The science of economics is loaded with numbers. Charts, graphs, and formulae abound.
Yet, despite this pretense at exactitude, economics is unable to tell you what will happen tomorrow let alone a year or a decade from now.
Which brings us to the “fiscal multiplier.”
This bit of mathematical chicanery supposedly indicates how individual types of federal spending will affect the economy.
You can go to the following web page to see a good description of the process. Here are some excerpts.
A measure of the short-term impact of a fiscal stimulus on the Gross Domestic Product (GDP) of an economy
The fiscal multiplier is extremely difficult to estimate. It is because the economy is complex, with multiple forces affecting its output.
In such a situation, it becomes too hard to pinpoint the change in output that is directly attributable to fiscal policy.
Hmmm . . . “extremely difficult to estimate” and “too hard to pinpoint change.” But does that scare us economists? No. Bravely we dive into the cesspool, hoping to catch a nice fresh fish.
There are two main approaches to estimating the fiscal multiplier. First is the econometric or statistical approach, and the second in the simulation or model-based approach.
1. Econometric Estimation
The econometric estimation of the fiscal multiplier is performed using a statistical model called a Structural Vector Autoregressive model or an SVAR model. The model is a multivariate time series model that measures the relationship between multiple variables through time. The SVAR approach requires a lot of data, which is not always available. Hence, even though the method is based on data, the results may not be stable.
2. Model-Based Estimation
The model-based estimation approach creates a model of the economy and then uses simulation to estimate the required variable. The models that are often used to model the economy are known as Dynamic Stochastic General Equilibrium (DSGE) models.
They model different sectors of the economy and the interaction among them. The simulations from the models are aggregated to measure the required variable, in our case, the fiscal multiplier. Such an approach does not require a lot of data, but it suffers from model risk.
3. Bucket Approach
The bucket approach is a very simple method that estimates the fiscal multiplier depending on how an economy ranks on various factors. It is more of a back of the envelope calculation, which can provide a ballpark figure for the multiplier based on the experience of other economies with similar features.
I suspect the more correct name for all of the above would be Dynamic Stochastic General Hocus Pocus (DSGHP).
Then, the economists stroke their chins and take these “extremely difficult to estimate” and “too hard to pinpoint the change” numbers and use them when . . .
The output gap – the difference between expected economic output under current law and possible economic output if the economy were operating at full potential – is projected to total $1.85 trillion over the next two years according to the Congressional Budget Office (CBO).
Fiscal policy can reduce this output gap over time. How effective a policy will be depends on its “multiplier” – the output produced for each dollar spent. While COVID relief should be designed to achieve a number of different goals – and there is no “right” share or length of the output gap that must necessarily be closed – policymakers should focus on high-multiplier spending and tax cuts where possible.
Here we see how the false certitude of WAG (Wild Ass Guesses) is displayed in a Congressional Budget Office (CBO) official table, which proves, for instance, that a “Paycheck Protection Program” (whatever it eventually may be) is less than half as effective as a “Coronavirus Relief Fund for States” (whatever it eventually may turn out to be).
About the best one can say about the CBO estimates is that they are (usually, somewhat) less politically motivated than Congress is.
The real problem not only is that people believe the WAG estimates, but that the estimates are based on a fundament lie:
‘Importantly, these policies may boost economic activity in the short-term, but they will ultimately add to the debt and thus slow long-term economic growth.
‘Policymakers can balance these risks by focusing on the policies that produce the greatest amount of economic activity for a given cost and can mitigate or reverse them by coupling short-term fiscal support with long-term deficit reduction.“
There is zero, no, make that ZERO evidence that reducing federal “debt” slows economic growth. Here’s why:
- Federal debt is not really “debt” in the usual sense. It is the total of deposits into Treasury Security accounts.
- The federal government does not use those deposits to pay its bills. It creates new dollars for that purpose.
- The federal government pays off the “debt” simply by returning those deposits.
- The way the government keeps its books, reducing the debt requires running surpluses, which always leads to depressions — or if we’re lucky, just to recessions.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
Today, we are running a serious recession. How are we trying to get out of it? By deficit spending, aka “throwing money at it.” That, in fact, is the only way we ever can cure recessions. Increased deficit spending prevents and cures recessions.
As for “coupling short-term fiscal support with long-term deficit reduction,” this makes no mathematical sense at all unless we are prepared to create massive surpluses (probably via tax increases) in the future. This is known as, “Kicking the can down Depression Road.”
In summary, we are being fed bad data compounded by bad economics.
What’s the solution? Begin with the fact that the federal government has unlimited money. Then consider each economics problem separately, and then throw money at it. Given infinite resources, why try to husband those resources via phony mathematics?
The economy is the private sector. When we enrich the private sector, we grow the economy.
And finally, no “inflation” protestations, puleeeze!. Inflation is not caused by federal deficit spending. Inflation is caused by shortages — usually shortages of food or energy — and actually is cured by federal deficit spending.
Want economic growth? Implement the “Ten Steps to Prosperity” and forget about Fiscal Multipliers.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all or a reverse income tax
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.
4 thoughts on “Do numbers make seat-of-pants guesses better?”
Nobel Prizes have been handed out to economists since the late ’60s to no avail
As with so much of economics, the “Nobel Prizes” are fake.
Michael Hudson refers to Paul Krugman and the dumbest economist ever to win a Nobel Prize, and that if he actually understood economics, he never would have won it. Nobel Prizes in economics are only awarded to economists that support the prevailing orthodoxy.
Krugman puzzles me. There are times when I think he finally understands reality, and then his next article proves otherwise.