I added a new glossary item this morning, on the multiplier effect. I add such entries whenever I can or when I need them for something else I am writing.
This entry says:
A multiplier effect is a measure of the amount by which income is increased or decreased as a result of additional spending within an economy. If a multiplier effect is greater than one then the additional spending produced an increase in income of greater than its own amount, and vice versa. The largest multiplier effects are usually associated with healthcare spending and capital investment, where returns that are several times the size of the sum initially expended can result. In contrast, defence spending has very low multiplier effects. Some multiplier effects e.g. those resulting from spending on education are hard to measure because of the extended time periods involved.
Thoughts?
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Did you invent the “multiplier” ??
No
Why?
I see “members” of the punk band The Stranglers are back commenting again!!! Keep up the good work Richard, you are obviously annoying some people in Downing Street or Tufton Street or both for them to raise their heads again with their inane ramblings
I had realised that too
Those promoting genocide are cowards
Does it perhaps need expamding a little to show how it works, perhaps wth an example along the lines of
Increase a nurse salary by 10%, government receipts from tax and NI increase by 10%, spending by the individual in the economy does ….. etc.
I was wondering that…..
Also, in the first line you mention ‘income’. Whose income? The employee who is getting a pay rise? If the glossary is primarily aimed at those whose current understanding is limited, I think it needs to explain a little bit more.
Explaining to those without knowledge something which the writer knows intimately is very difficult. I am reminded that many years ago I was on a training course where we were required to explain to someone, in 15 minutes, how to do something, anything. My partner chose to explain to me how to rewire a house. He had been an electrician, I was an 18 year old who knew, unusually, how to reqire a plug. We didn’t get very far.
Noted…
It is national income
The glossary has been changed
as the multiplier effect can go up or down when income is increased or decreased can we quantify the effect on aggregate incomes were Hunt to reduce inheritance tax to the wealthier who tend to save surplus income WHILE AT THE SAME TIME effectively cutting Universal Credit increases to a larger aggregate group of unfortunate people ?
Would it produce growth in the economy?. Im referring to the crude impact on the economy as a whole rather than in terms of social justice.
Keep up the good work, Richard!
IHT has a negative imapct – it increases saving and reduces gvernmment spending on those most likely to spend all they get – which also has a negative multiplier effect
A double whammy
There should be an accompanying entry too covering Investment in Public Services and Utilities.
These are always treated by the Treasury and the Media as “Costs”, implying that the Taxpayer will be worse off as a result. So for example any spending into the NHS is a cost when in fact, because of the Multiplier Effect is an “Investment Earner” for the Treasury not a simple “Cost”.
We need to state that because of the Multiplier we will collectively be “Better Off” because of this investment.
These fall into the “These Items Fund Themselves” category.
It should include examples, as you have done above, of those things like Armaments that will in fact make us collectively worse off because of the Multiplier being less than one. These could be specifically highlighted in the “How are you Going to Pay for It” category.
Noted
I will get to it
Might also be useful to add why armaments has a negative multiplier effect.
Very good indeed.
It is absurd that when most politicos talk about “gov spending” it is usually cast in a negative economic light akin to – oh dear I had to buy XYZ today. The knock-on impact is never considered, probably intentionally – because if “gov spending” has a multiplier (and thus carrying with it the implication of more tax collection) them……why can’t we have more? No no no, the piggy bank only has so much money etc.
The “Brighton” report on multipliers implied that defense spending had a negative multiplier (i.e. it destroyed value in the economy) by the way.
Agreed
Perhaps I was too generous on defence
I agree in general but historically defence spending has created spin offs
the Jet engine
radar enabled long distance tourism, safer travel
the computer originally for a military purpose and the internet from which we got the world wide web ( CERN not defence) enabling , google etc, amazon, Facebook, etc and much else.The end of the typing pool.
Long range missiles enabling space exploration, satellites which made possible accurate navigation, world wide TV, 24 hour news
not all of these are blessings.
Maybe…..
To Ian Stevenson.
Re spinoffs from defence spending.
This spending I feel falls into a Third Category, ” Blue Sky Spending”
This covers Investment in Universities and Basic research that does not necessarily have a fixed goal. Spinoffs attract funding after discoveries are made not before. (You don’t know what you are going to find until you’ve found it). This research still needs to be done but in this case a Multiplier can’t be assumed beforehand.
In the last forty years there has been a tendency to put money into defence spending, minimal multiplier. Reduced spending on other Blue Sky Research. Those things you mentioned are developed in Universities, exploited by Finance, not society as it should be.
I usually use these points to show the state can grow the economy.
Generally defence spending is a black hole.
Isn’t it ON WHAT government spends that’s a key? Defence has some technology etc spin-offs, certainly (even medical advances, as a result of wars, to keep soldiers alive and back to fighting?) but perhaps we don’t need some of them and others could have come from well-funded civil research (eg Mazzucatto’s “mission economy” idea; or historically, Japan’s MITI – in an economy forbidden from too much defence spending)?
Paying an additional nurse or care worker should have a high multiplier, especially if there’s a way to account for the social good produced as well as her own spending, tax etc. Paying an expensive ‘government adviser’ or an accountancy or business consultant will have a lower multiplier because their propensity to save is bigger (and even their spending may be on unproductive assets or imports or actually overseas). Spending on military hardware will be even lower because the spending goes directly into an unproductive asset which then depreciates.
(Side question: do you include propensity to consume/save/import in the glossary, or is that too much ‘economics talk’ ?)
I agree with another Reply that at least one simplified example would help to explain multiplier, at least to those who like to follow ideas with numbers. (My remarks above are obviously too much for a glossary!)
I just wondered if it works in the opposite way, for instance:-
The ticket officers are fired to save money.
The ticket officers now no longer pay employment tax and have to be paid unemployment benefit. This plus the ticket officers now pay less VAT means that the government finances take a hit?
The rail industry spends less but would possibly loose 700,000 tickets.
Yes, multipliers do work in reverse
Indeed there’s a downward spiral or vicious circle as well as a virtuous one. It’s similar to the ‘business cycles’ (or in extreme language, boom and bust) spoken of by economists, related to confidence and expectations: low confidence/expectations -> low investment -> lower employment -> lower consumption… expectations fulfilled, until (maybe when a few competitors have gone bust) expectations of business opportunities improve and the process inverts -> higher investment etc etc.
It is not the same as boom and bust
The multiplier is technical fact
Boom and bust is sentiment driven
I just wondered if the un exploited oil and gas fields off the coast the cause?
Sorry. Cause of what?
maybe or explanation is indeed too simplistic…
https://www.internationalstudiesblog.nl/articles/simply-wrong-the-money-multiplier
I have no time for the money multiplier
I think one of the most significant contributions of John Maynard Keynes and one of the concepts most neglected by modern politicians.
And journalists and the, possibly, the IFS.
Agreed
I think a couple of examples might. Government spend £1k on
a) a benefit claimant whose benefits rise from £5k to £6k
b) a public servant pay rise from £25k to £26k
c) a public servant pay rise from £95k to £96k
d) F35 jets for our aircraft carriers
e) a £1 tax break for a top rate income tax payer
Maybe this is too elaborate for a glossary… but it would make the point.
I will muse on it
It’s raining this morning
I had never heard of the multiplier effect until this week when I have read The Production of Money by Anne Pettifor. It suddenly seemed blazingly obvious that such an effect would happen. But as a previous comment says, I think that your description needs a couple of concrete examples to bring it alive.
Ok
The fact that it has taken so long to add this to your glossary makes the point that Keynes’s ideas seem to have been completely forgotten by today’s economists. It is odd really, it is generally agreed that when a company invests (e.g. in manufacturing plant) it will over time gain more benefit than it has paid in monetary terms. The equivalent doesn’t seem to be accepted for government expenditure in infrastructure which is analogous, let alone investment in the workforce (health, education, etc).
And that is without taking into account the resultant return to government accounts of consequent tax revenues.
I admit I thought it was there. I went to use it in a footnote to something I was writing and found the gap. I have noted requests for additions.
FWIW here is my view.
The multiplier effect sounds to me to be the best argument for investment (injecting money). In fact, it describes to me what investment SHOULD do, not the extractive bullshit ‘investment’ we often associate the term with these days (which is usually just loans to get access to get assets).
Your description to me seems a bit bashful. No doubt you are trying to write a serious measured glossary devoid of bias so you might be self conscious of your enthusiasm for it. But I get it – so do many others – so it needs to shine a bit more and not hide under a bushel. Truths should not be hidden under bushels
You might want to mention that we have become frighteningly bad at measuring the benefits of things. We all too often measure investment now in terms of how much it engorges financial wealth and have lost the nuances / externalities because no one can be bothered to measure these anymore. Which is a choice – a really bad choice.
No challenge in there then 🙂
Sorry.
You asked.
I over-delivered as per usual.
What a fault 🙂
PSR wrote ” You might want to mention that we have become frighteningly bad at measuring the benefits of things.” For an outstanding example look no further than GDP and its dominant role in assessing national economic health; notable for its omissions, as much as its contents. Inclusion of earnings from prostitution and drug trafficking can never be accurately calculated but they’re in there. Likewise the income from private healthcare but not of the NHS or domestic carers.
Correct Ken
This effect underpins using the argument for social return on investment to support social projects – arts, sport, community cohesion – as well as public capital investment.
It rather fell apart because no one would agree on how to measure the return and figures were basically pulled out of thin air. This, in turn, enabled those who were opposed to such investment to ignore the argument completely.
The soft nature of the impacts and the length of time before the benefits are seen make it difficult to attribute positive outcomes to one single action (investment).
That doesn’t mean that the effect doesn’t exist or that there isn’t a social return on investment.
Because of the length of time involved, a very small investment can have a massive economic return.
In the education sector the multiplier effect of spending by a school or university can demonstrate the value of the institution to the local and regional economy. Secondly, the return on investment of time and fees etc by the individual learner can also be measured in terms of enhanced lifetime earnings etc . Thirdly investment in education has a return to society because it tends to increase individuals’ productivity, health and well being. The imposition of full cost fees for higher education ignores these social returns and assumes that higher education spending is simply a cost that has to be reduced.
Accepted
“Some multiplier effects e.g. those resulting from spending on education are hard to measure because of the extended time periods involved.”
This highlights one of the deeper and intransigent problems that the discipline of economics finds too difficult adequately to address; so simply ignores (its methodology is problematic). Economics focuses exclusively on what it can measure and analyse mathematically with ease (especially since the first rigorously mathematical economist, Leon Walrus [1834-1910] led the discipline down an extremely ill-conceived path. Economics is nothing like physics).
Businesses have long measured profits easily and effectively, and economics has been too easily seduced by the facility in measurement, to follow the methods and narrow focus of business and commerce because that id where it is intellectually comfortable. Business, however selects what is important to itself, but fails to embrace all the consequences for everyone outside the business of its decisions, or its effects. It is a terrible basis for examining macro-economics, or of a whole polity.
There is no doubt that education is the most powerful tool to develop an economy; but it is very hard to measure quantitative effects rigorously, or comparatively; especially in the short or even medium term. It is easier for the Economics discipline just to ignore it, because it has no ready method to measure the benefit; and it has exploited that fact, principally in its own interest. Why economics is allowed not only to fail by ignoring crucial factors like education, but misdirect everyone’s attention from these key issues; effectively by insisting that only that which economics finds easy to measure, is all that should really matter to everybody. It is completely absurd, and is at best self-serving. The misdirection of attention, especially political attention is a damning indictment of the discipline, and of politicians who generally follow economists far too blindly.
Appreciated
If I’ve understood this correctly, you’re not talking about interest on savings, but on the whole economy.
An ISA, for instance, multiplies money by the percentage rate. Investing £1 in someone on low wages through a benefit rise, generates not just that £1 into the economy, but also allows the business they spent it with to grow in a small way. Increasing a benefit by £1 for 1000 people and they all spend it, that’s £1000 into a local economy, which then gets spent through the supply chain, being used time and again.
Also, if I’ve understood your writings correctly, this extra money will not cause inflation as the government can remove excess money by taxing it out of the system.
Please correct what I’ve misunderstood.
You’re just fine
Spending sounds a bit too vague. Not all spending is equal, which is what the multiplier effect is trying to measure. Usually consumption on activities and services, like military defense, have an almost 0 multiplier effect. Whereas activities like buying machinery, such as a dishwasher, has some multiplier effect because this saves some labour time. This time can be invested in more useful labour which earns wages.
It is a good definition and thanks for once again building up this wonderful site into a real knowledge hub.
However the multiplier effect always leaves me confused and disappointed. If something has a multiplier of 2 then isn’t it basically like buying pound coins for 50p each? Why don’t governments buy as many as they possibly can, just as we would if we found someone selling off a bunch of cheap pound coins?
In particular I don’t understand why it’s treated as a left/right issue. Both like prosperity don’t they?
It is not a left / right issue