Showing posts with label multiplier. Show all posts
Showing posts with label multiplier. Show all posts

Wednesday, August 6, 2014

Josh Bivens With Another Reminder About the Stupidity of Austerity

By Josh Bivens

[...] there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels [...] Government transfers—Social Security, unemployment insurance, food stamps, Medicaid, Medicare—are not classified as government consumption and investment spending in the GDP accounts. Instead, they show up as increased consumption spending [...] Most of the political argument has centered on the recovery phase of this cycle, simply because the actual recession began before the Obama administration took office. Further, it’s really only been since 2011 that government spending has been a truly significant drag on growth. Before then, between the Recovery Act and what we have called “ad hoc stimulus measures” (like the payroll tax cut in 2010), we didn’t have real austerity until the fallout from 2011’s Budget Control Act (passed in the wake of Republican debt ceiling brinksmanship in summer 2011) began.

Read rest here.

Mark Blyth's book Austerity: The History of a Dangerous Idea is highly recommended.

Wednesday, July 23, 2014

CEPR | Stimulus and Fiscal Consolidation: The Evidence and Implications

In a previous post, see here, Matias provided a graph that displayed the fiscal results for the US as a share of GDP from 1993-2014, along with a discussion of the misconception that democrats are nothing but tax/spend liberals. I thought it would be pertinent to post this paper by Dean Baker and David Rosnick providing conclusive evidence on the effects of stimulus packages and fiscal consolidation during the recent economic crisis.

From the abstract:
The first part deals with the most important literature on the subject, the consensus in the research of the past decade attests a clear counter-cyclical effect of stimulus packages during a prolonged recession. The second part deals with the impact of changes in government consumption and investment to growth. For this data for developed countries in 1980 are analyzed. Consistent with much of the previous literature have increased government spending during a crisis has a positive effect on economic growth. In addition, the period is simulated after the crisis, the multiplier effect is around 1.5. The third part focuses on the production potential, which has declined sharply due to the economic crisis. This would have to include a comprehensive model that analyzes the effects of an economic stimulus package with, since the effect could turn out relative to the size of the stimulus package as significant.
Read rest here.

Friday, November 1, 2013

The Hidden Benefits of Food Stamps

From Mother Jones
Although the Republican-controlled House cuts are unlikely, given a promised veto from President Obama, food stamps will still be slashed by $5 billion on Nov. 1, when the 2009 Recovery Act that increased the aid along with other stimulus spending expires. The 13.6 percent temporary boost in food stamp dollars helped more than half a million Americans escape food insecurity, and millions more to climb out of poverty—4.7 million in 2011 alone, according the Center on Budget and Policy Priorities (CBPP).The Nov. 1 reduction means $36 less per month for a family of four and $11 less for a single person.
See rest here

The Failure of American Governance in 1 Depressing Chart

From The Atlantic:
Infrastructure spending has a higher bang for the buck than just about any other kind of spending. The San Francisco Fed, for one, estimates that every $1 of highway spending raises GDP by $2. Second, even if you don't believe in multipliers, infrastructure spending is something we have to do eventually—so we'd save money if we do it when interest rates are low. Third, investors are paying us 0.43 percent after inflation to borrow for 5 years.
Now look at the above, via Cardiff Garcia, of inflation-adjusted infrastructure spending in the U.S. the past decade. Weeping is optional.
 See rest here

Friday, December 28, 2012

To Failure

The ministry of silly budgets

Philip Larkin was wrong; failure actually does come dramatically indeed. Or so it seems if you look at the failure of the fiscal policies of the Tory cabinet. John Lanchester has a great piece in the new issue of the London Review of Books showing the perverse effects of austerity. Yes the multiplier works, and it is rather large he contends.

As much as the story of the Cameron/Osborne failure [they've promised to reduce the deficit from 4.8% of GDP to 1.9% and delivered after two years a mild hike to 4.9%], or the problems with the 'independent' Office of Budget Responsibility [you have to love the name, it's like they work for the Ministry of Silly Walks] and the additional nuggets on IMF revisionism, there is an interesting take on the history of economic ideas.

Lanchester correctly points out that:
"About thirty years ago, when Keynes was in the depths of economic unfashionability, going up to a group of macroeconomists and trying to start a conversation about the multiplier would have been roughly like going up to a group of astrophysicists and trying to start a conversation about your star sign."
Lucas suggested that if you talked about Keynes at a conference people would giggle. Note that Richard Kahn, the one that formalized the multiplier in 1931, one of the few theoretical concepts that has direct economic policy applications and is passible of empirical falsification, did not win the Sveriges Riksbank Prize (known as the Nobel).

Even better, he actually gets a good definition of what would be essential in economics. In his words:
"Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’ In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households’ (Italics added)."
Mine would be 'demand determines income,' but we are splitting hairs. The orthodox would be either 'markets are efficient' or 'supply creates its own demand.' And here lies a crucial problem. These last two are actually quite well known (Efficient Market Hypothesis and Say's Law), but the heterodox ones are not. Not only we have worse PR, but also when the mainstream fails it is very good at avoiding any blame. In fact, even Lanchester, in an otherwise perceptive discussion, falls into the trap that a good one sentence definition of the field of macroeconomics would be "nobody knows anything." Not true, 'the mainstream knows very little' would be better.

Thursday, June 21, 2012

And here's to you, Mrs Robinson


Jesus loves you more than you will know (wo, wo, wo) ...I know, but I was going to talk about the other Mrs Robsinson, Joan Violet (née Maurice), the main disciple of Keynes,* as I had promised in a previous post. Joan Robinson's contributions to economics demand several posts. She has participated, as Maria Cristina Marcuzzo noted, in three Revolutions, namely: the imperfect competition, the Keynesian and the capital debates ones.

And to reduce her to those three one has to fit her contributions to growth theory into a subcategory of either the Keynesian Revolution (the extension of the Principle of Effective Demand to the long run) or the capital debates (the critique of mainstream growth theory), and omit her various other contributions to monetary theory (e.g. endogenous money and the circuit), methodology (e.g. history vs. equilibrium), Marxist economics and so on. She was prolific for sure.

There are several great reviews of her contributions in all of them, which would make my post irrelevant. But what I want to discuss is the point raised in Sergio Cesaratto’s presentation, that in the last one of those revolutions her contributions might have been seen as negative. In his exposition Sergio emphasized quite correctly her rejection, at least in certain contributions, of the notion of long term normal equilibrium positions, and, hence, the traditional method of economics.

This was done, for the most part, to emphasize the notion that history matters and that path dependency was important, since the process of reaching the equilibrium would affect the equilibrium itself. Arguably, the role of uncertainty, following Keynes and some post-Keynesians, played a role in her rejection of normal equilibrium positions.

Path-dependency is indeed an important feature of real economies, and Robinson was quite right in emphasizing its relevance.++ However, the fact that the normal or long run equilibrium positions might depend on the initial conditions and on the trajectory to its final position would render the very notion of equilibrium irrelevant for the analysis of real historical situations might not be granted.

In her view, the notion of equilibrium originated from a misleading mechanical analogy with movements in space, and shouldn’t be applied to movements in time.  However, nothing suggests that the long run position of equilibrium cannot be path dependent and actually represented by an equilibrium position. Let me suggest that the idea of the supermultiplier is, for example, a case in point. Output depends on the autonomous components of demand, and investment, as derived demand, behaves in a way which leads to the adjustment of capacity (supply conditions) to demand.  It is an equilibrating process, but not a unique one, or one that leads to a determinate path of accumulation, since alternative initial conditions (e.g. sizes of the relevant coefficients) lead to different outcomes.  Also, changes in several factors can affect the trajectory by which capacity adjusts to demand.

Further, uncertainty, or true, fundamental and non-probabilistic uncertainty was also a relevant component of Robinson’s critique of equilibrium positions. Uncertainty also suggests that historical processes are complex and could not be reduced to equilibrium analysis. This was also in line with the post-Keynesian developments in the 1970s, by Paul Davidson and others, that suggested that uncertainty was central for Keynes understanding of the functioning of the economy.

That is again true. Uncertainty was important for Keynes, and is central in the functioning of real economies. However, uncertainty does not preclude the use of equilibrium. Uncertainty implies that agents use conventions, rules of thumb in order to make decisions. In an uncertain world agents stick to social norms, and even if there is significant uncertainty on an individual basis, the institutional framework tends to reduce uncertainty. In that sense, for example, the New Deal reforms decreased to a great extent the degree of uncertainty in the functioning of the economy, and guaranteed a high degree of stability to workers.  Another example of how institutional framework would reduce uncertainty is the use of capital controls (and fixed but adjustable exchange rates) to reduce the pressures on interest rates during the Bretton Woods era. With that framework, fiscal expansion with low real rates of interest produced a normal equilibrium with low unemployment level. In other words, nothing implies that uncertainty suggests that the multiplier and accelerator processes are not operational or that normal positions of equilibrium cannot be achieved.

In my view, the two main problems to Joan Robinson’s critique of the equilibrium method in the latter part of her career are that, on the one hand, by emphasizing the independence of the investment function and of uncertainty it led to the development of a set of models (later incorrectly referred to as Kaleckian) that bring back the entrepreneur as the central figure in economic growth (the so-called profit-led regimes). On the other, and even more problematic, it took place at the same time that (as noted by Garegnani) the mainstream rejected the old notion of long term equilibrium, and started to use dominantly the intertemporal models (this ones in fact terrible mechanical analogies to movement in space).

The old classical (and indeed even the old Marshallian) notion of normal positions, which allowed for historical contingency and path dependency was abandoned by the mainstream, but that was seen by several heterodox authors as an improvement because now mainstream models were ‘capable’ of incorporating multiple equilibria and instability. In fact, Keynes point was that normal situations (and hence stable equilibrium positions) in capitalism were sub-optimal. And Joan Robinson, at least in part, is responsible for some of those heterodox (very confused) views of the development of the mainstream.


* Richard Kahn would be the other candidate, but his contributions to the Keynesian Revolution were considerably less visible, if admittedly incredibly important, with the formalization of the multiplier on the top of the list. Kalecki and Kaldor, although quintessential Keynesians, were not disciples of Keynes in a direct way, and Sraffa, although personally close, and contrary to what some think, very favorable to the idea of effective demand, was not a disciple proper either.

++ Note that path-dependency is not exactly the same as hysteresis, a point raised by Mark Setterfield. I’ll expand on this on another post.

PS: A paper in which some of the pros and cons of Robinson's approach to economics, in particular on money and growth, is available here (subscription required).