Sunday, May 19, 2013

The multiplier exists

I taught a three hour lecture on introductory economics to journalism students last Friday. Besides being a great pleasure (why do they call it teaching “load”?), the lecture included explaining to prospective journalists the meaning of the “multiplier”. As textbook, we used the updated version (in its Spanish translation) of Krugman, Wells and Graddy. By the multiplier, when government spends 1 euro in public investment, this has an impact on the gross domestic product (the value of production, which is the same as income) of more than one euro. Why is that? Because this euro produces by itself some good of service (which is part of GDP), but it also goes to the pocket of someone (a public sector worker, for example), who spends it in part (depending on the ratio of income that is spent and saved) on some good or service. This also goes to the pocket of someone, who also spends a fraction of it, and so on. Conversely, when government cuts spending by one euro, this has a more than one euro impact in the reduction of GDP. Of course, the cost of public spending is that taxation is usually distortionary, or that high debt has economic costs. It is then an empirical issue to compare the effects of increasing or not reducing public expenditure with the costs of taxation of debt. But it is official (at least in the textbooks, that is, it is also the orthodox thing): the multiplier does exist. I finished by recommending to my students that they read the recent article by Paul Krugman in the NewYork Review of Books on the promoters of austerity who decided to forget about the multiplier.

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