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On Multipliers, via Mark Thoma

April 26, 2016

Chris Dillow:

On multipliers: Richard Murphy writes:

[The government and OBR] believe that austerity generates growth and so cuts the deficit. The trouble for them is that all the evidence shows that the opposite is true: cuts shrink national income and government spending increases it.

This has attracted cheap abuse from some… Such abuse is wrong, and misses the point. It’s wrong, because – in the context he is writing about – Richard is right to claim that fiscal multipliers are big. There’s widespread agreement (pdf) that multipliers are bigger in recessions (pdf) than in normal times. For example, Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo say (pdf):

The government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds.

The fact that Osborne’s austerity has failed to cut the deficit as much as expected is wholly consistent with this. Bigger multipliers than Osborne assumed meant that austerity depressed output by more than he expected thus making it harder to reduce borrowing.

…..

The political point is that Labour supporters should not rely upon a big multiplier as a case for fiscal expansion. And … Lots of leftist policies … can be designed without reliance upon fragile claims about the macroeconomy.

Read more here.

And not all ethical considerations need short- or medium-term macroeconomic validation. But as proposed in my book, Unicycle, if nature has an ethical sense of direction, and markets are necessarily rooted in nature, then there is a right way to go in macro.

 

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