Tag: economics

PZ Myers attempts economics

Bemusement ensues. I haven’t thought much of PZ Myers ever since I was under the mistaken impression that he was a strange woman producing nonsensical criticisms of my WND columns. What I have come to find uniquely amusing about him is the way he applies his intellectually inexcusable Courtier’s Reply as a general intellectual principle; the man never allows complete ignorance to prevent him from spouting a ludicrous and uninformed opinion:

It reminds me why I detest Libertarians, and Ron Paul in particular. The man would be a total disaster for the economy, in addition to being a poisonous social regressive.

Just to be clear, PZ Myer’s believes Ron Paul would be a total disaster for the economy. What is so insane about this is that even neocons and moderate Republicans who absolutely loathe Ron Paul and are pulling out all the stops to prevent his nomination will readily admit that Ron Paul is the only national American politician who knows the first thing about economics, being the only one who repeatedly, for literal decades, warned about the evils of an economy built on credit.

Statements like this offer conclusive proof that self-styled champions of science often don’t give a damn about science or empirical evidence, they are merely using the patina of science to further their philosophical and political ideologies.

Explaining economics to the EPJ

Even in response to public criticism, it seems a little strange to have to explain what is quite literally textbook economics doctrine to someone writing for the Economic Policy Journal. Yesterday, Robert Wenzel claimed “Vox Popoli is caught in the quicksand hailing Denninger nonsense” and attempted to explain himself thusly:

First off, credit is not money. Money in the United States at present is the dollar. The Federal Reserve can create more money by buying credit instruments, but they could buy anything. First off, credit is not money. Money in the United States at present is the dollar. The Federal Reserve can create more money by buying credit instruments, but they could buy anything. It is also true that because of the fractional reserve system, banks create money in Fed orchestrated fashion by issuing credit, but again the banks could buy any asset, including, Salavdor Dali paintings or stock equity, and expand the money supply. The key factor to understand is that it is not credit creation, but the money creation that is at the heart of an expanding money supply. If the Treasury borrowed money but it was bought by investors, without any involvement by the Fed, the money supply wouldn’t expand at all.

And what is a “dollar”? A dollar is presently a credit instrument, specifically, a credit instrument known as a Federal Reserve Note. This is what Mises defines as “credit money”, and not, as is commonly assumed, “fiat money”, nor is it “commodity money”, as was the case with the historical dollar, which was defined in 1792 as 24.056 grams of silver. Wenzel clearly doesn’t realize that the entire inflation/deflation discussion revolves around the very question he ignores, namely, the current nature of the dollar. Further to this point, as I have repeatedly pointed out, most purchases are not made by currency, but by credit. That is why the inflationary effect of the rapid increase in the M2 money stock, 9.65% in the last year alone, is not showing up in prices to the extent one would normally tend to expect, thus leading to dubious claims of a sudden and simultaneous fall in monetary velocity. The real reason for the unexpectedly moderate effect of this rapid M2 expansion is that the $9.5 trillion increase in the money supply is dwarfed by the $53 trillion in outstanding credit, which has remained stubbornly flat since 2008. To be fair to the inflationistas, however, it should be pointed out that we’re not seeing any significant price deflation yet because the Federal Reserve and the federal government have been fighting deflation to a standstill over the last three years with the combination of the large increase in M2 and the 92% increase ($4.8 trillion) in the federal debt. Note that since 2008, this expansion in federal credit is more than twice the size of the expansion in the M2 money stock.

Second, the interest rate maintained by the Fed is not “zero-percent…presently” and it never has been during the crisis. The current effective Fed Funds rate is 0.07%.

This is technically correct… and also happens to be silly and misleading pedantry. The 0.07% Fed Funds rate is effectively free money, especially since the rate was historically over 5%, going as high as 20% in the early 1980s. I also note that the $640 billion that was loaned to 532 European banks yesterday was generally considered to be free money although it has a nominal interest rate of 1%. To put it into practical terms, Best Buy selling new PlayStation 3 consoles for $4.20 instead of $299.99 isn’t quite free, but it is perfectly reasonable to describe it that way.

I have no idea where Denninger or Vox Popoli get the idea that credit “shifts demand forward”. Credit transfers money from one person to another. If someone invests, say, in a newly issued Treasury Bill, he is foregoing consumption but the money ends up with the government which then spends it. Money invested in a capital good creates future consumer goods, but that doesn’t mean that there is no current demand. It merely means that the current demand is for the capital goods.

This is an astonishing admission and reveals that Wenzel quite literally does not know basic economic theory. One finds numerous references to the way in which credit time-shifts consumption by pushing the demand curve outward in various economic textbooks ranging from old ones like Paul Samuelson’s 1948 Economics to Greg Mankiw’s 2009 Principles of Economics.

For example, Samuelson writes about the time-shifting aspects of credit when he wrongly attempts to distinguish between internal and external debts:

Borrowing and Shifting Economic Burdens Through Time. Still another confusion between an external and internal debt is involved in the often-met statement: “When we borrow rather than tax in order to fight a war, then the true economic burden is really being shifted to the future generations who will have to pay interest and principal on the debt.” As applied to an external debt, this shift of burden through time might be true…. If we borrow munitions from some neutral country and pledge our children and grandchildren to repay them in goods and services, then it may truly be said that external borrowing represents a shift of economic burden between present and future generations.
– Economics, p. 424 (1948)

If one realizes that Samuelson’s distinction between internal and external debt is only meaningful in a nationalistic context, it should be obvious that the distinction is irrelevant with regards to the question of whether demand is being pulled forward or not. Another example can be seen in a textbook published 61 years later, as Greg Mankiw first references the concept of pulling demand forward in an indirect manner:

[T]he political response to rising inequality—whether carefully planned or the path of least resistance—was to expand lending to households, especially low income households. The benefits—growing consumption and more jobs—were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly. Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the U.S., the expansion of home ownership—a key element of the American dream—to low- and middle- income households was the defensible linchpin for the broader aims of expanding credit and consumption….

In the end, though, the misguided attempt to push home ownership through credit has left the U.S. with houses that no one can afford and households drowning in debt Ironically, since 2004, the home ownership rate has been in decline.
– Principles of Economics, p. 431 (2009)

It’s not ironic in the slightest, though, since this is precisely what economic theory dictates and was, in fact, the basis of my own 2002 prediction of the coming collapse of the real estate markets. The demand curve was shifted outwards by the extension of easy credit, pricse rose and home sales increased for a period of time, after which both prices and home sales crashed. Many readers will recall that exactly same thing happened – and that I predicted it at the time – with the automotive and home-buying incentive programs pushed by the Obama administration in 2009. Mankiw eventually proceeds to present the explicit mainstream doctrine to which Denninger referred in his original post:

Why Credit Cards Aren’t Money It might seem natural to include credit cards as part of the economy’s stock of money. After all, people use credit cards to make many of their purchases. Aren’t credit cards, therefore, a medium of exchange?

At first this argument may seem persuasive, but credit cards are excluded from all measures of the quantity of money. The reason is that credit cards are not really a method of payment but a method of deferring payment. When you buy a meal with a credit card, the bank that issued the card pays the restaurant what it is due. At a later date, you will have to repay the bank (perhaps with interest). When the time comes to pay your credit card bill, you will probably do so by writing a check against your checking account. The balance in this checking account is part of the economy’s stock of money.

Notice that credit cards are very different from debit cards, which automatically withdraw funds from a bank account to pay for items bought. Rather than allowing the user to postpone payment for a purchase, a debit card allows the user immediate access to deposits in a bank account. In this sense, a debit card is more similar to a check than to a credit card. The account balances that lie behind debit cards are included in measures of the quantity of money.
– Principles of Economics, p. 624 (2009)

Note that it doesn’t matter if the concept is described as “deferring payment”, “pulling demand forward”, “shifting the demand curve outward”, or “time-shifting economic burdens”. These are four different ways to describe the same phenomenon, and regardless of how it is phrased, it has long been used to attempt to justify the economically incorrect juristic claim that credit is not money.

Finally, defaults, in and of themselves, have nothing to do with deflation/inflation in the system. If the Fed buys Treasury bills and creates money to do so, the money is out in the system. If the Treasury defaults on the Bills issued that doesn’t mean the amount of money in the system shrinks. A credit default is thus not “the equivalent of burning paper currency.”

This statement merely shows that Wenzel has no understanding of how the monetary system actually works. He clearly pays no attention to the Federal Reserve’s Z1 report, otherwise he would recognize that the 19.6% reduction ($3.3 trillion) in financial sector debt and 4.8% reduction ($663 billion) in household sector debt are a) the result of defaults and b) have had a profound effect on the deflation/inflation in the system being the reason behind the massive increase in federal debt and the expansion of the money supply.

Denninger nonsense, and apparently Vox Popoli’s, is complex, but when pulled apart at any strand, it doesn’t hold up. It has taken six paragraphs to refute two Vox Popoli confused paragraphs. Denninger and Vox Popoli make bold statements without the logic to back them up. It takes many statements to refute their bold ones because the foundation has to be established.

As I said, I am not going to debate these characters on every point. They shift too much without consistency or substance, you could spend decades trying to refute them and they will simply come out with some new statement that doesn’t reference their earlier points.

I will only refute them when I see major whoppers or new major characters spouting their nonsense. Just know that their arguments in general are disjointed, tend to ignore reality and tend to use technical terms and/or themes in a manner not used by anyone else on the planet—thus adding even more layers of complexity and confusion to their arguments.

It is more than a little amusing to see someone who neither knows nor understands Keynes, Samuelson, or even Mankiw, let alone Mises, attempt to claim that Karl Denninger and I, two of the very few observers who correctly predicted the present crisis, are spouting nonsense or presenting disjointed arguments. The fact that he doesn’t understand them does not make them nonsensical. And his genuine belief that we are using “technical terms and/or themes in a manner not used by anyone else on the planet” only serves to conclusively prove his ignorance of economic theory. While I’m tempted to cut Wenzel some slack due to his support of Ron Paul, that is unfortunately not my idiom. So, to end my response with all the tender mercy of Van Helsing driving home a stake, I shall conclude by quoting Ludwig von Mises:

In a developed monetary system, on the other hand, we find commodity money, of which large quantities remain constantly in circulation and are never consumed or used in industry; credit money, whose foundation, the claim to payment, is never made use of;* and possibly even fiat money, which has no use at all except as money.
– The Theory of Money and Credit, p. 103 (1953)

*I emphasize the bolded text for the benefit of those who may have forgotten the central point of Karl’s original post.

Explaining debt-deflation

Karl Denninger explodes the myth of “time-shifting” expenditures:

We have here a problem in understanding basic economics, a rather odd thing for someone who believes in the central premise that inflation is “always and everywhere a monetary phenomena.” Wenzel is not alone; classical economists (most of them anyway) ignore debt (that’s credit on the other side!) because they assume that the function of debt is simply to time-shift. That premise only holds true if you ever intend to (and do) pay the debt off. Of course there’s this problem — the American Government has never done that, and over the last 30 years (from 1980 forward) debt has grown faster than GDP has in every quarter until the crash and now it’s doing it again.

This puts the lie to “time shifting” and makes the additional credit in point of fact a naked short on the currency. And what is a naked short? It’s counterfeiting! What happens when you counterfeit something? It’s illegal to counterfeit shares of stock or money because the value of each instance of that thing goes down as you’re representing in the market that there are more of them.

Heh wait a second….. that’s exactly what unbacked emission of currency does, right!

Bingo.

This is a clever and succinct means of explaining what so many people find inexplicable. It should be obvious that credit is a form of money, for the obvious reason that you can exchange it for goods. I further note that it is presently of near-equal value with cash. (This is a reference to the zero-percent interest rate presently maintained by the Federal Reserve.)

The conventional response has been to claim that all credit does is shift demand forward… but that can only be true if the credit is repaid. A credit default is therefore the equivalent of burning paper currency. This is why I have often stated that the inflation/deflation question hangs on the matter of whether the governments can and/or will print faster than they default.

And a look at history shows literally hundreds of sovereign defaults and a very few attempts to print away the deficits, which means that the default option is the likely choice in the end.

This news may help explain how it works: “523 banks borrow €489bn from ECB – bonds and markets rise”.

Now ask yourself, what did those banks buy with those $640 billion borrowed? Stock and bonds, perhaps?

Yeah, that’ll work

Zerohedge notes the circular nature of the Italian bailout:

The EU was already embarrassed into releasing a press release that it could procure €150 billion in Eurozone contributions to the IMF rescue, now that the UK is out of the picture and the December 9 Eurosummit agreed upon total of €200 billion including non-Eurozone contributors (mostly the UK with €30.9 billion) has been “adjusted.” Now we find that the rabbit hole goes even deeper into Bazooko’s Circus because according to a just released update, of the remaining meager €150 billion in funding, Germany will be responsible for €41.5 bn, France at €31.4 billion, and Italy will need to provide €23.5 billion. To, you know, bailout Italy.

This could catch on! If you’re in debt, just bail yourself out! I’m beginning to think we should start administering drug tests to the mainstream economists and the European finance ministers. I mean, I understand the theoretical importance of animals spirits and the confidence game, but seriously, who is this supposed to fool?

The drug war against the economy

Fred Reed chronicles one effective way for G to GDP:

When I arrived in Mexico going on ten years ago, it was a mildly sleepy upper-Third World country, whatever that means—corrupt but not dangerous, not rich but hardly poor, barely middle-class overall and climbing, the mañana thing seldom noticeable, and women pouring into the professions. I parodied the American conception of Mexico as perilous hell-hole because it wasn’t. Not even close.

Then in 2006 Felipe Calderón became president, and declared war on the drug cartels. Mexicans I talk to think he did it under pressure from Washington, but I don’t know. Certainly Washington has done everything in its power to encourage it.

The war failed, as anyone with even a vague understanding of the world would have predicted. A war on drugs—foolish phrase—may be said to succeed if the price of drugs rises on the American street. It didn’t. It won’t.

Things happened that were touted as successes against the traficantes. A fair number of bosses of important cartels were killed or caught. Since Americans confuse leaders with movements and countries, this sounded like progress. Of course if, for example, you kill a leader of the “Taliban,” his second takes over within hours and all goes on as before. And if you kill the leader of a cartel, his underlings fight among themselves for the pieces, thousainds die, and law breaks down. Mexicans know this. The State Department apparently doesn’t.

Meanwhile, as always, drugs remain everywhere available in America.

At first the killing remained largely in the northern states, Chihuahua, Sonora, Sinaloa, Tamaulipas, and such, with patches south in Jalisco and, especially, Michoacan. The gringos who lived around Lake Chapala, an hour south of Guadalajara, were not much affected.

Then the mayhem arrived here at Lakeside. In recent months the gringo havens along the lake have seen firefights with automatic weapons and grenades. Bodies are frequently found. Very frequently. Until recently no gringos were killed. The narcos were fighting among themselves and against the police. Expats didn’t, and so far don’t, interest them.

A few days ago an American was killed in Ajijic, the epicenter of gringolandia. It was just an armed robbery gone bad. The narcos had nothing to do with it. Thing is, when the country falls into chaos because ofthe war against drugs, every other kind of crime follows.

The expats have begun moving out. Realtors report large numbers of houses going on the block. If this continues, and I see no reason why it won’t, restaurants will continue to close, maids and gardeners will lose their jobs, and the doctors and dentists that serve the expatriates will leave. Today a local Spanish website reports a fall of fifty percent in trade at eateries. If this continues, tourism, a crucial business in Mexico, will disappear. Already, we hear, the cruise ships have stopped going to Puerto Vallarta.

Prohibition never works very well and often the costs significantly exceed the benefits. And creating crime ex nihilo only serves to turn law-abiding citizens into criminals, it seldom significantly modifies their behavior. Just as you won’t stop reading the Bible or playing chess if such activities were made illegal, most people won’t stop drinking or doing drugs. Perhaps if pro-drug war Americans are unconcerned about the loss of Constitutional rights, the immorality, or the foreign instability created by the drug war, they will be more responsive to the way in which it is obviously serving as a negative fiscal multiplier now that the global economy is in contraction.

Alt Investors interview

Rahul interviewed Vox Day on December 14, 2011

Rahul: The first thing I wanted to get into is the argument of inflation vs deflation. I believe that we agree on many issues, but I know for sure we disagree on this topic. Why do you believe we’re going to face a deflationary depression.

VD: Because I believe the amount of credit created money, which is stored up in notional derivatives, and loans and that sort of thing, are going to decline faster than the central banks of the world are able to create money through the banks and push them out of the system.

Rahul: So what about the U.S. dollar then. We have Peter Schiff saying that the dollar is garbage. Since we artificially have low interest rates, a huge debt, and a trade account deficit, that will cause a run on the dollar.

VD: Because Peter Schiff has an amateurish understanding of the technical economic aspects of inflation as they relate to a debt-based currency. I was on his show; I like Peter and have a lot of respect for him. When it comes to the detailed aspects of economics, he doesn’t know what he’s talking about. He’s an investor and a good one. Everyone says look they’re printing money, and look at M2. They’re right, and M2 has increased. However, that’s only part of the equation. The unsophisticated way to look at the inflation/deflation question is to erroneously assume that money is paper. The central bank can print paper, and sophisticated people would say it’s all electronics (Fed would just flip a switch). What money really is, you can find this in Mises, is that money is the combo of paper money and bank credit. When you buy something, do you have to pay in paper?

Rahul: No.

VD: Off course not. How are you paying for it. You’re paying for it in credit. That’s an invented currency. It trades completely fungible. It’s completely fungible with paper currency and the electronic bank money. If you look at the data for the past 3.5 years, the total credit debt outstanding is flat at 53 trillion. M2 has increased a bit, but that’s 9 trillion. The amount of M2 has dwarfed by the outstanding bank credit. That amount, if it increased at its 50 year historical rate of 8.8%……known as Z1, we would have 72 trillion. We don’t. It’s still stuck at 53 trillion. That means it’s an active form of deflation. The only reason that this isn’t visible to everyone is that most of the deflation is hidden off the books in the financial institutions.

Rahul: Ok then. So what do you think about gold then? We have all these libertarians saying that gold will go to 10K /oz because we’re going to go back on some sort of gold standard. What’s your take on that?

VD: My take is that gold is much better as a wealth protector than it is than an investment. People think gold is good in inflation and bad in deflation. We had inflation throughout the 1980s at the same time that we had plunging gold prices. Now we’ve been seeing deflation…..even the inflationistas admit that there was deflation in 07-08. And yet gold prices went up. Gold, in some ways……for those who consider gold true money, then they should view it as anything that makes gold valuable is deflation. I think gold is a good safeguard of wealth even if you believe in inflation or deflation. Gold will still hold its value. The currency can disappear in either inflation, because it becomes worthless, or in deflation, where the financial system collapses because the debts can’t be paid off.

Rahul: Ok. Switching topics. Let’s look at Europe. Do you believe that the Euro countries will go back to their original currencies, like the Greeks going back the Drachma, or do you see a EuroTarp situation?

VD: Well I think they’re going to try a EuroTarp and it will fail. The Euro will break apart. I’ve been saying this for 10 years. I’m not surprised by the problems of the Euro. The only thing that surprises me that it’s 1.30 against the USD. 2.5 years ago, it was 1.15. It should be below .88 against the dollar.

Rahul: Why do you think it’s that high?

VD: I believe that the Fed is sending a lot money to Europe to prop up their currency.

Rahul: Allright. One last question. How will the U.S. get out of the depression? Krugman always talks about WWII getting us of the last depression. Will we have WWIII to bail us out or a Reagan style candidate to get us of this mess.

VD: Well, first of all, Krugman has no freaking clue what he’s talking about. He’s an absolute ignoramus on this matter. Before I got into economics, I was into military history. My grandfather fought in the south pacific. What got the U.S. out of the depression was that the rest of the industrialized world was blown to pieces. The US was the only country to have a functional industrial infrastructure. Therefore, we had 10 years to sell them consumer and capital goods to rebuild their infrastructure. It’s not even worth discussing. WWIII won’t get us out because WWII didn’t.

Rahul: So what will get us out of this mess?

VD: Collapse. What most likely going to happen is the financial system will collapse. The societal system will hopefully hold up. Currencies usually have a life of 70 years. It’s not the end of the world if the Euro dies. This isn’t the first attempt of a European monetary union. There have been at least five. This will collapse. The dollar will eventually collapse. This always happens. They will end up putting this back together.

Rahul: Will the SDR be the world’s reserve currency?

VD: It’s hard to say. I wouldn’t think so. What else is there? The central banks are allergic to a gold standard for the obvious reason that they can’t run their credit boom game very easily on a gold standard. They can do it, but they can’t do it to the same extent. Gold isn’t a magical cure all. We had a depression on a gold standard and we had problems with it. That doesn’t mean I’m against it. It’s much better and I’m for it. It isn’t a magical panacea that is going to usher us into unending prosperity. We still have to make stuff people want and sell it. That’s where wealth comes from. The whole idea that we can play games with money and that sort of thing, and somehow live off of that, is absurd. It’s a hangover from 40 years of a large credit boom. Since we’ve had a large credit boom, the bust will be magnified.

Mailvox: context is king

Druidhouse perceives a nonexistent contradiction:

in the interview you say that WWII didn’t get us out of the depression, but rather that the fact that the u.s. was the only manufacturing facility left standing and that europe and the rest of the world were in rubble, thereby giving us a monopoly for a while on manufactured goods. but it was precisely WWII that left Europe’s infrastructure in ruins and america’s unscathed which gave us that monopoly. you are expressing a contradiction. and there’s nothing wrong with my reading comprehension.

I am not expressing a contradiction here. While there is nothing wrong with Druidhouse’s reading comprehension, or more to the point, his listening comprehension, his confusion stems from his ignorance of what “WWII got us out of the depression” means in the economic context.

In that context, which of course is the context in which the Alt Investors interview took place, “WWII got the USA out of the Great Depression” is a Keynesian and Neo-Keynesian argument in which it is asserted that the huge increase in government expenditure involved in the production of war material led to the post-war economic growth. It absolutely does NOT mean that “winning the war and surviving with the only intact industrial infrastructure” led to economic growth.

This should be obvious, since the economists who make the “WWII solution to depression” argument are not advocating World War III and the destruction of the European and Chinese industrial infrastructures, but rather increased government expenditure. It is a particularly stupid argument, of course, since Germany, Japan, Great Britain, and the Soviet Union also vastly increased their defense spending without realizing any post-war economic growth as a result… and it was not even necessary for the USA to enter the war to ensure the destruction of the German, Russian, French, Italian, and British infrastructures.

Interview

Here is the interview with Alt Investors I did yesterday for those who might be interested. There are a few moments with some very bad buzzing on the line that lasts about five seconds each time, so consider yourself warned.

Since there has been an amount of interest in the topics being discussed, I wouldn’t mind having a transcript of it. If anyone is bored enough to type it up, please send it to me and I’ll post it here.

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”.