Sorry, but the fiscal multiplier doesn't multiply


Rather a lot of macroeconomics is conducted with models. Given the complexities, this is inevitable, but it is necessary, at least occasionally, to look up and calibrate the model against reality. Which is just what this paper (via Scott Sumner) has just done. For those of a Keynesian persuasion, the results aren't pretty.

You see, the central conceit, that government borrowing to spend boosts the economy by more than the amount of the spending, the multiplier, just isn't true. Just isn't true for us here in the UK, that is. The fiscal multiplier just doesn't multiply.

....the impact of government fiscal stimulus depends on key country characteristics, including the level of development, the exchange rate regime, openness to trade, and public indebtedness.

Higher development (like us) makes for a higher multiplier. Openness to trade for a lower. These two might, in our circumstances, roughly balance each other out. However:

Indebtedness also matters: when the outstanding debt of the central government exceeds 60 percent of GDP, the fiscal multiplier is not statistically different from zero on impact and it is negative in the long run.

Hmm, so, UK debt is, end Jan this year, 57.6% of GDP. So, at current borrowing rates we've about 3 months before the effects of deficit spending turn negative. But that's not the end of it:

Exchange rate flexibility is critical: economies operating under predetermined exchange rate regimes have long-run multipliers greater than one in some specifications, while economies with flexible exchange rate regimes have multipliers that are essentially zero.

The pound is extremely flexible: so none of the fiscal stimulus we've already had has had any effect either.

If this paper is correct then that's it for Keynesianism in the UK, into the dustbin of history with it. For if the fiscal multiplier just don't multiply, there's no point to it all at all.

It was Keynes himself who remarked that people often find themselves in the grip of long dead economists to the detriment of their ability to do economics: M'Lord Keynes died in 1946.