The historical facts of this debate, and of the policy itself, are quite clear, and it does not simply boil down to proving that the multiplier is (or is not) zero.

1. Keynes himself recognized (in the GT) that the multiplier is not stable and can be ineffective. To quote Keynes:

"It would seem (following Mr. Kahn) that the following are likely in a modern community to be the factors which it is most important not to overlook (though the first two will not be fully intelligible until after Book IV. has been reached):

(i) The method of financing the policy and the increased working cash, required by- the increased employment and the associated rise of prices, may have the effect of increasing the rate of interest and so retarding investment in other directions, unless the monetary authority takes steps to the contrary; whilst, at the same time, the increased cost of capital goods will reduce their marginal efficiency to the private investor, and this will require an actual fall in the rate of interest to offset it.

(ii) With the confused psychology which often prevails, the Government programme may, through its effect on “confidence”, increase liquidity-preference or diminish the marginal efficiency of capital, which, again, may retard other investment unless measures are taken to offset it.

(iii) In an open system with foreign-trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries, since a proportion of the increased consumption will diminish our own country’s favourable foreign balance; so that, if we consider only the effect on domestic employment as distinct from world employment, we must diminish the full figure of the multiplier. On the other hand our own country may recover a portion of this leakage through favourable repercussions due to the action of the multiplier in the foreign country in increasing its economic activity.

Furthermore, if we are considering changes of a substantial amount, we have to allow for a progressive change in the marginal propensity to consume, as the position of the margin is gradually shifted; and hence in the multiplier. The marginal propensity to consume is not constant for all levels of employment, and it is probable that there will be, as a rule, a tendency for it to diminish as employment increases; when real income increases, that is to say, the community will wish to consume a gradually diminishing proportion of it." JMK chapter 10 GTEIM

So one can admit to possibilities that planned saving and planned investment don't always line up correctly when implemented, without concluding that fiscal policy works in a reliable and useful fashion. Crowding out effects are real and Keynes knew all about it.

2. there is zero evidence of Lerner's functional finance working as planned. Politicians have most definitely not run surpluses during booms, but have accumulated debt. Buchanan and Wagner have provided plausible explanations of debt-bias in policy.

3. Friedman's Long and Variable Lags argument has stood the test of time, Keynesians have no substantive answer to this challenge. Given the length of a 'normal recession' politicians in a democracy are not at all likely to implement appropriate fiscal policy in a timely fashion.

4. Estimates of the actual fiscal multiplier come in at very low levels anyway. Data indicates that fiscal policy has little or no effect. Barro leans towards saying its no effect (http://online.wsj.com/news/articles/SB123258618204604599), Krugman says there is still a small multiplier effect. Nobody finds the strong and reliable effect that Keynesians originally hoped to use in "fine tuning the economy".

The 2008-2013 experience is highly relevant because the slump has been long enough to negate the Long and Variable Lags issue- politicians have had more than enough time to act, they have acted with historic monetary and fiscal "stimulus" and the effects were less than originally predicted. After the fact speculation by Mark Zandi that things could have been worse and by Krugman that the deficits should have been larger are not based on hard statistical facts, but are the product of faith and shaky analysis. 

I don't see how anyone can look at relevant theory and the data both and walk away thinking that there is a strong case for activist fiscal policy. It has not worked. The overall case is at best very weak.


D.W. MacKenzie, Ph.D.
Carroll College, Helena MT


--------------------------------------------
On Tue, 11/19/13, Robert Leeson <[log in to unmask]> wrote:

 Subject: [SHOE] The Keynesian multiplier
 To: [log in to unmask]
 Date: Tuesday, November 19, 2013, 4:28 AM
 
 As I made clear in November 2011, it
 is evidence that the assumption has been falsified that
 James is requested to provide.
 
 RL 
 
 ----- Original Message -----
 From: "[log in to unmask]"
 <[log in to unmask]>
 To: [log in to unmask]
 Sent: Tuesday, 19 November, 2013 5:47:10 AM
 Subject: Re: [SHOE] Where are the ex-Austrians?
 
 On 11/18/2013 1:27 AM, Robert Leeson wrote:
 > "Keynes's multiplier argument is founded upon three
 fundamental assumptions that turn out to be false: (1) that
 savings are not spent but are a withdrawal from the
 expenditure stream ..."
 >
 > Since James also made this assertion in November 2011,
 perhaps he can now provide some evidence to support it.
 >
 > RL
 It's incredible to me that someone writing on the History of
 Economic 
 Thought list wants "evidence" that Keynes considered saving
 not to be 
 spending by income earners but a withdrawal from the
 expenditure 
 stream!  Incredible also because every introductory
 macroeconomics 
 students learns that meaning of saving.  Anyhow, Robert
 can look up 
 Keynes's meaning of saving in the _Treatise_ (1930), volume
 1, p. 172, 
 the _General Theory_ (1936), pp. 74 and 210; Keynes's
 _Economic Journal_ 
 articles (December 1937) and (June 1938).  (Joan
 Robinson, _EJ_, 1938 
 repeats Keynes's definition of saving to mean a withdrawal
 from the 
 expenditure stream.)  Robert can also check these
 pieces of evidence, in 
 contrast with the classical explanation that savings are
 spent by 
 borrowers, that is, saving is not cash hoarding (Smith,
 Ricardo, and 
 J.S. Mill) in chapter 2 of _Keynes and the Classics
 Reconsidered_ 
 (Kluwer, 1998), a volume to which he contributed a chapter
 (7).
 
 James Ahiakpor
 > ----- Original Message -----
 > From: "James C.W. Ahiakpor" <[log in to unmask]>
 > To: [log in to unmask]
 > Sent: Monday, 18 November, 2013 5:27:45 AM
 > Subject: Re: [SHOE] Where are the ex-Austrians?
 >
 > Steve Kates wrote:
 >> I think there should be a Godwin's Law for
 Economics. Whoever brings
 >> empirical results into a theoretical discussion
 automatically loses.
 >>
 >> It should not be thought that I stepped back very
 far when I agreed
 >> that the failure of the stimulus is not obvious.
 It's obvious that
 >> it's not obvious, since this will remain an open
 and never ending
 >> debate for as long as economists exist.
 >>
 >> But so far as the economic policy side is
 concerned, there is no
 >> waiting around for academic economists to decide
 which way is up. With
 >> the sequestration in the US and other similar
 actions across the world
 >> by those who are trying to manage their economies,
 this is a debate,
 >> that for the time being anyway, is resolved. No
 country in the world,
 >> with the possible exception of the US, would try to
 stimulate their
 >> economies through additional levels of public
 spending. The recessions
 >> are not over. Economic conditions are worse than in
 2008. But
 >> increases in public spending are off the table
 everywhere. If we can't
 >> even agree on that, then what can anyone ever say
 that can be a
 >> foundation for further discussion.
 >>
 >>
 > I think for any law to be useful, there has to be a
 mechanism for its
 > enforcement.  That is why I despair at Steve's
 suggestion.  Who will
 > enforce Godwin's Law for Economics?  I also think
 data or empirical
 > results can be useful in a "theoretical" discussion.
 After all, aren't
 > theories supposed to be evaluated with evidence to
 ascertain their
 > reliability?  I believe a more useful approach to
 dealing with
 > "empirical results" used to affirm a certain belief
 system is rather to
 > examine the nature of the data used to estimate the
 results as well as
 > the methodology employed in constructing the functional
 form or
 > estimating equation.  On that basis, it is easy
 (for me, at least) to
 > dismiss the meaningfulness of estimated government
 expenditure
 > multipliers as a basis for belief in Keynesianism,
 particularly fiscal
 > stimulus.
 >
 > Keynes's multiplier argument is founded upon three
 fundamental
 > assumptions that turn out to be false: (1) that savings
 are not spent
 > but are a withdrawal from the expenditure stream, (2)
 that government
 > (and business) expenditures don't depend upon income or
 savings (even
 > for a closed economy), and (3) that consumption
 spending takes a
 > unidirectional form, like running a relay race -- A's
 consumption
 > becomes B's income, then B's consumption becomes C's
 income, and so on.
 > Now if one corrects assumption (1) to realize that
 savings fund business
 > investments as well as government budget deficits, and
 (2) that
 > government spending has to be financed by taxes (paid
 out of income) and
 > there cannot be any measured consumption expenditures
 without any
 > current production and sales--so-called "autonomous
 consumption" for the
 > economy as a whole, then the expenditure multiplier has
 to be equal to
 > infinity. But there is also nothing left to multiplier
 it by.  That's
 > why the government expenditure multiplier EFFECT is
 zero.
 >
 > No amount of fooling around with functional forms
 negates the above
 > conclusion.  There is thus no point, as far as I'm
 concerned, arguing
 > with someone who insists on basing their belief in
 Keynesianism on
 > estimated multipliers.  I published the "mythology
 of the Keynesian
 > multiplier" in the _American Journal of Economics and
 Sociology_ in 2001
 > and I repeat the point in footnote 20, p. 87, of my
 modern Ricardian
 > equivalence article in the _Journal of the History of
 Economic Thought_
 > (March 2013).  How else can I hope to persuade a
 non-repentant Keynesian
 > (who also claims to be a historian of economic thought)
 of the folly of
 > such belief?  If one introduces central bank new
 money creation into the
 > argument, then we would have an explosive multiplier
 effect on real
 > income (output and employment) nowhere observed on
 earth! As Murray
 > Rothbard once observed, regarding the silliness of the
 Keynesian
 > multiplier argument, all government needs to do to
 create prosperity for
 > ever is just to find just 1 dollar to spend.
 >
 > Indeed, I think such "studies" as publicized by Alesina
 without getting
 > to the heart of the Keynesian mythology don't serve a
 very useful
 > purpose.  They are rather a distraction. 
 Aggregate data are generated
 > by a multitude of factors (or impulses, the favorite
 language of the
 > econometric estimators).  Without carefully
 identifying them and
 > isolating their respective impacts on observed data, no
 estimation tells
 > a useful story about the economy.  This is what we
 learn from
 > econometrics.  And this is also why someone once
 wrote about the two
 > things he wouldn't like to see in their preparation:
 sausages and
 > econometric estimation, the latter because many
 unsavory things can be
 > done to generate the end result!
 >
 > James Ahiakpor
 >> On 17 November 2013 00:53, Alan G Isaac <[log in to unmask]
 >> <mailto:[log in to unmask]>>
 wrote:
 >>
 >>      On 11/16/2013 8:36 AM, Alan G
 Isaac quoted:
 >>
 >>             
   "The range of the spending multiplier estimated
 using
 >>             
   these various approaches is from .4 to 1.5, with
 some
 >>             
   estimates even lower than .4 and some estimates
 larger
 >>             
   than 1.5.  However, most fall in the .4 to 1.5
 range."
 >>
 >>
 >>
 >>      If I may offer just one more
 quote from some people who care about
 >>      the evidence.
 >>      Jordà, Òscar  and Alan
 M. Taylor, 2013,
 >>      "The Time for Austerity:
 Estimating the Average Treatment Effect
 >>      of Fiscal Policy"
 >>      http://www.nber.org/papers/w19414
 >>
 >>             
 "[W]e have a measure of the multiplier that
 >>             
 explicitly accounts for failures of identification
 >>              due
 to observable controls.  Our estimates ...
 >>             
 suggest even larger impacts than the IMF study when
 >>              the
 state of the economy worsens. ...  It appears
 >>             
 that Keynes was right after all."
 >>
 >>      As Steve now allows, it is
 *not* obvious that the fiscal responses
 >>      to the Great Recession
 invalidate Keynesian claims about the
 >>      role of aggregate demand. 
 Not in the least.
 >>
 >>      Cheers,
 >>      Alan Isaac
 >>
 >>
 >>
 
 
 -- 
 James C.W. Ahiakpor, Ph.D.
 Professor
 California State University, East Bay
 Hayward, CA 94542
 
 (510) 885-3137
 (510) 885-7175 (Fax: Not Private)