This is today's YouTube short video:
The issue is important.
The transcript is:
At this election, ask any politician you speak to about multiplier effects.
Multiplier effects happen whenever the government spends money.
That money does not go into a black hole, it goes to someone, and they pay tax on it, and then they spend what's left over, and the next person who they spend the money with pays tax on it, and then they spend what's left over, and so on, and on, well, until someone saves, and that stops the process rolling.
But the point is, that one payment by government creates lots of additional tax payments within the economy. And that's what the multiplier effect is. It is the consequence of government spending generating extra tax income.
But whenever we hear about the government talking about - or politicians talk about - how they're going to pay for anything, they never mention this fact.
So, whenever you talk to a politician, ask them, what's the multiplier effect of what you're doing? Will it create its own funding?
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Strictly speaking, the multiplier effect estimates how much national income increases from an amount of public spending. If the tax take is about 35% of GDP then you need a multiplier of about three for public spending to pay for itself. That may actually be true for some spending, such as healthcare, but it is unusual.
But spending now can save later. It is often cheaper to pay a small amount for prevention than a lot later on cure (not just healthcare – skimping on regular maintenance for example on houses or roads leads to damage that is expensive to repair).
For some spending, such as Sure Start, there is good evidence that the savings (in terms of reduced long term public spending on health and education) are greater than the initial spending. Think of it as an investment in the future that produces real positive returns.
And this is only considering the finances. Health and education and many other items of public spending create public goods that are not captured in financial measures such as GDP. We really should be paying more attention to measures of well-being, not just GDP.
https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/bulletins/measuringprogresswellbeingandbeyondgdpintheuk/may2024
A multiplier effect of 3 might be unusual – but suppose it is only 1.5 – that means that when it comes to funding the requirement when the questioin ‘how are you going to pay for it?’ comes up is to suggest how the rest is paid for, not the whole sum. And so, the argument always stands….
Don’t forget the VAT take. Can you include employer NI as well? From employers further down the road as well as the initial employer?
All of those count
Andrew wrote: “Strictly speaking, the multiplier effect estimates how much national income increases from an amount of public spending. If the tax take is about 35% of GDP then you need a multiplier of about three for public spending to pay for itself.”
National income isn’t “the tax take”, more like GDP. The multiplier only needs to be 1 to pay for itself, and most govt spending – even according to the fiscally conservative IMF – has a multiplier >1. Remember govt spending is a component of GDP, not something subtracted from it.
I have been telling anyone willing to listen-and a few who were not-about the multiplier.
Surely among the well educated commentators and journalists, many will have heard of it. I sometimes suspect they are told not to raise the subject. Just as the letter signed by 800 officials in early February about Gaza hasn’t been mentioned since. That one has been sat on.
I don’t like conspiracy theories but sometimes it might apply.
And of course the reverse if Government doesnt spend…………..
Is it right Paul Johnson and the IFS doesn’t factor in multipliers? If not, why?
You rarely hear them mention the issue
Mr Stevenson, they will never mention it cos that would spoil their fairy stories, & we can’t have that, can we?
Indeed Mike.
And even if the multiplier is less than one, I assume it means the net cost for that item of spending is less than the headline figure.
https://www.bma.org.uk/media/6665/junior-doctor-pay-restoration-costing-analysis-methodology-v1.pdf
It’s important to distinguish this from ‘trickle down’ economics.
Giving money to rich people in the hope it trickles down fails because rich people save and when they spend it’s not always on stuff that has the best multiplyer.
Government does spend and mainly on wages to the non-wealthy where multiplyer effects are strongest.
Agreed
But that requires a longer video
Yes…. Short is good.
We have a multiplier effect; we don’t have a term for the opposite – the trickle down effect. Let us call it the Divisor effect. The effect falls off a cliff. What we have is an ebony built to produce the Divisor effect. That keeps it simple, and I think the shrivelling shrinkage is more easily revealed by a simple word
I like it…
It is indeed difficult not to think there is a conspiracy of silence on this .
This mornings R4 Today getting more and more aggressive – almost as though they have adopted their own economic framework when interviewing all three parties – ‘there is no money’.
Even to the extent of not accepting the Lib Dem saying they would tax oil, tech and bank profits – almost ‘you cant do that the US wouldnt like it’..
It sounds like aggressive interviewing but its lazy and stops them having to think about the reality of how the economy, works , including the multiplier .
We are going to hell in a handcart.
I remember reading somewhere that due to the very high multiplier effect investment in frontline health and social care is essentially cost free. As both remain human to human activities, despite the best efforts of governments and tech companies. So lots of quite low paid workers get jobs, many in poor areas, who spend it so fostering local economic growth, and also the benefit is largely retained in nation, unlike for example importing a superstar or computer company from overseas so the benefit of that investment is extracted. Hence tax take rises, unlike if apple, Infosys, Fujitsu, or dare I say it a hyper popular popstar flies in to do a concert.
You are right – health and social care have very high multiplier effects
Mr Temple – let me help:
“Does investment in the health sector promote or inhibit economic growth?”
Aaron Reeves1*, Sanjay Basu2,3, Martin McKee3, Christopher Meissner4 and David Stuckler1,3
Conclusion: health circa +4.5 and “defense” circa minus9
Interesting paper. Just think – more gov spending on NHS, more tax back. Oh dear, we can’t have that – Silly Streeting would start to cry.
There is a massive flaw in your video in that you claim that multiplier effect exists regardless of how the government spends money.
This is patently untrue.
The size of the multiplier, and crucially whether the multiplier is less than or greater than 1, is fundamental.
Plenty of government spending has a multiplier less than 1.
You only look at the direct impacts and always appear to ignore the secondary (often partially offsetting effects).
You do realise that a multiplier effect of less than one is still a multiplier effect? It may not guarantee a full recovery but it still has a multiplier effect.
So you are wrong – of course there is a multiplier effect
You think spending £Xm to obtain a benefit of <<£xm is a good use of resources?
And you claim to be an economics professor. Seriously?
Do you really think the only benefit of the spending comes from the cash generated?
Tell me what the NPV of early years education is.
Now tell me its value.
If the answer is the same you do not understand value.
Worse, you definitely do not undertsand economics.
But you might be an economist.
Mrs Cross you are 100% correct and I have posted a paper (see above) which addresses this.
You will be gratified to see that it is possible to have minus multipliers as is the case with “defense”.
On the plus side – the case for more spending on health (& I guess education) seems quite robust.
There was an analysis of multipliers by Fournier and Johansson for the OECD in 2017.
They found that some areas of government spending had multipliers less than 1, some higher.
I’d share the abstract if I was permitted to.
You can
But there is nothing new in that…
Here it is:
This paper provides evidence on the effects of the size and the composition of public spending on long-term growth and inequality. An estimated baseline convergence model captures the long-term effect of human capital and total investment on potential output for a panel of OECD countries. The composition of public spending added to this baseline provides evidence that certain public spending items (public investment and education) boost potential growth, while others (pensions and public subsidies) lower potential growth. There is also evidence that too large governments reduce potential growth , unless the functioning of government is highly effective.
In other words, it says nothing useful at all
Conversely, when Government cuts spending there is a negative multiplier effect if people lose jobs or government stops buying stuff.
Thre is, you are right
Surely, in the scenario given by Richard almost all of the money spent by government will be recovered through tax during the multiple cycles of subsequent consumer spending with that money – until some is withdrawn from further circulation through saving. I don’t know what the cumulative saving rate by ordinary individuals would be (I grant the wealthy will be different) but I doubt it is higher than 5% which would imply a multiplier factor of 20. (If 95% returns to the government, it only needs to spend £5 to get £100 of economic activity, the rest is self funding through tax generated).
That doesn’t seem right, from experience of governments spending. So would it be more accurate to say the money continue to be recovered in tax until it is either saved OR is spent on something that is not UK-taxable? Thinking of health, money spent on salaries will be taxed and the remainder spent within the economy, but a fairly high proportion of healthcare consumables (e.g. drugs) will be imported and the subsequent cycles of recirculation and taxation will not return to the UK. Is that why military spending is described as having a very small multiplier?
And does the inevitable lag between cycles of money use and taxation matter?
The lag definitely matters, but it is also continual, I.e. there are vast numbers of overlaying lags of different durations, meaning that the aggregate impact can only be approximately measured.
It is also interesting that these same commentators who are so averse to spending government money never question the fact that the government subsidises all companies with benefit top-ups to wages, housing benefit, providing healthcare, infrastructure (road, rail), banking facilities and insurance (lender of last resort) without which these companies would struggle to survive. Now if only they were to pay a genuine living wage.
Companies are the biggest scroungers of welfare from the government which I’m sure could have a multiplier effect as long as the companies do not extract money to give to savers (shareholders).
Interesting chart in this Forbes article:-
https://www.forbes.com/sites/stevendesmyter/2024/05/29/in-defense-of-deficits/
If true it ought to be the central talking point of the UK election but won’t be telling us all we need to know about this election!