Author: VD

Mailvox: this is not the multiplier you’re looking for

Albatross gets caught attempting to pull the old switcheroo:

There are two senses in which the multiplier is used. In one sense, the multiplier is used as a statistic about government spending (i.e. suppose the government spends one dollar more, if GDP increases by 1 dollar, you have a multiplier of one). In this case, you wouldn’t understand my point. In another case, the multiplier refers to a theoretically posited increase in private sector activity because the government enables an “injection” into the economy (this is the sense in which the money multiplier exists). I meant the second sense and most Keynesians mean the second sense. You can’t understand Keynes’s thought experiment vis a vis burying money (since no gov’t money need be spent) unless you understand the injection multiplier as opposed to the statistical multiplier. I can go into further details if you’d like but I this is enough for you to understand why we came to different extensions from your conclusion.

Albatross failed to recognize which multiplier was the subject at hand. The entire 2008-2009 debate over the multiplier, and the context of the ECB study to which the linked article was referring, solely concerned the “fiscal multiplier”, which does not render Albatross’s point difficult to understand so much as entirely irrelevant. For example, here is The Economist’s article on it, to which Paul Krugman subsequently responded in his post entitled “Multiplying Multipliers”.

The debate hinges on the scale of the “fiscal multiplier”. This measure, first formalised in 1931 by Richard Kahn, a student of John Maynard Keynes, captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion.

The size of the multiplier is bound to vary according to economic conditions. For an economy operating at full capacity, the fiscal multiplier should be zero. Since there are no spare resources, any increase in government demand would just replace spending elsewhere. But in a recession, when workers and factories lie idle, a fiscal boost can increase overall demand. And if the initial stimulus triggers a cascade of expenditure among consumers and businesses, the multiplier can be well above one.

The multiplier is also likely to vary according to the type of fiscal action. Government spending on building a bridge may have a bigger multiplier than a tax cut if consumers save a portion of their tax windfall. A tax cut targeted at poorer people may have a bigger impact on spending than one for the affluent, since poorer folk tend to spend a higher share of their income.

Crucially, the overall size of the fiscal multiplier also depends on how people react to higher government borrowing. If the government’s actions bolster confidence and revive animal spirits, the multiplier could rise as demand goes up and private investment is “crowded in”. But if interest rates climb in response to government borrowing then some private investment that would otherwise have occurred could get “crowded out”. And if consumers expect higher future taxes in order to finance new government borrowing, they could spend less today. All that would reduce the fiscal multiplier, potentially to below zero.

However, it must be noted that the notion of potentially reducing the fiscal multiplier below zero is practically – I should not have said theoretically – unthinkable, for the obvious reason that there has never been a time since the original publication of The General Theory that any of the developed economies has come anywhere close to reaching full employment, except for revised definitions of “full employment” that all fell well short of an economy operating at full capacity. No Keynesian or Neo-Keynesian spends any time whatsoever considering theoretical sub-zero stimuli, for the obvious reason that they tend to render the entire Keynesian perspective either unnecessary or counterproductive. The usual Keynesian claim is that fiscal multipliers reliably range from 1.5 to 3x… which has been shown empirically to be untrue.

Furthermore, Albatross not only erroneously attempted to apply the “injection multiplier” to a discussion that explicitly concerned the “fiscal multiplier”, but also defined the injection multiplier incorrectly. The injection multiplier is not “a theoretically posited increase in private sector activity because the government enables an “injection” into the economy” but rather “any injection into the economy via investment capital, government spending or the like [that] will result in a proportional increase in overall income at a national level.” It includes, but is not limited to, the definition he provided.

Returning to the orginal point, it’s not at all surprising that the fiscal multiplier has been determined to reliably be less than one. As I noted in RGD, Robert Barro’s study of federal spending in WWII demonstrated that even in the most commonly cited Keynesian success story, “the estimated multiplier for defense spending is 0.6-0.7”.

John Maynard is still dead

But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:

In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”

Here are some key findings.

We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.

This is contra everything that is ever taught about GDP in mainstream economics. TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.

And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.

Sand in the iron fist

Even a murderous, totalitarian government isn’t enough to maintain complete control sometimes:

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.

The last of Wukan’s dozen party officials fled on Monday after thousands of people blocked armed police from retaking the village, standing firm against tear gas and water cannons.

Since then, the police have retreated to a roadblock, some three miles away, in order to prevent food and water from entering, and villagers from leaving. Wukan’s fishing fleet, its main source of income, has also been stopped from leaving harbour.

The Chinese Communists will win this one of course. But they won’t always win. And they have to win every single time to maintain control. The rebels only have to win once. It is interesting to see how even communist societies have to deal with the realities of socionomic pressure once the credit boom ends.

The most importantest nomination ever!

Ross Douthat considers Ron Paul’s surge in Iowa and is inspired to accomplish the rarely seen double-sellout on principle:

Even as the national party prepares to choose between the former speaker and the former Massachusetts governor, Iowa Republicans may end up choosing between Gingrich and Representative Ron Paul. In every post-Thanksgiving poll but one, Paul has been neck and neck for second place in Iowa. In most of them, he has lagged well behind the soaring speaker, coming in just below 20 percent while Gingrich hovers around 30. But a new Iowa survey, from Public Policy Polling, shows Gingrich leading Paul by just a single point, 22 percent to 21….

Iowa Tea Partiers face a choice. If the town hall crashers and Washington Mall marchers of 2009 settle on a Medicare Part D-supporting, Freddie Mac-advising, Nancy Pelosi-snuggling Washington insider as their not-Romney standard bearer in 2012, then every liberal who ever sneered at the Tea Party will get to say “I told you so.” If Paul wins the caucuses, on the other hand, the movement will keep its honor – but also deliver the Republican nomination gift-wrapped to Mitt Romney.

It’s a stunning achievement. In order to prevent Barack Obama from winning a second term, Republicans must sacrifice principle to pragmatism and nominate the self-styled progressive Republican, Mitt Romney. But in order to prevent Mitt Romney from being nominated as the Republican candidate for president, Tea Party Republicans must sacrifice principle to pragmatism and vote for the Medicare Part D-supporting, Freddie Mac-advising, Nancy Pelosi-snuggling Washington insider, Newt Gingrich.

The problem is that too many Republicans listen to this sort of nonsensical analysis, all of which is intended to accomplish precisely one purpose: convince conservatives to vote against their own principles. Once they have done that, it doesn’t matter who wins; the Bank Party has already won.

There are actually only two distinct candidates in the 2012 election. There is Ron Paul, who represents the U.S. Constitution, and there is Newt Romney O’Bama, who represents the Bank Party. The unprincipled pragmatists always like to claim, in defiance of both mathematics and logic, that a vote for Not-X is a vote for X, and yet, whereas the more salient and material fact of the matter is that a vote for X, Y, or Z is a vote for the set of {X,Y,Z}. There is no substantive difference between Romney, Gingrich, and Obama on any of the major issues presently facing the nation.

I don’t believe Ron Paul can win the Republican nomination for president. But then, I didn’t believe Tim Tebow could lead the Broncos to the top of the AFC West either. Roll Ron roll!

A progressive standard-bearer

His views “are progressive”. That is straight from the man’s mouth. Seriously, even in the eye of the economic hurricane, this is the man that the Republican establishment genuinely prefers to Ron Paul… which should tell you everything you need to know about the Republican Party. If they nominate Newt Romney, there is absolutely no way that any self-respecting conservative or libertarian can belong to or support the party.

Facebook is dying

This is anecdotal, but I have the impression that Facebook is rapidly going the way of MySpace. As you know, I am also a regular blogger at the Black Gate, which began receiving a substantial amount of traffic from Facebook about two years ago.

However, looking at the pattern of the traffic received over the course of the year, I began to notice that the amount of traffic received from Facebook was declining. Consider the following numbers as percentages of the Facebook-derived January traffic.

Jan 11 100.0
Apr 11 69.3
Jul 11 45.7
Oct 11 63.5
Dec 11 26.5 (est.)

Now, one might reasonably suspect that this is due to a seasonal pattern, except for the fact that the December 2010 traffic was 112.0… with 35 percent less overall traffic than is presently indicated for December 2011. Since Black Gate’s traffic has been growing steadily throughout the year, this means Facebook-derived traffic as a percentage of all traffic has fallen even more drastically than it appears in the direct 112:26.5 year-on-year comparison.

I was never a Facebook enthusiast, but I really don’t use it anymore. It would seem to appear that I am not the only one.

The unconservative candidate

It used to be that Republican “moderates” would portray themselves as socially moderate, but fiscally conservative. Now, however, they’re not even fiscally conservative anymore:

The tax plan proposed by Republican presidential candidate Newt Gingrich would add $1.3 trillion to the U.S. budget deficit in 2015 alone, a new analysis shows, complicating his goal of balancing the government’s books.

The analysis by the nonpartisan Tax Policy Center compares the federal government’s take under Gingrich’s proposal with projected U.S. revenue if current tax law ran its course and existing income tax cuts expired as scheduled after 2012.

One interesting aspect of this presidential campaign is that it has revealed the Republican candidates to be every bit as unwilling to cut government programs as the Democrats. As numerous observers have pointed out, the Republicans elected to the House in 2010 were elected to do one thing: reign in federal spending. And they have manifestly failed to do that.

Tax cuts are definitely desirable, but they are less desirable and less necessary than spending cuts. And tax cuts without spending cuts means even more debt.

This is why a second Obama term would be vastly preferable to either a Romney or Gingrich presidency. Obama is actually more constrained on spending by a Republican House than either of the two Republicans would be. It’s almost beside the point to describe any of the three as being Democrats or Republicans, though. They all belong to the Bank Party.

Bear with me

The new Blogger interface finally supports sufficient column widths to permit my favored layout, so I’m experimenting with going to it and using Disqus. Expect an amount of chaos today. I’m trying to figure out how to turn off the requirement to provide an email address in order to comment; if I can’t, I’ll just trash the whole experiment again.

UPDATE: Thus far, the new interface permits a much better blog search and blog archive functions. So that’s good. Still figuring out how to recreate some of the other functions, though. And the interface for modifying text and text colors in the gadgets is really poor; it insists upon using the same color for the post bodies as well as on the sidebars. This is a problem if one is light and the other is dark.

UPDATE II: Disqus says the following: “Can I remove the email requirement for Guest commenting?

No, Guest commenters are required to provide an email address for notifications and moderation purposes, however the email address will of course never be displayed and does not require verification.”

UPDATE III: I have no idea why IntenseDebate was showing up before and now is not showing up. Or why these Blogger comments look so different than they do on Alpha Game. Or why no one seems to be able to DESIGN A FREAKING COMMENT SYSTEM THAT JUST WORKS. I still miss that original one, whatever it was called. It worked better five years ago than anything I’ve seen lately.

UPDATE IV: And I have officially exhausted the amount of effort I am willing to expend upon “improving” the blog structure. The classic template may be ancient and creaky, CoComment may be quirky and buggy, but it works better than the up-to-date alternatives. There is no point in breaking things simply to make use of comment systems I like even less than what I’ve got.

Mailvox: A new GOP foreign policy

A VP reader who writes at Policymic recommends the GOP adopt Ron Paul’s foreign policy:

Republicans love to wax poetic about America’s founding documents. Read anything by popular conservative pundits to get up to speed on how our precious Constitution has been shredded by liberals and why America desperately needs to return to the principles contained therein.

The major Republican presidential contenders all share that view as well. Newt Gingrich’s website, for example, tells readers that religious liberty and life are unalienable rights “contained in the Declaration of Independence.” Mitt Romney has similarly ripped on “advocates of “secularism” for taking the idea of separation of church and state “…well beyond its original meaning.”

The problem, however, is that Republicans don’t endorse their own back to basics argument when it comes to foreign policy. Conservatives, historically speaking, don’t a endorse the idea that America is the world’s police force, and for the sake of consistency and the good of the country, today’s Republicans need to abandoned this interventionist mindset.

This may sound like a strange argument if you don’t know your history, so let’s briefly put it context. The idea that America should cross the globe solving every nation’s problems is a progressive one. And it makes sense when you think about it. The left generally accepts that the government ought to have a very active role in society, alleviating poverty, ensuring a level playing field or the little guy, and so on. So why wouldn’t the same be true of foreign policy as well?

It’s all quite true. Unfortunately, it’s all quite irrelevant. The observable fact of the matter is that most Republicans, including many who call themselves conservatives, are now progressives on the foreign policy front. There is literally nothing conservative about the Republican Party’s mainstream anymore, and they are at their most left-wing and pro-government intervention with regards to foreign policy.

What they should do and what they can reasonably be expected to do are two completely different things. Which is why they are so often called, quite correctly, the Stupid Party.

Tebow goes viral

Sports Illustrated correctly notes a new aspect to the phenomenon:

Before, when Tebow pulled rabbit after rabbit out of his hat, it was easy enough to chalk it up to Denver’s new quarterback giving the entire team a jolt — more confidence that, no matter what, the game was never out of reach. That’s all still true, but the reason this Broncos run has continued goes beyond that.

What’s happening now is that opposing teams are starting to buy in, too. No one will ever admit to it, of course, but Tebow is in the league’s head.

I noticed this last night too. The faces of the Bears players, and especially their coaches, showed something between concern and outright fear during the fourth quarter. What Tebow has done is transformed the Broncos into something like the NFL version of the Terminator; they simply will not give up even when the game is obviously over.

Consider Marion Barber. He isn’t a stupid player or a bad one. The one thing he is known for is his hard running and he even made a great catch in overtime. The mistake he made at the end of regulation time when he didn’t go down soon enough and was forced out of bounds wasn’t indicative of stupidity, but desperation. The only way to be absolutely sure of victory was to get the first down, and so he foolishly decided to go for it.

And the way the Broncos defense was swarming to the ball and attacking even in overtime when the Bears were in field goal range is simply not normal. In most cases, a team in that position gives up and allows the running back or receiver go for the score. Those who try to distinguish between Tebow and the Denver defense are completely missing the point. A great quarterback will lead an offense. A great inspirational leader will inspire the entire team.

I remember when a mediocre team had a truly dreadful quarterback situation. The Baltimore Ravens didn’t score an offensive touchdown for FIVE STRAIGHT GAMES, but still managed to win two of them on the strength of their epic defense. When asked to make a distinction between their great defense and awful offense, Ray Lewis refused. They were one team, he explained, and if the offense couldn’t manage to get it done for one reason or another, all that meant was that the defense would simply have to step up its game.

And behind the inspirational leadership provided by Lewis and the powerful team spirit forged by that month of adversity, the Ravens didn’t merely win the Super Bowl, they smashed their way through the AFC playoffs by forcing other teams to quit. I remember seeing Eddie George almost cringing in front of Lewis and receivers pulling up their slants rather than go over the middle. NFL football requires such an intense effort that a mentally defeated team will find it difficult to beat even an inferior opponent.

That’s why Tebow and the Broncos outperform in the 4th quarter. It’s no longer that they don’t stop giving 100 percent, it’s that the other team knows they won’t stop giving 100 percent. What gives Tebow his uncanny ability to win isn’t his belief in God, his belief that God wants him to win (which he doesn’t actually believe anyhow), or even his teammates’ belief in him. What gives Tebow his uncanny ability to win is his unusual ability to maintain hope, even in the face of certain failure.

Peter King spoke with Denver’s kicker: The 51-yard winner looked like it was a Tiger Woods tee shot on a par-5 hole. It almost drilled a hole through the net behind the goalpost.

“You know what’s fun about this?” said Prater. “Everyone keeps saying what Tim can’t do. And he goes out every week and we win. We love the guy. He’s so real. Now we just feel like anything’s possible.”

Of course, Tebow isn’t the only quarterback whose deeds are looking divinely inspired this season. He may be less outspoken, and his religious beliefs are much less discussed, but Aaron Rodgers is also an evangelical Christian. Tom Brady, on the other hand, quite clearly sold his soul to the Devil, aka Bill Belichick, some years ago.