The "Fatal Conceit" of Fiscal Multiplier

Naming a numeric multiplier of the unity (1) with two more digits after decimal point, Christina Romer once spoke high of fiscal policy. Then on, Robert Barro did not like her claim among other reasons for “being imprecise by being too precise.” After all, a quotation of number smaller than the “margin of error” is statistically incorrect.

             Whoever is more right, “fiscal multiplier” is more like snake oil, misconceived and stillborn.

             First, one of many parents of the misconceived is from cross-sectional data (L^-1) at a given point in time (T⁰ as of the month of survey). Exponents and supporters of “multiplier” neglect the simplest fact that the “marginal propensity to consume” is no more applicable to over-time stability (T^-1) than the balance sheet is combinable to the income statement.

             “Exogenous” to Cambridge macroeconomics, the space dimension (L for Length in dimension denotation) is one the time dimension (T for Time duration) is another. The negativity (L^-1 or T^-1) is only “for the sake of” accounting, more specifically per defined unit of L and per given unit of T respectively.

             Second, the stillborn is anti-GAAP. Under the “Generally” accepted accounting principles, each and every entry shall be once and for all to the books. We might pay heed to Luca Paciloi from Venice.

            Third, the so-claimed medicine against recession is politically incorrect in “General” and even more so particularly in the era of D.E.I. Where and when a public “fiscal expenditure” multiplies, your or my private purchase has every right politically and legally to multiply as well.

             Fourth, macroeconomists, intentionally or otherwise, fall in the trap of “fallacy of composition” (Paul Samuelson. Economics, 1948). Each of us can spend less than she earns, but all of us across the nation cannot. The baseline: Whatever we may do, the national income accountants as CPA without fail equalize the sources on the credit side (“AS”) to the uses on the debit (“AD”).

             Proponents of the fiscal so-called “multiplier” sometimes illustrate the effect in a diagram with the “aggregate” sources aka the Gross Domestic Products (Y≡ GDP by definition) on the abscissa and the “aggregate” uses to be christened the Gross Domestic Expenditures (Y≡ GDE in compliance with GAAP) on the ordinate. Then, either of the two, GDP and GDE, is by nature to make a straight line from the origin at the angle of 45º.     

             So good and so nice but for “multiplier”: Where in the first place (L^-1) is the Cross? Well, the Cross, Keynesian or otherwise, is everywhere except for “From Here to Eternity” in the diagram. When in the first time (T^-1) is the Cross? Well, “It’s Now or Never.”

 

From Here to Eternity

Elvis Presley - It's Now or Never