Thursday, 22 October 2009

Economics - Multipliers And Money

You will all be aware of the difference of opinion between those who argue for the Government, Bank of England, and others to increase spending and money flowing into the system and those who take the view that balanced finance and careful control of spending is the only safe way forward. At the root of this is the concept of the Multiplier, that spending will circulate in such a way as to encourage economic activity and recovery from the recession/depression. Those for deficit finance, that is borrowing to spend, argue that this is essential to kick in the Multiplier. Those opposed argue that as excess borrowing was the root of all the trouble, spending should be carefully targeted, and debt restricted to that sustainable in the long term.

Much of the debate revolves around the validity or not of applying the theories of John Maynard Keynes to the current situation. To reduce it to its barest level, it is said that he was in favour of deficit financing in times of economic recession to stimulate the economy. Unluckily, when the world changed after 1939, whilst he was heavily involved in the war effort and in rescuing the world economy in 1945, he died in 1946 and never had time to write up and publish in full how his thinking had developed since the early 1930’s. His ideas were taken up by Nicholas Kaldor (1908-1986) and Joan Robinson in what was known as the “Cambridge School”, which were highly influential in the UK in the period 1950 to 1980. Their influence on the one hand, and the Marxist-Leninists on the other, more or less wiped out the middle ground and other schools of thinking in the period.

Putting complex ideas, however, in the hands and minds of politicians is even more dangerous than allowing them to determine their own expenses, or to run a scheme of agricultural or other subsidies. The concept of the Multiplier is such an idea, to a politician and their special advisers facing a bad downturn in the economy it is a powerful psychedelic hallucinogen. Briefly, the idea is that when economic activity slows or turns down to avoid the risk of a major decline, there should be monetary and other “pump priming” injections into the economy. Because this money will them go from one activity to another, if the circulation takes place as expected the total economic effect as it goes through the system will multiply the several sectors involved to the total health of the economy as expressed in the Gross National Product. This will generate added tax revenues etc. and balance can be restored.

Necessarily there are a number of assumptions embedded in Keynes ideas. One is that there is a moral ethic involved in policy decisions and expenditures. This may have been the case in the 1930’s, when morality was a touchstone of much of public and welfare policy, but in recent years has been overtaken by other ideas, that of serving particular interests represented by lobbyists where it is access and power that matter. Another is that as far as possible the statistics and data used for the process of decisions should be as reliable as possible and honestly derived. As the figures given out by government, and the indexes and basic data are now more often works of political fiction, and sometimes fantasy, there are real problems.

Other assumptions in Keynes were that essentially, all the more prosperous in the population would pay taxes, all the companies and other economic entities in the UK would pay UK taxes, all the financial sector would be included in the tax base would be taxable, there would not be a major criminal element in economic affairs, and the public sector would be the minor spender as opposed to the real economy. Also a government would not stoke up a boom by grossly inflating any market of significance. In recent years this has been the property market, and the huge bonuses being tolerated, even in reality encouraged, in broken nationalised banks at present are designed to try to rack the London market back up as fast as possible if only for the sake of the politicians own property portfolios and their trusts and special accounts offshore in tax havens. If you attempt to factor all this into Keynes ideas, then you have very serious problems.

Which brings me back to the Multiplier, and the high point of Keynes ideas on the subject, the 1960’s and 1970’s. These involve painful memories of the anger and resentment I caused when I asked questions like “What if does not work?” or “Is the money being spent on the right things.” Or “Are you sure that you can control and hold inflation to a level of only 3% if the pound declines or the trade unions persistently win pay deals at higher levels.” Had burning at the stake been permitted, I would have been one of the first up, a John Rogers of modern age.

In the 1960’s the UK and the world was a very different place. Where did my money go at the time? The house I was in was built by local builders, from UK materials. My current property was built by a firm with offshore financing and the service charges and freehold payments go to people with offshore private trusts. My power suppliers were British gas and electricity boards, but now is French. The railway was British Railways, now it is owned by the French. My food came from small local shops, with most of the supplies, seasonal, from within the region. For most people now it is a local supermarket now, and you have to look for the British produce. My clothing and footwear were always British made, now it takes time and effort to find a British product, most people do not bother. My insurances, once British, are now in the hands of an offshore based Private Equity Company. And so on and so on.

The upshot of all this is as with Lord Mandelson’s cash for cars programme a large proportion of the money going in as “quantatitive easing” or “pump priming” is not circulating in the UK economy, it is going somewhere else in the world. In short to produce an effect in the UK similar to that of the 1960’s or 1930’s, a proportionately vastly greater amount of money has to be spent, and therefore borrowed because of the nature and extent of the leakages abroad at all levels. Additionally the UK financial system is entirely different from the times of either Keynes or Kaldor. It is geared to operate extensively outside the UK on a far greater scale and much of it under foreign ownership, albeit using the City of London as its base. So much of the money going into that system will not appear in UK pockets.

A largish chunk of the money that does remain goes into the pockets of money men at multiples comparative to ordinary people hugely greater than those of the past, and certainly of my own, my parents, and my grandparents time. As I suggest one modern multiplier effect is to sustain property prices, and therefore to help keep most of our politicians and their associates personal wealth at high levels.

The idea of Keynes Multiplier was to benefit us all. The multiplier of today will only impoverish the great majority of us, and further enrich the few.


  1. Great explanation, and just as true here in the good ol' USA.

  2. Great article - Can't understand why politicians can't get their heads around this, subservience to Europe perhaps?