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Anorak | Why Increasing Government Spending Won’t Work

Why Increasing Government Spending Won’t Work

by | 14th, July 2011

OK, yes, so we know the economy’s screwed. At the very best we’ve got high debt, low growth, high unemployment when what we’d really like is, in order, low, high, low.

So, the big question is, what should we do about this? You’re not surprised, of course, that the various answers to this come strictly along party political lines. Labour say that we should be spending lots more lovely government money because Labour’s support largely comes from those who receive lots of lovely government money. The Tories want to spend less of the taxpayers’ money because their support comes largely from those who have to pay the tax bills.

Not really all that enlightening. So, where does the truth lie?

The argument against spending lots more is that government in general just pisses it away. The argument in favour is based on the work of one JM Keynes who said that even if it is pissed away in a situation like ours it still does lots of good. This in turn depends upon something called “the multiplier”. No, don’t worry, this isn’t an economics seminar: just accept that if the multiplier is positive and large then the piss it away anyway idea works. If it’s small or zero then it doesn’t.

So, what size is that multiplier?

the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and

Well, the UK is an open economy with flexible exchange rates. The multiplier is therefore low to zero. Pissing the money away doesn’t work.

No, this doesn’t make the Tories particularly right on this or any other matter (for a start, they’re not using this argument to reduce spending): but it does make Labour wrong on this one specific point.

Not that anyone will pay a blind bit of attention.



Posted: 14th, July 2011 | In: Money Comment (1) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink