or a pegged exchange rate system in relation to macroeconomic stabilisation at a country level. It also applies more generally in situations in which orthodox monetary policy is redundant, as when interest rate policy hits the zero bound.”
meanwhile … the 100 Odious Billion question ….
‘The response of depositors to negative interest rates has resulted in neoliberal economists, such as Larry Summers, calling for the elimination of large denomination bank notes in order to make it difficult for people to keep their cash balances outside of banks.
Other neoliberal economists, such as Kenneth Rogoff want to eliminate cash altogether and have only electronic money. Electronic money cannot be removed from bank deposits except by spending it. With electronic money as the only money, financial institutions can use negative interest rates in order to steal the savings of their depositors.
http://www.counterpunch.org/2016/03/09/the-financial-system-is-a-larger-threat-than-terrorism/
Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is The Neoconservative Threat to World Order.
@DOCM
The economics profession has more than enough neoliberal fellow travellers who see monetarism as the greatest novena, capable of curing cancer. And it can’t even generate 2% inflation. Holy water at least has a placebo effect. But if you have spent your whole career telling yourself black is white you have to go on , duntcha?
Surely multipliers are reduced if interest rates are negative.
I posted a comment on this thread on March 10th, 2016 at 09.39 am. ???
Oh la la. 53% of French would like a vote on EU exit…via le monde
Une majorité de Français (53 %) souhaite un référendum sur le maintien ou non de la France dans l’Union européenne (UE), à l’instar de celui prévu au Royaume-Uni le 23 juin. C’est l’une des révélations de l’enquête menée début février auprès de 8 000 électeurs dans six pays de l’Union (Allemagne, France, Pologne, Irlande, Espagne et Suède) par l’université d’Edimbourg et le cercle de réflexion allemand D/part.
Can anyone recommend some reading on the theory behind multipliers? Everything is trina chéile now so I presume multipliers are too.
seafóid – its just theory! There are no real economic multipliers – only virtual ones. Though I might allow as how my credit card (with its modest credit limit) is actually an income multiplier – of sorts.
Blanchard was the multiplier guru. About 5 year back he disowned them. My half-educated guess is that back in the old days when new credit was created and fed into the economy (correlated to, but not caused by) some contemporary government sponsored fiscal boondoggle. The new credit found its way – not into assets, but into productive enterprises. Those days are no more.
Professorial level economists were at a loss to explain some elements of the causal nature of economic rates-of-growth so they resorted to the use of the Psychic Balm term “multipliers”, in much the same manner as they used the term “The Invisible Hand”. Neither term explains anything. But they sure sound important.
I did come across – ‘Post-Keynesian Economics’, ed: Kenneth Kurihara. Rutgers University Press. 1954. – it has 8 references to ‘”multiplier principle”. Very difficult reading.
seafóid – a belated update on “multipliers”. They go back to at least 1931 – R F Kahn, “The Relation of Home Investment to Unemployment” – Economic Journal, June 1931. Also, the Great Lord K has a lot to say about the matter, though he re-termed the “multiplier” as either an increase (or a decrease) in the Marginal Propensity (of wage earners) to Consume. Its described in Chapt 8 of The General Theory.
The idea is that an increase in Government (deficit) spending on infrastrucure, to relieve the devastating social effects of widespread unemployment, has two effects; it removes (primarily) unemployed persons from social welfare programmes and (secondarily) it should lead to knock-on (trickle-down) decreases in unemployments as the monetary benefits of the primary employments are absorbed by the wider society. There are some Terms and Conditions here! As the Marginal Propensities to Consume increase, more consumer goods and services are consumed and the economy slowly improves – up to a limit.
The total level of employment (the adult workforce participation rate?) is crucial to the operation of ‘multipliers’. There is a ‘ceiling’ on adult participation – hence on the multiplier effect also.
An interesting observation of both authors is that the MPC approaches zero as wealth (high income) increases. The richer spend less and less (proportionately), whilst the poorer spend more and more. Funny that. Moral: Do not reduce the incomes of low-earners – you’ll get falling consumption. Or is that deflation as some prices have to decline in parallel?
There is a very precient warning by Keynes – about the use of algebraic economic models (chapt. 21 – ‘The Theory of Prices’): –
“Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rely on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols”.
In my economics class of 214 undergrads – not one (apart from myself) had read neither Smith nor Keynes. ????