Comments And Wagers

We welcome comments challenging this research.

Please also use this forum if you wish to propose a wager regarding a future out-of-sample test.

2 comments on “Comments And Wagers
  1. My first thought is that I buy the argument for the government spending multiplier. If the average savings rate is .5 then a sufficiently large spending package should result in overall income in the amount double the amount spent.

    Obviously there are some complications. Whether or not banks choose to loan funds is important because lending depends on the existence of profitable loans to fund. To say that the average savings rate is .5 importantly ignores the variation and distribution hidden behind that average. Real-world spending packages are often constructed in ways which disturb the application of theory. There is a probability effect which ensures that the theoretical expectation will deviate probabilistically from reality.

    Considering all of this, I still estimate the multiplier to be larger than 1, although I agree that the literature supporting this idea is weak, and I can’t think of any OS tests.

    My final point would be that the multiplier hardly matters out of context. There is also a private sector multiplier with which the government spending multiplier must be compared. My suspicion is that they are insignificantly different in theory, and in the real world the private sector multiplier may be better due to malformed spending policies. With the government spending multiplier charitably equal to the private multiplier, there is already know reason to engage in transfers of wealth. Importantly, the transfers themselves incur additional cost. Taxation costs the amount taxed multiplied by the foregone private multiplier. Print-funding costs an inflation tax, also subject to the multiplier. Borrowing has costs and so on.

    It is clear to me that even with a spending multiplier well above 1 there is no justification of spending.

  2. Hywel Morgan says:

    As described, your project is at risk of being wrong-headed; there is no such thing as “the” multiplier (K).

    At full employment, any additional public spending can only be achieved, in real terms, at the expense of other spending, so the maximum possible value for K is zero. It would probably be negative.

    Depending, inter alia, on how far one is short of full employment over the course of one’s data, K may be any value between 0 and 7 (illustrative numbers). Everything in between will have identical truth content, and will be equally apt to mislead. K will vary depending (inter alia) on the existence of unused resources.

    I feel sure JMK would concur. But I would not wager on that.

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