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The (Keyenesian) multiplier effect. Easily debunked?

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DerpStatis posted on Sun, Nov 4 2012 7:06 PM

I have a really basic question and I don't have time to go to the economics textbooks to check details. So I'm hoping someone can please shed some light on this.

Basically the story goes...

If the government spends X , then there will be m*X increase in GDP. (Fiscal multiplier effect)

I assume the number "m>1" is the multiplier that is estimated empirically and takes into account crowding out, etc. (Multiplier is because of money changing hands more than once)
When I learned this multiplier it was generally assumed that this somehow made government spending more preferable.

Isn't it the case that if an individual spends X the same thing will happen? Or is there some magic that happens when you collect taxes? Why does it matter that the government spend the money? I don't see what the trick is, is it so easy to debunk this? Please let me know if you have a reference to a discussion of this.

And most of all, what happened to assessing things based on opportunity cost, rather than some gdp accounting?! (rhetorical question)

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All that matters within the Keynesian model is that money is spent, not who spends it. So you're perfectly right that individuals spending money should have the same effect. C+I+G+(E-M)=Y.  It doesn't matter where the spending comes from, it just has to come from somewhere. This is why (contra many conservative and more than one libertarian strawman) oftentimes Keynesians propose a variety of tax-breaks. Indeed that was a large part of the 09 stimulus package.

The reason why government spending is supposed to be especially effective is that the government has an incentive to have no propensity to save and therefore it can activate the multiplier. This is why Keynes advocated the "treasure chest" idea of the government saving a huge amount of money during the boom period and then when the depression hits it uses this money in order to boost back up aggregate demand.

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Answered (Verified) Tugwit replied on Wed, Nov 14 2012 2:32 PM
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Neodoxy,

Keynesians say that since the tax cut multiplier b/(1-b), is one less than the government spending "multiplier" 1/(1-b)

(1/(1-b)) - (b/(1-b)) = (1-b)/(1-b) = 1

that "proves" that government spending is better for the economy than tax cuts. 

That comes from disguising the "saved" fraction of disposable income (1-b)Yd as a+I+NX, and disguising tax T, as G. 

It's another kind of Keynesian math fraud. I have more about it in Pt 2, Fiscal Multiplier Debunked.

Scroll down about 2/3 of the way to The Bogus Tax Cut “Multiplier” (TCM)

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Tugwit replied on Wed, Nov 14 2012 2:52 PM

Wheylous,

I never heard back from Caplan. And I don't use math tricks. I show the ones Keynesians use.

I did get a reply from a Keynesian professor. I had asked him: In the GDP equation:

Yt = C + I + NX + G

Where is tax? It seems kind of curious to have the GDP equation and no mention of tax doesn't it? I mean what is it that govt spends?

He went off on a big diversion and didn't answer. So I emailed back and asked him again. First, he was unable to find tax in the GDP equation. Then he said it was in C.

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That's not the point. I want Tugwit's mathematical reply.

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Tugwit replied on Wed, Nov 14 2012 3:28 PM
Wheylous, If that was meant for me, yes, there is no Keynesian "multiplier" for any kind of spending. Each $1 of any kind of spending is just addition. Each $1 is spent multiple times, but there is no way to calculate some fantasy value for the jobs it will create, or what the increase in total national income will be, or especially to say that $1 of govt spending returns (according to the Obama administration) $1.50, so deficit spending pays for itself with money left over. For a marginal propensity to consume = b, you can derive a 1/b "multiplier" for consumption spending, and I do that in Pt 1 Fiscal Multiplier Debunked on Tugwit.blogspot.com . The 1/b "multiplier" is just as legitimate as Keynes' 1/(1-b) "multiplier", and 1/b is actually required to avoid the Keynesian infinity, for when investment is zero. The problem is that you can't use the investment "multiplier" for consumption, and you can't use the consumption "multiplier" for investment. For a $1 increment of consumption, the marginal propensity to consume is 1, and 1/b = 1/1 = 1. For a $1 increment of investment, the marginal propensity to consume is zero and 1/(1-b) = 1/(1-0) = 1. No multiplier for either consumption or investment. That's why the marginal propensity to consume is irrelevant to the effect of spending on income. It only applies to the allocation of income to spending. In Pt 2, Fiscal Multiplier Debunked, I show the absurdity of the Keynesian "multiplier process" story. Scroll about 1/4 to 1/3 the way down the page to: The Absurd "Multiplier Process" Story. Tugwit
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Tugwit , really big thanks!

This is exactly what I was looking for. I remembered there was some funny math with the tax multiplier difference. I'll take a look at the site a bit later.

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You don't need mathematics to dispute or disprove it. A dollar spent by government at most is a dollar spent by government. The question is does it expand productivity and create wealth? In virutally all cases the answer is no.

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Jargon replied on Wed, Nov 14 2012 4:03 PM

Shackleford this is all highly irrelevant and begging the question of what the thread is actually trying to answer rationally.

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Jargon:

Shackleford this is all highly irrelevant and begging the question of what the thread is actually trying to answer rationally.

 

No, it's not. Economics is not a physical science. The formulas used by Keynes are not laws or highly-accurate theories of physical phenomena. You do not need proofs to disprove the assertions purported by the mathematics.

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shackleford:

Jargon:

Shackleford this is all highly irrelevant and begging the question of what the thread is actually trying to answer rationally.

No, it's not. Economics is not a physical science. The formulas used by Keynes are not laws or highly-accurate theories of physical phenomena. You do not need proofs to disprove the assertions purported by the mathematics.

shackleford , I agree with your previous post that you don't need math to debunk this. However it is very important for me personally and probably in general to understand how the Keynesians are reasoning and be able to point out the errors in their models. That was the purpose of my post, and any arguments in that regard are very valuable to me. So I have to disagree with your criticism.

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There's nothing wrong with using math in economics. The GDP equation, for example, is 100% true because it's an identity.

As for Tugwit - you don't need Tax to show up in GDP because it's not production, obviously.

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Tugwit replied on Thu, Nov 15 2012 1:53 PM
DerpStatis Folks have been arguing logic with Keynesians for 76 years. And to what effect? Keynesians are impervious to logic, because they can always fall back on their math. But their math IS "funny". If you look at the multiplier chapter of Keynes' "General Theory of Employment, Interest, and Money", what he did, how he did it, and WHAT HE LEFT UNSAID, he was either a moron or a fraud. The way he did it and what he left unsaid, point to fraud. He said that if 1 out of every $10 of income goes to investment, then 10 out of every $1 of investment goes to income. In the example he gave, there are 2 values for his "multiplier" (which is not a multiplier), 10 and 1, and he used the wrong value, 10, for the effect of investment spending on income. It's a little hard to get $10 out of $1, so that's where illegally putting addition first in the math order of operations comes in. At least Keynes was clever in the way he did it. When Keynesians later added the tax variable, and then had to make it disappear, and you see the marginal propensity to consume b erroneously applied to tax, total income, and the tax rate. And when you see -bT and wonder where is -(1-b)T, and where is bT and (1-b)T? That's when the Keynesian scam all starts to fall apart. The software appears to be buggy. My formatting gets ignored and I no longer receive notices of replies. So this post will probably be run together as one paragraph.
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Tugwit replied on Thu, Nov 15 2012 2:00 PM

Wheylous,

Yt = C + I + NX + G

If " you don't need Tax to show up in the GDP equation because it's not production" then what is it that government spends?

Tugwit

PS: The formatting appears to be back again.

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Wheylous:

There's nothing wrong with using math in economics. The GDP equation, for example, is 100% true because it's an identity.

As for Tugwit - you don't need Tax to show up in GDP because it's not production, obviously.

 

I never said there's anything wrong with using math in economics. But the math is only descriptive, not prescriptive as in physical science. The GDP does not accurately measure economic growth. It's a tool used by statists to justify more government spending. Thanks, G! It seems to me that tax would be included in G. And G would include taxation as well as borrowed money.

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Jargon replied on Thu, Nov 15 2012 6:45 PM

Physical sciences are not prescriptive.

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Tugwit replied on Fri, Nov 16 2012 3:20 PM
shackleford, “The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even it they were to express much more than they really do.” - Ludwig von Mises
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The math used in the physical sciences is still descriptive. Equations simply describe hypothesied relationships.

Freedom of markets is positively correlated with the degree of evolution in any society...

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