on stimulus spending and multipliers | briefing document
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on stimulus spending and multipliers

 

 

a briefing document

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on stimulus spending and multipliers
bank systemic contagion GDP 1: gross domestic product
first and second round effects of external prices rises on inflation
useful essay by laffer on supply-side economics

the mechanics of inflation : The great government swindle and how it works

the sum of a geometric sequence: or the arithmetic of fractional banking

introductory

A lot of what pretends to be economics is not economics at all, it is the politics of power. It is a rhetoric designed to obfuscate, and often involves the psychology of incentives.

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 Emanuel

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’.

socialist ‘new’ labour’s hidden extra £350 billion tax just this year
why 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 system liquid.

stimulus

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 government.
  • 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 ‘the rich’, to pay it back - or perhaps the next generation (see also inflation).
  • Coercion
    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 wage.)

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 recommended:

“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.” [1926]

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’ satire.

“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.” #1936]

Marker at abelard.org

The 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 recouping, has very dangerous downsides best understood by anyone who has ever played Monopoly. Governments are about the centralisation of power.

“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 man.
[Hobbes, 1651]

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 of eden.

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.”
[Curran, 1790]

Marker at abelard.org

R.J. Barro

“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 is one.”

 

 

 


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“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

End the Fed by Ron Paul

£14.39 [amazon.co.uk]
$12.86
[amazon.com]

Grand Central Publishing, 2009
ISBN-10: 0446549193
ISBN-13: 978-0446549196

calculating multipliers

Remember where we came in:

A lot of what pretends to be economics is not economics at all, it is the politics of power. It is a rhetoric designed to obfuscate, and often involves the psychology of incentives.

The multiplier (or multipliers) is a useful, but difficult and unstable, concept used by Keynes. It should not be confused with the similar fractional 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”. Who ever heard of a government scheme that wasn’t mired in corruption and waste?

  • 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.
Here is another example on which you can practise.

There is often talk of economies running at under-capacity, by which tends to be meant factories with machinery standing idle, empty office space, or people unemployed. This is another parameter that resides between the dubious and nonsense. The factory may be able to produce more plastic rubbish, even though nobody can be found who wants it, let alone who will buy it. Introducing a 16-hour, 7-day week, counting blades of grass would certainly increase employment.

Just to extend confusion, government shills continually talk of stimulus increasing employment. It is bad enough trying to estimate changes in GDP through government stimulus, but estimating its effect on ‘jobs’ is even more dubious.

Is the objective to increase a dubiously measured GDP, or is it to increase employment? Obviously, banning the use of heavy machinery in motorway construction, and issuing picks and shovels - or even toothpicks - will increase employment, as will building large standing armies by coercion. Incidentally, these are all Luddite tricks that have been used by National Socialist and International Socialist governments.

Or is the increase of flat-screen televisions and motor cars the objective? Whence the more highly you automate your factories and reduce employment, the better. (See also a citizen’s wage.)

If you don’t know where you are going, you sure as hell ain’t going to get there.

end notes

  1. Fiat money is the usual term for monetary systems that are not backed by real assets.

  1. Taken 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.)”

return to the index

on stimulus spending and multipliers
bank systemic contagion
first and second round effects of external prices rises on inflation
useful essay by laffer on supply-side economics

the mechanics of inflation : The great government swindle and how it works

the sum of a geometric sequence: or the arithmetic of fractional banking


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