Wednesday, December 1, 2010

The multiplier is totally irrelevant.

There are a thousand articles, chapters in books, papers, etc which discuss the relative merits of different forms of economic stimulus, with particular emphasis on the multiplier effects of each. For example there is the tax cut versus increased public spending debate. An recent article by Prof Michael J.Boskin is just one example.

But the multiplier or “bang per buck” argument is also dragged into other areas, for example the relative merits of different employment subsidies.

However the entire argument over mulitpliers is TOTALLY IRRELEVANT because given a relatively low multiplier, the additional dollars needed to create a given number of jobs is not a REAL cost. That is, producing the extra dollars ex nihilo required by a relatively low multiplier form of stimulus does not cost anything in REAL TERMS. All that is required is a book keeping entry.

For example, the multiplier in the case of tax cuts over the next year or two could be unimpressive because a significant proportion of households have had their fingers burned during the credit crunch. As a result they may NOT want to buy houses, or anything else, with BORROWED money. Instead, they may want to buy stuff with SAVED money.

But where does this additional stock of money come from? There is only one source: a government deficit. But that deficit, assuming it accumulates as extra monetary base rather than extra national debt, does not COST anything in real terms to produce. To put it bluntly, printing money does not cost anything.

This point is intuitively obvious to advocates of Modern Monetary Theory. I would be nice if professors of economics, like Boskin, were similarly clued up.

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