This is a very clear, simple to understand, and short explanation of the multiplier effect, which completely undercuts the argument for fiscal austerity.
Coupled with MMT, the multiplier effect makes a much bigger pie possible through intelligently targeted fiscal policy.
Richard Murphy mentions education and healthcare but public investment in infrastructure and R&D have similarly high multipliers, unlike tax cuts for the rich and military spending, which have low multipliers.
Currently, politicians on the right and at the center tend to favor the latter and deprecate the former, which results less than optimal distribution and a stagnant or declining living standard while leading to greater inequality.
Pass it on.
Tax Research UKThe multiplier shows that not all government spending is equal
Richard Murphy | Professor of Practice in International Political Economy at City University, London; Director of Tax Research UK; non-executive director of Cambridge Econometrics, and a member of the Progressive Economy Forum
Rubbish article. Murphy seems to think that if govt spends an extra £X and govt's tax take rises by at least £X in consequence then every thing is just fine and there's nothing more to worry about. Unfortunately if the economy is at or near capacity, and the result of that extra economic activity is likely to be excess inflation. In that case govt will have to rise taxes EVEN FURTHER (or raise interest rates) to damp down the inflation.
ReplyDeleteAlso his claim that the "multiplier matters" is not true. At least if the multiplier is very low, that's no problem at all: all govt and central bank have to do is create and spend EVEN MORE money. Creating base money, as Milton Friedman said, costs nothing in real terms. I.e. if there is a zero cost solution to a problem, then the so called problem is not a problem.
Rubbish is your comment, not the article!
DeleteRalph Musgrave,
ReplyDeleteUnfortunately if the economy is at or near capacity,...
In a globalized economy, what matters is global slack, not domestic slack.
Low multipliers just mean lots of people are saving. Since Saving is just voluntary taxation, then if there is unemployment there is more scope to spend further with low multipliers than high multipliers.
ReplyDeleteEssentially the private sector does more with high multipliers than low multipliers, which just means less government intervention is required. And low multipliers lead to greater hoarding of financial wealth and probably inequality.
As ever, look after the unemployment and the multipliers will look after themselves.