Those Revolting Europeans

[wardd]

Those Revolting Europeans
By PAUL KRUGMAN

The French are revolting. The Greeks, too. And it’s about time.




Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing.




Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur!




What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.




What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.




Moreover, there seems to be little if any gain in return for the pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover.




But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives?




One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.




As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, the krona (and also had the courage to let its banks fail and default on their debts). Sure enough, Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t.




Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience.




Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.




So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.




The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.

...

[John of Phoenix]

What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.

It's puzzling that the austerity plan had such enthusiastic support to begin with. The Great Depression and the Wilson vs. Roosevelt methods of dealing with it should have been lessons learned long ago.

[hanleyclifford]

Hearing stuff from Paul Krugman makes me feel young again - like when I was in economics classes back in the sixties. It sounded suspicious then - and now I know why.

[Keith Wilson]

The Germans are soon going to be faced with a choice: accept higher inflation or ditch the Euro. I will be interesting to see which way they go.

[Concordia 33]

It's puzzling that the austerity plan had such enthusiastic support to begin with. The Great Depression and the Wilson vs. Roosevelt methods of dealing with it should have been lessons learned long ago.

Not everyone subscribes to that way of thinking

New York Times columnist Paul Krugman’s latest piece “Death of a Fairy Tale” is yet another rant against austerity measures in Europe, especially in Britain. Such measures, he argues, would be disastrous for the United States, even though the world’s superpower is now more than $15 trillion in debt, with the highest deficits since World War Two. Krugman has consistently argued for a big government approach towards America’s economic problems – greater stimulus spending, higher taxes, and more bailouts.

The Nobel prize-winning economist’s article is highly misleading in its claim that austerity is the cause of Europe’s economic woes today, an assertion that is not backed up by any evidence. Last Friday, Krugman wrote that:

All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.
… However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

Krugman singles out the British government for its cost-cutting approach, which he claims has significantly contributed to the UK slipping back into recession:

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.
So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

There is of course a major problem with Krugman’s analysis – deep-seated austerity measures have barely been implemented across most of Europe, including in Britain. The reality that Krugman ignores is that real austerity has yet to be introduced in most European countries, whose governments are still in the process of drawing up plans for budget cuts – Spain, with an unemployment rate of nearly 25 percentafter years of ruinous socialist rule, is a case in point.

There is a growing consensus across much of Europe that Keynesian-style stimulus measures don’t work. As Portugal’s finance minister Vitor Gaspar told The New York Times last week, his country tried “a Keynesian-style expansion” back in 2008, which was a failure and may have worsened the economic situation:

My country definitely provides a cautionary tale that shows, in some instances, short-run expansionary policies can be counterproductive. In London, Institute for Fiscal Studies research has shown that just 6 percent of planned cuts in current public service spending in Britain have actually been implemented by the Conservative-Liberal Coalition. That’s hardly a recipe for plunging Britain back into “depression” as Krugman calls it. In fact, “88 percent of the cuts to benefits and 94 percent of the cuts to public spending are still to come” as Ryan Bourne of the Centre for Policy Studies notes. The planned cuts, if implemented by 2016-17 as planned, would merely take the UK back to 2004-5 public spending levels in real terms. And the same goes for much of the rest of Europe, which is only just starting to implement cuts in government spending and public services.

A far more compelling explanation for the lack of economic growth in Britain than the myth of austerity is the country’s excessive tax burden, which amounts to 34.3 percent of total domestic income, combined with a public debt which is now higher than 75 percent of total domestic output, and a budget deficit of more than 7 percent of GDP. Government spending in Britain has risen to more than 50 percent of GDP. All of this acts as a significant brake on investment, a deterrent to job creation and an incentive for high wealth individuals to flee the country.


The main reason why many of the largest economies in Europe are in trouble is the lack of economic freedom, and not because of any lack of state intervention. Europe has been dominated by big government for decades – suffocating business regulations, sky high taxes, mounting red tape from Brussels, and ever-rising levels of public spending needed to pay for vast welfare states and entitlement systems.

It’s no coincidence that the European economy least affected by the financial downturn is the one with the greatest level of economic freedom – Switzerland, which remains outside of both the Eurozone and the European Union. And Europe’s largest economy, Germany, has disavowed Keynesian solutions under Angela Merkel, and is in a far stronger position than other Eurozone members such as France, Spain, Italy, and of course Greece, which have been bastions of government intervention.
Europe has no solution to its current massive debt crisis other than cutting levels of government spending. And nor does the United States. But austerity measures both in Europe and in America must be combined with lower personal and corporate taxes, labour market deregulation, eliminating red tape for businesses, large-scale entitlement and welfare reform, and a firm commitment to free trade. Big government prescriptions have been tried and tested on both sides of the Atlantic and have significantly failed to create jobs and generate wealth. The Krugman approach of ever greater levels of public spending is the wrong prescription for Europe and would condemn the continent to decades of economic decline. It would also be hugely damaging for the United States, which is now going down the same path of profligate debt and overspending that has become Europe’s ruin.

[wardd]

Not everyone subscribes to that way of thinking

not everyone subscribes to critical thinking

[wardd]

you can't save yourself to wealth, you gotta invest

[hanleyclifford]

you can't save yourself to wealth, you gotta invest

Another accidental truth from the wardd. The government is inflating the money faster than you can grow it. Goverment spending is not investment; even the old Keynsians know that.

[boatbuddha]

Not everyone subscribes to that way of thinking

I find that piece exceptionally weak, I'm guessing it came from the Heritage foundation right?. First there can be little doubt that the austerity measures are hurting european economies even though most of it hasn't been implemented, businesses are reacting to what they believe will be the case in the future. As for the UK the so called excessive tax burden is really not the excessive, in fact it's less than Germany's. Furthermore, if tax burden were the key determent of economic growth Sweden wouldn't be seeing a near 6% gdp increase. Finally as for Switzerland you can't really compare it to the rest of Europe because it's not in the EU or the Eurozone.

[boatbuddha]

Goverment spending is not investment; even the old Keynsians know that.

It's not necessarily investment but it can be.

[hanleyclifford]

It's not necessarily investment but it can be.

Get out your old Paul Samuelson textbook, (I threw mine away)

[boatbuddha]

Get out your old Paul Samuelson textbook, (I threw mine away)

There's a reason economics is called the dismal science. Back in my grad school days we in the poly sci department would have regular lunches with the guys from economics and almost without fail we would wind up in a screaming fight because they were so divorced from reality.

[hanleyclifford]

There's a reason economics is called the dismal science. Back in my grad school days we in the poly sci department would have regular lunches with the guys from economics and almost without fail we would wind up in a screaming fight because they were so divorced from reality.

They still are...

[wardd]

Another accidental truth from the wardd. The government is inflating the money faster than you can grow it. Goverment spending is not investment; even the old Keynsians know that.

only you know that

so building a highway so goods can get to market is not investment?

[Concordia 33]

There's a reason economics is called the dismal science. Back in my grad school days we in the poly sci department would have regular lunches with the guys from economics and almost without fail we would wind up in a screaming fight because they were so divorced from reality.

This kind of sums it up.....

Mind you, one of my professors at Harvard was John Kenneth Galbraith, who warned us that “economic forecasting was created to make astrology look respectable.”

[wardd]

now bachmann is a revolting european

[Concordia 33]

now bachmann is a revolting european

Is this really necessary - are you here to trash every conservative, or to discuss something. Your little jabs (often out of context) are really more contentious than anything else. It's hard to want to participate in your threads when this is how you choose to treat people just because they disagree with you.

[wardd]

Is this really necessary - are you here to trash every conservative, or to discuss something. Your little jabs (often out of context) are really more contentious than anything else. It's hard to want to participate in your threads when this is how you choose to treat people just because they disagree with you.

as a leading republican spokesperson why would she do this?

[John of Phoenix]

Big government prescriptions have been tried and tested on both sides of the Atlantic and have significantly failed to create jobs and generate wealth.

That's a lie as it pertains to Europe. What's been tried there is pure austerity and it's failing just as it failed for Wilson here. What worked, and has been used here in limited measure by both dubya and Obama, is stimulus spending. Comparing the magnitude of stimulus to recover from the Depression to now, it's apparent that we've only scratched the surface but even that has had positive results.

Europe? It's been all austerity and look what happened in the recent elections.

[boatbuddha]

That's a lie as it pertains to Europe.

It's a lie as it pertains to the US too.

[hanleyclifford]

Actually big goverment has generated jobs and wealth----mostly goverment jobs, and wealth for the people who control the government.

[wardd]

Actually big goverment has generated jobs and wealth----mostly goverment jobs, and wealth for the people who control the government.

you don't seem to understand wealth is a collective creation

[keith66]

"We contend that for a nation to try to tax itself into prosperity is akin to standing in a bucket & attempting to lift yourself up by the handle", Winston Churchill said this and he was not wrong.
It seems to me that the lessons of history with the Weimar replublic & more recently Zimbabwe have been ignored. Mubageconomics doesnt work.

[hanleyclifford]

you don't seem to understand wealth is a collective creation

Collectively created, and selectively enjoyed.
Give it a rest.

[wardd]

Collectively created, and selectively enjoyed.
Give it a rest.

you got your so the h with everybody else

[hanleyclifford]

It seems to me that the lessons of history with the Weimar replublic & more recently Zimbabwe have been ignored. Mubageconomics doesnt work.

You said a mouthful there...Mugabe was never an economist; he is a thief and a thug.

[wardd]

You said a mouthful there...Mugabe was never an economist; he is a thief and a thug.

and he is relevant how?

[P.I. Stazzer-Newt]

[boatbuddha]

"We contend that for a nation to try to tax itself into prosperity is akin to standing in a bucket & attempting to lift yourself up by the handle", Winston Churchill said this and he was not wrong.
It seems to me that the lessons of history with the Weimar replublic & more recently Zimbabwe have been ignored. Mubageconomics doesnt work.

People with little knowledge of history love to throw around this churchill quote from the early 1900s. Why don't you do yourself a favor and research Churchills time as Chancellor of the Exchequer.

As for Zimbabwe and Weimar, I'll let you figure out why those comparisons are not apt.

[Meli]

Well we spent instead of slashing.
Hey, our unemployment figures are down to 4.9% :Whistle

[PeterSibley]

only you know that

so building a highway so goods can get to market is not investment?

I would like to hear hanleyclifford's response to that. The proposition that government spending doesn't produce wealth seems quite silly, almost all of our hard infrastructure, that which that underlies all economic activity is publicly generated.

[hanleyclifford]

I have already agreed that government spending does indeed result in wealth, actually a transfer of wealth, but that is not the same thing as production or investment. Verdamnt!, I should have saved that stupid Samuelson book.

[boatbuddha]

I have already agreed that government spending does indeed result in wealth, actually a transfer of wealth, but that is not the same thing as production or investment. Verdamnt!, I should have saved that stupid Samuelson book.

But it can create production and wealth. E.g. City A is on a very nice harbor but has no port facilities. The government invests in building a port on City A's harbor and as a result shipping traffic creates wealth for the businesses and inhabitants of City A.

[wardd]

I have already agreed that government spending does indeed result in wealth, actually a transfer of wealth, but that is not the same thing as production or investment. Verdamnt!, I should have saved that stupid Samuelson book.

going to the store results in a transfer of wealth

[David G]

E.J. Dionne weighs in - connecting Richard Lugar's fall to the issue of austerity measures in Europe:

http://www.washingtonpost.com/opinio...RDU_story.html

Mourdock’s success is decisive proof, if any more was needed, that the Republican Party has lurched far to the right of where it once was. Lugar was regularly described in the course of his reelection campaign as a “moderate.” But he is not a moderate, and never has been. He is a conservative who happens to be civil. Lugar earned a lifetime rating of 77 percent from the American Conservative Union. If being more than three-quarters to the right puts you in the “middle” of the political spectrum, it’s a very skewed measure.

Being a good tea party Republican, Mourdock is all about slashing government spending without regard to the impact of the cuts on the economy or on those who need government help. He cast his campaign as a battle against “the nightmare of ever-growing government” that would turn the United States into a “Western European-style nation.”

This gets us to the irony: Right now, it’s conservatives who want to follow the Western European path of austerity that voters in France and Greece rejected last weekend. The Obama administration, by contrast, has chosen a distinctly American path that kept austerity at bay. As a result, the American economy has climbed out of the Great Recession more quickly than most of Europe. Had Obama accepted the right wing’s assertions that cutting government is the one and only route to prosperity, we would have gone the way of Britain, which is slipping toward recession again.

In fact, the “socialist” Obama has presided over an economy in which private employment has risen by 4.2 million jobs during the recovery even as governments at all levels have cut public payrolls by some 600,000 since the beginning of 2009. If shrinking government is the political right’s goal, this puts Obama to the right of both Ronald Reagan and George W. Bush. The United States should have been even more aggressive in pump-priming the economy — and Obama would have been if conservatives and some moderates had not been so resistant.

[David G]

A boating industry pundit weighs in:

http://blog.tradeonlytoday.com/deale...ook/?p=1136%22

Is it time for more economic stimulus?

Should the evidence that our already-weak economic recovery is getting weaker, coupled with news from Europe that five countries have officially slipped back into recession, raise the specter of another stimulus package here?If our recovery doesn’t regain momentum very soon, a serious look at another round of stimulus spending should be in order. It won’t be easy, of course. It will trigger an outcry about deficits and debt, the latter already surpassing $15 trillion and rising. We’ll hear terms like “unsustainable” and debt “heaped on our grandchildren.” And, the entire political harangue will likely take our focus off what should be most important and practical – “it’s the economy, stupid,” as Bill Clinton’s adviser James Carville famously said.Growth should trump debt, claims Steve Conover, who has a doctorate in political economy, writing for the American Enterprise Institute. “In order to make clear the dialogue about the debt, it is first necessary to understand who owns it,” he explains. Here’s how it breaks down, according to reports from the Federal Reserve:The largest holder of our government debt is (drum roll) – the government (31.2 percent). It owes the Social Security trust fund that’s been investing in U.S. T-bonds. We, the American public, come in second with 26.3 percent. The Federal Reserve is next at 11.1 percent. The remaining 31.5 percent is held by foreign central banks and individuals: China at 7.5 percent, Japan 6.9 percent, United Kingdom 2.8 percent, OPEC 1.5 percent and all other countries 12.7 percent. So, just how do we wrap our arms around this?Contrary to political rhetoric, seeing the $15 trillion debt as something our grandchildren will have to pay off is the wrong focus. The fact is investors mostly opt each time their bonds mature to rollover into another T-bond. But, a very key metric used by investors is the level of “interest bite” i.e. that portion of the federal tax receipts needed to pay the interest on the debt. That is viewed as the measure of likelihood of repayment. And currently there’s good news there that seems to escape daily reporting.While our national debt level might be rising, the interest rate on new debt is close to zero. That low interest rate results in a near-zero “interest bite” on any level of debt. Accordingly, the “interest bite” has been between 9 and 11 percent of tax receipts during the last few years, substantially lower than the 19 percent we topped out at during the Clinton presidency.Not to be overlooked, however, Conover accurately warns that we must be aware that when the debt level rises, as it is today, any increase in the interest rate will quickly cause the “interest bite” to go up, too … unless it’s offset by additional tax receipts generated by a growing economy. There it is again – the need to focus on stimulating the economy!The continuing low interest rates appear to offer an opportunity to stimulate the private sector economy back to real growth with carefully crafted spending programs and primarily with incentives for the private business sector. After all, fiscal intervention by government is only to halt economic decline in the short run. Genuine long-term growth depends entirely on the private sector’s economic success.I’m no fan of growing debt or budget deficits. There are many ways Washington could reduce out-of-control spending and we should demand it. Nevertheless, with the economy seeming to be faltering again, and everything from borrowing rates to tax receipts solely dependent on the size, health and growth rate of our economy, it could be time to focus more on stimulating growth than worrying about the debt level. How do you see it?

[Y Bar Ranch]

I would like to hear hanleyclifford's response to that. The proposition that government spending doesn't produce wealth seems quite silly, almost all of our hard infrastructure, that which that underlies all economic activity is publicly generated.

Government enables producing wealth, through your examples such as infrastructure (internet, interstate, seaways) and creating a legal climate for trade, etc.

It can also interfere with it through burdensome regulations, high taxes, etc.

On top of that, it can transfer it through a huge bureaucrat-ocracy that taxes the producers and gives the money to its employees and other benefactors.

[TomF]

The question is whether only investments of private dollars generate multiplier effects, or if (as per Keynes) there are multiplier effects from public investment too.

Announce major cuts to Defence spending which affect a specific geographic locale - perhaps discontinuing R&D in a certain location, closing a military base, or reduced purchasing of goods manufactured at a specific American plant ... and see if anyone talks about the economic impact on the community. You'll soon hear from the local mayor, chamber of commerce etc. about the impact on local grocery stores, real estate markets, service industries etc. ... as money's taken out of the local economy. Somebody will talk about the multiplier effects, and the resulting effect not only on the local economy but on overall tax revenue.

It seems clear that geographically focused cuts in Government spending are understood even by some Republicans, depending on whether your ox is being gored, to have negative multiplier effects. Is it so presumptuous to point out that those multiplier effects only came into existence from the investment of Government money in those now-cut sectors in the first place?

[Y Bar Ranch]

It seems clear that geographically focused cuts in Government spending are understood even by some Republicans, depending on whether your ox is being gored, to have negative multiplier effects. Is it so presumptuous to point out that those multiplier effects only came into existence from the investment of Government money in those now-cut sectors in the first place?

First, do you really mean multiplier, or do you mean trickle-down? Unless there's a bunch of non-government money flowing in also, then it is just trickle-down.

Second, the boundary for the problem really needs to be drawn around the whole government. Taking a dollar from everyone to give a whole bunch of dollars (minus what is skimmed by the bureaucracy) to just a few and having them trickle it down in a locale isn't really multiplying anything from the federal perspective. Where's the overall gain to the entire country?

[mikefrommontana]

When a bridge across the Mississippi falls down and needs replacement, the benefits are national, not to just the two towns on either side. Same with Interstate Highways the and other large and linear infrastructure.

[Y Bar Ranch]

When a bridge across the Mississippi falls down and needs replacement, the benefits are national, not to just the two towns on either side. Same with Interstate Highways the and other large and linear infrastructure.

Exactly. The counter-example is a "bridge to nowhere" that only benefits a minor constituency and has essentially no multiplying effect, even though both bridges cost the same.

[hanleyclifford]

It looks like we are headed for a bog down over terms. There is no such thing as "government investment". There is government expenditure for "infrastructure" which in the private sector might be called "capital improvements". Such improvements are made with a view to return on the investment (dare we use the dirty "P" word). Government expenditues on things like roads and bridges can have a stimulating effect on the economy but not necessarily. The government does not usually get a return on most such items except for example turnpikes or other such revenue producers. The stimulus in the case of such projects is to induce the private sector to join in with venture capital. I'm sure our economics platoon leader, David G of Harborworks will expand on the subject for us.

[Peerie Maa]

It looks like we are headed for a bog down over terms. There is no such thing as "government investment". There is government expenditure for "infrastructure" which in the private sector might be called "capital improvements". Such improvements are made with a view to return on the investment (dare we use the dirty "P" word). Government expenditues on things like roads and bridges can have a stimulating effect on the economy but not necessarily. The government does not usually get a return on most such items except for example turnpikes or other such revenue producers. The stimulus in the case of such projects is to induce the private sector to join in with venture capital. I'm sure our economics platoon leader, David G of Harborworks will expand on the subject for us.

If you think about it holistically, as USA plc, then investment in infrastructure will allow the economy to add net value, generating more taxes which represent the profit in the system that can be reinvested in further improvements to the infrastructure and other benefits to the shareholders (citizens).

[hanleyclifford]

If you think about it holistically, as USA plc, then investment in infrastructure will allow the economy to add net value, generating more taxes which represent the profit in the system that can be reinvested in further improvements to the infrastructure and other benefits to the shareholders (citizens).

Please exchange the word "will" for the word "may" and I will agree with you. However, you are still confusing the issue from an academic economics standpoint. The government is not supposed to be a commercial entity except perhaps in socialist or fascist countries.

[TomF]

First, do you really mean multiplier, or do you mean trickle-down? Unless there's a bunch of non-government money flowing in also, then it is just trickle-down.

Second, the boundary for the problem really needs to be drawn around the whole government. Taking a dollar from everyone to give a whole bunch of dollars (minus what is skimmed by the bureaucracy) to just a few and having them trickle it down in a locale isn't really multiplying anything from the federal perspective. Where's the overall gain to the entire country?

No, I'm not talking about "trickle down" of a finite pool of money. I'm talking about demand stimulation, just as economists argue occurs with private investment.

A typical example (e.g. here, or here ) is that a company builds a new factory somewhere. Their investment creates a cascade of subsequent expenditures in that community - as people purchase or renovate homes, use their incomes to buy consumer goods, and generally stimulate the local economy through local buying. As people have said repeatedly around here, it's not a zero-sum game - the amount of wealth in circulation grows as demand grows. The impact of these multipliers is greater to the degree that the additional demand is satisfied by domestic production, rather than imports. That is pretty generally accepted macroeconomics, with respect to private sector spending.

The argument is that economics isn't a zero-sum game - that money transferred into a place will generate additional demand, beyond the value of the money transferred in. Like, building a $10M structure will mean somebody's got money in his jeans to get a haircut, to go to the bar, to buy groceries and gasoline. And the people who give haircuts, tend bar, and sell groceries/gasoline now also buy groceries, maybe tune up their cars, etc. And the amount of wealth circulating expands beyond the value of those dollars originally transferred in from somewhere to build that $10M structure.

Of course if multiplier effects aren't real, and it all is a zero-sum game, then it's zero sum whether that new $10M structure was paid for with funds a private investor transferred in from his bank account in Los Angeles, or from funds a government transferred in from their bank account in Washington. You can't have it both ways, if you're already saying that the additional value comes from haircuts, groceries, car maintenance and the like. The barmaid's tip jar doesn't know whether the $10 from the sad middle-aged guy whose wife walked out on him worked for the Department of the Environment, Wal-Mart, or if he's a private mechanic and fixes those guys' cars. The $10 tip in her jar helps pay her rent either way.

[Peerie Maa]

Please exchange the word "will" for the word "may" and I will agree with you. However, you are still confusing the issue from an academic economics standpoint. The government is not supposed to be a commercial entity except perhaps in socialist or fascist countries.

I was offering you s different way to think about the government as a part of the nation. And a different way to think about the governments responsibility to look after the best interests of all of the nation and all of its citizens.
For example we have a constant problem with our Tory parties desire for short term cheapest possible spending dogma, which means that they would rather export a dollop of revenue into another nations economy (and never see it again) to buy something than buy from domestic suppliers if the foreign price is a little cheaper. Forgetting that for every hundred pounds invested in UK products, perhaps 25 pounds comes back to the Treasury as taxes. Look at it holistically as UK plc and its balance sheet, the foreign goods have to be 75% of the price of home made before they are truly cheaper. You have to look at the whole picture to decide whether government is discharging its responsibilities properly.

[hanleyclifford]

Your discussion goes to the issue of whether government shall be "organic" or "institutional". Here in the United States we still cling to the notion of limited "institutional" goverment whereas in Europe (and elsewhere) the government has co-opted every facet of life. For the moment I prefer to cling to the notion of limited government with specified powers, others remaining to states or to the people. This is in fact why the US is no longer a British colony. Not every social ill is the fault of government nor can goverment be the solution to every problem.

[TomF]

Organic? Institutional?

The view is perhaps where the "public" goods start and stop, but the US' laws about abortion, drugs, etc are every bit as interventionist into daily life as anything we've got in Canada. Not a lot that's more "organic" than requiring a pregnant woman to view an ultrasound of her fetus before having an abortion. Same goes for various laws about birth control etc.

The idea that the American brand of politics - even "small government" politics isn't intimately involved in citizens' personal life is a fiction. And that it isn't promoted and maintained by both Right and Left even more fictional.

As the Tea Party rally signs famously read, "keep your hands off my Medicare."

[wardd]

It looks like we are headed for a bog down over terms. There is no such thing as "government investment". There is government expenditure for "infrastructure" which in the private sector might be called "capital improvements". Such improvements are made with a view to return on the investment (dare we use the dirty "P" word). Government expenditues on things like roads and bridges can have a stimulating effect on the economy but not necessarily. The government does not usually get a return on most such items except for example turnpikes or other such revenue producers. The stimulus in the case of such projects is to induce the private sector to join in with venture capital. I'm sure our economics platoon leader, David G of Harborworks will expand on the subject for us.

doesn't increased economic activity also generate more taxes?

[Keith Wilson]

The government is not supposed to be a commercial entity except perhaps in socialist or fascist countries.

Don't be silly. Of course the government is a "commercial entity", although not in the sense of trying to make a profit. It spends a pile of money, has huge effects on the economy, and it would be very foolish indeed to ignore the effects of its spending, or not to spend in a way which maximizes the prosperity of the citizens.

. . . whereas in Europe (and elsewhere) the government has co-opted every facet of life.

Again, don't be silly. The governments of the Western European democracies certainly have somewhat larger roles than the government in the US. They certainly have NOT 'co-opted every facet of life'; we're not talking about Stalinist Russia nor China in the time of Mao. It's not terribly difficult to distinguish between modern France and Maoist China.