Fiscal Multiplier Effect

[LovePrevails]

Hey the fiscal multiplier effect (http://en.wikipedia.org/wiki/Multiplier_(economics)) is often cited by keynesian as ajustification for state spending and quantative easing

as well as taxing the rich to fund welfare programs, etc.

 

My flatmate is a politics junkie with a degree in economics and his criticisms of some of my arguments have highlighted a gap in my knowledge

 

what are the (Austrian/free-market) objections to this thesis?

[ThomasDoubts]

The multiplier effect is measured by GDP and GDP is subject to the broken window fallacy.

Government spending requires:

  

      1) Printing money.   AKA theft via inflation.  This obviously dilutes everyone's purchasing power.  Any growth or wealth goes to the minority with first rights to the freshly printed money.  Everyone else gets inflated money, which the Multiplier doesn't account for.  The US printed money to fund bailouts.  GDP didn't go down as much as it otherwise would.  A keynesian would argue this is a good thing.  I argue it's not.  I argue that when you go bankrupt, you don't get to be resurrected at the expense of every else's purchasing power.

      2) Taxation:   AKA theft.  They steal money from individuals, spend a portion on administrative beaurocracy, then put it back into the economy.  State spending crowds out the private sector.  There is no consideration for the amount of growth that could be achieved if the State hadn't stolen the money from producers and consumers in the first place.  If the policy is a reaction to a lack of growth or income among the citizenry, it neglects the simple fact that they could let people keep their own money, and they wouldn't need stimulus.

      3)  Borrowing:  AKA theft against the unborn.  Debt creates wealth.

 

 

Like all State spending, it's about redistributing wealth through force.  Ultimately, it's always measured in changes in GDP.  If the State borrows a trillion dollars to dig a hole to China, GDP and employment will go up.  That doesn't mean any wealth was created; it's just a transfer/redistribution of wealth from creditor to debtor.  If it's funded through taxation, it's a redistribution from the taxable to whoever the State wants.  If it's funded through printing, it's the king giving gifts, and stealing through inflation.  Any way it's done, it's a total misallocation of capital, and rooted in theft.  Notice that any policy claiming to make use of the multiplier effect is never universal.  Rather it's aimed at, for example, bailing out bankrupt/insolvent banks, because the state is uncomfortable with the consequences of not doing so.  Thus, socialized losses, and private profits.  They claim to be able to measure it's effects.  They can't.  2nd, 3rd, 4th order effects and so on.  The benefits of not doing anything.  The costs of boosting GDP.  These things aren't accounted for. 

 

This isn't to economical, and the Mises institute would probably have better info, but these are my off the cuff thoughts on it. 

[ribuck]

Economic well-being comes from production and mutually-beneficial exchange. Anything else just adds friction to the system.

 

Empirically it's obvious that the multiplier effect is effectively "one", i.e. ineffective. Despite all the Keynsian tools in the armory of US and European governments, they have not been able to achieve their target GDP growth since the fiscal crises. If the multiplier was anything other than "one", those governments would have been able to achieve any GDP growth rate they desired.

[GRosado]

Tell him that government spending causes a crowding out of the private sector. Crowding out is when the private sector resources are taken by government & used for whatever expenditures.

[LovePrevails]

SEE ALSO: https://mises.org/sites/default/files/QJAE_17_3_Boyes_0.pdf