Will, thanks for replying.

But what if the money being used is freshly printed by the central bank? That’s where my real concern comes in. If we’re printing money to finance this stimulus, surely this has a negative effect on the multiplier? This is why I’m surprised why people on the left aren’t more fiscal ‘c’onservative. Sure, if you must, spend money – but spend it using real funds.

I also struggle to see how building a road that nobody’s going to use is a net benefit to the economy.

Finally, on inflation – would you not agree that given the fall of the pound (in large due to monetising debt, the perilous state of our economy and our deficit as a whole) it is highly unlikely we’re going to be facing inflation in the short term? Look at our trade imbalance.

Thanks again for your response – always good to know that people actually take the time to read these emails.

The 364 economists were discredited when the budget led the way to the long economic upturn of the 1980s. Professor Sir Alan Walters’s critics had missed the reason to raise taxes – to allow interest rates to be cut sharply. Interest rates are a key driver of UK economic performance because of the huge amount of debt – including mortgage borrowings for houses – dependent on short-term interest rates.

Mark – I didn’t take it personally at all but thanks for saying so – just a bit of light ribbing. Of course, you’re right, it would be disastrous if the bond markets stopped funding the deficit but we’re not there yet and the judgment of the 67 economists is that cutting in 2010-11 raises that risk.

David, Psi, Ewan – I’m not suggesting that the best policy would be to tarmac rural Scotland or to fill in holes for that matter, of course not. But there would be a multiplier higher than zero (and probably close to 1 given the raw materials and labour costs). Reading your earlier comment, I think we atually agree on different policies having different multipliers (the reason I reproduced that table). My contention was that, on average, well targeted spending projects will have higher multipliers than tax cuts. As Giles points out, this is particularly true when the savings rate is rising.

Josh – You’re priceless. To paraphrase: you can’t trust any economists apart from the ones I agree with”

Marcus – Giles Wilkes is good on why there is still a deflationary risk. See here: http://freethinkingeconomist.com/2010/02/16/ive-been-waiting-for-this-inflation/

Ewan – Agree with you on the banks but we can walk and chew gum, no?

I see plenty of this stuff in the US – the “stimulus” has been used to maintain airports or stations that nobody uses this anymore. How is that productive? And I would imagine that most of these studies that advocate a stimulus are based on the presumption that every dollar – or pound – is targeted. But when you spend almost $1tr, that’s just impossible.

If you read my example, (deliberatly ludicrus, to make it east to understand) I was suggesting tarmacking a distant area of Scotland (not even roads) where there would be no demand for the increase in tarmacked area and destroying the tourism industry. Will, apparently, thinks it will have a “substantial” multiplier effect, but I hope he has mis-stated his view on this. We’ll find out when he replies.

Are we working on the basis that the road needs to be tarmacked or what? Or are we advocating digging a hole and refilling it for the sake of it?

But Will, would you not also say it depends on the value of stimulus you inject into the economy? For example, surely using a surplus – as Keynes advocated – would be a much more robust response to a downturn than financing spending through, well, printing money?

That’s my problem when some folks – I’m not necessarily referring to you in particular – claim that a fiscal stimulus is the answer to all our problems. Furthermore it could even be argued that the UK never had a fiscal stimulus because around 99% of the newly printed money was used to finance existing public spending. On the other hand the Germans actually had reserves – rather than a printing press – to stimulate growth. Funny that, because I’m sure the Germans are aware of what happens when you print money.

Personally I’d prefer the FN/Guido route, but like the United States, can we honestly claim that we’re stimulating the economy whilst destroying our own currency and frightening the hell out of bond traders? I’m also glad to see that some folks – incidentally, often on the right – have a better understanding of Keynes than the Left does. Keynes actually liked surpluses and noted that deficits were only necessary during a downturn. Can we really say that Labour are following Keynes here? One part of Keynes they may well be familiar with is causing inflation that cuts the deficis and attempts to fool the working man into believing that because he’s still in work he’s doing just fine. But as we’ve seen with Jimmy Carter, inflation also pushed the poor into a higher tax bracket – fiscal profligacy has its consequences and they usually hurt the most vulnerable, folks I would have hoped Labour would seek to protect.

Finally, rather than a fiscal stimulus what I’d prefer to see is a real, concerted attempt to sort our banks out. Given the non-existent interest rates it’s near enough impossible for some banks not to be making a profit right now, mainly because they’re failing to pass on these cuts to the taxpayer – that was what exacerbated the Great Depression, not a lack of stimulus. In fact, most banks are actually hiking their interest rates to consumers. Will, I know you’ve often highlighted that when cutting rates fail the only recourse is to enact a fiscal stimulus, right? But what happens when consumers and the population at large fail to get these cuts passed on?

Unfortunately it will be the bond market – rather than politicians – who decide when spending cuts have to start. That’s unless you’re advocating more QE?

“…Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.”

http://www.nytimes.com/2009/12/13/business/economy/13view.html

You are right, goverment spending is more useful than tax cuts in promoting growth. And we don’t need to rely solely on the US example to prove it. The Treasury here has also demonstrated it. The Treasury Public Model 2002 shows that, in the first year, the ‘bang for buck’ from a tax cut is 0.3, compared to 1.1 for an increase in government spending. Better, both types of stimulus rise over time so that in year 3 the return is 0.9 for tax cuts and 1.4 for increased spending.

http://socialisteconomicbulletin.blogspot.com/2010/01/investment-not-cuts-by-michael-burke.html

Of course, the Treasury estimates, like Moody’s are just long-run averages, and in current conditions the multipliers are certain be higher.