Without a govt stimulus our economy will sink further

11:47 am - September 5th 2011

by Richard Murphy    

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It was interesting to note two FT Op-Eds this morning calling for the same thing – fiscal stimulus.

Clive Crook did it with regard to the USA:

[Obama] should propose a strong new stimulus, more ambitious than the measures mooted so far. At the same time, with new and equal emphasis, he should call for strong fiscal restraint in the longer term. This means tax increases for the middle class as well as the rich, and cuts to Social Security and Medicare. The president, finally, must spell this out.

That’s pure Keynesianism.

Without it he says the Republicans will walk the 2012 election. And the USA will suffer long and hard.

Wolfgang Munchau has much the same to say of Europe:

I would personally go all the way, and advocate a discretionary fiscal stimulus in Germany, the Netherlands and Finland to offset austerity in the south. What matters is the fiscal stance for the eurozone as a whole. There is, as yet, little recognition in the eurozone’s cacophonous capitals that an economic downturn poses an existential threat. I would expect therefore that the downturn will hit the eurozone with full force, and without defence. When that happens, the eurozone crisis will turn ugly.

The message is the same: unless Europe agrees, at least in part, to undertake a fiscal stimulus it too is in deep trouble.

And it is very obvious the UK is already in that position.

The universal clamour for austerity is now failing us badly, as some of us predicted it would.

Can we now have the stimulus we need, please? Before it all goes very horribly wrong indeed?

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Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments

“That’s pure Keynesianism.”

They will shortly be burning ephigies, followed soon after by the books.

What the USA needs to do is tax the rich. Not even tax them harshly. Tax them to a fair amount and get that money properly. Then the cuts to Medicare and Social Security cease to be so necessary. The idea of cuts to those vital safety nets is borderline murderous, because those services stop people dying. Simple as that. Stimulus packages come and go, but you make deep cuts to Social Security and Medicare, that’s not something that can be easily restored.

The big unmentionable act that nobody wants to mention is taxing the rich and very rich. Close down the loopholes and get some damn money out of people who can afford to pay it. The very rich owe their wealth to the state and its infrastructure, particularly in the UK. The state educates their workers, it keeps them healthy, it protects their premises from crime (or it tries to, you’d think after the riots folks would be more willing to kick into the policing budget). The very rich in Britain have relied on the infrastructure of the UK to make their money, they ought to give more back. Proportionally the poor pay more tax than the rich, yet they get the least back. That situation needs to change.

And yeah, then a stimulus package too. For good measure.

Ah, but Richard, the world of economics is more complex than you perceive.

It might even be true that the US and Germany/Holland/Finland should have further fiscal stimulus. This does not then go on to mean that the UK should.


Pretty important reading or those who would argue for fiscal stimulus.

“In How Big (Small?) Are Fiscal Multipliers? (NBER Working Paper No. 16479), co-authors Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh show that the impact of government fiscal stimulus depends on key country characteristics, including the level of development, the exchange rate regime, openness to trade, and public indebtedness. After analyzing a quarterly dataset on government expenditures for 44 countries (20 high-income and 24 developing) from 1960 to 2007, they conclude that the output effect of an increase in government consumption is larger in industrial than in developing countries. That response — which is called the fiscal multiplier — is relatively large in economies operating under a predetermined exchange rate, but it is zero in economies operating under flexible exchange rates.”

The US is a large enough economy, with a small enough trade sector, that we can happily argue that it’s working under a form of fixed exchange rate. Engough of what it does is all in $ for this to be at least partially true.

Germany, Holland and Finland share the €, so we can again state that they are at least partially in a fixed exchange rate regime (and much more of their economies are concnerned with the euro over and above just those three countries).

However, the UK is most ertainly not in a fixed exchange rate regime. We very much have flexible exchange rates.

Don’t forget, even in the most basic Keynesian models it’s possible for stimulus to leak overseas and thus have no domestic effect. And here we have recent empirical research, by good economists, stating that in the current British situation “the fiscal multiplier……. is zero in economies operating under flexible exchange rates.”

No multiplier, no stimulus, is there?

So not much point in doing it is there? Could be for the US and Germany etc, but your logical leap to thus the UK should do it as well doesn’t work.

Which might be why those experts at the FT didn’t try recommending it really.

but we need immediate cuts or we’ll face riots like in Greece…

Sorry – rather facetious of me.


While you are absolutely right in that a fiscal stimulous conducted through tax cuts (particularly for the wealthy, though not exclusively) would leak overseas in too great a measure to be a sensible course of action – that does not mean that the same is true of all methods of stimulus.

There was an interesting paper by engineer last year that noted the economic returns of recent infrastructure projects (primarilly rail and road investments) in the UK were unusually high.

On a range of projects over about ten years it found a six-fold return to the economy was typical on every penny spent by government.

Most wealthy countries can’t match that – because they already have much better infrastructure, and so the marginal benefits of such investment in places like france or Germany don’t match the UK. (In simplified language, we have a catch-up premium we could collect)

The quickest return for this would be in relatively small projects. HS2 (which the tories don’t want anyway) will take years to pay its divident to the economy. Relatively small projects like by-passes, road-widening, bottleneck reductions, rail electrification and so on – are very easy quick wins for the UK economy.

Unfortunately the present government isn’t as knowledgable as you about the leakage of their stimulous efforts as you are. Hence we are cutting corporation tax (which benefits relatively wealthy people and so leaks abroad quickly) while cutting back on infrastructure projects (eg rail electrification, some existing schemes for which have been shelved).

Which is a shame.

Hence we are cutting corporation tax (which benefits relatively wealthy people and so leaks abroad quickly)

Cue Tim W on tax incidence in 5…4…3…

“Cue Tim W on tax incidence in 5…4…3…”

Quite, as Warren Buffett said we he claimed his 17.4% tax rate. It’s certainly not the rich shareholders like him that pay the corporate income tax, is it?

News International is to sell its site in Wapping, London, the newspaper publisher announces http://bbc.in/tjNf0 #NewsInt

Waves bye bye!

As Timmy says, the fiscal multiplier for the UK in such a scenario may well be zero. What you are overlooking is that we are operating under an inflation targeting central bank. Therefore, the central bank would offset the fiscal expansion by tightening monetary policy sooner than would would be the case in the absence of the fiscal expansion. For the sake of argument let’s assume the central bank in response does not offset and tolerates a higher level of inflation. Tax cuts to work must be seen as effectively permanent. For the government commitment to permanent tax cuts to be seen as credible, they would also need to make a credible commitment to even deeper spending cuts sometime in the near future. If the governments commitment on tax and spending is not believed the tax cuts would not work as they would be seen as temporary. A temporary sales tax cut would have some stimulatory effect.

Raising tax in some areas and simultaneously reducing tax in some other areas such as low earners and employers NI would be more stimulatory than higher borrowing for tax cuts. Even if there was no fiscal multiplier an increase in infrastructure spending would be worthwhile at the cost of a slower reduction in the fiscal deficit.

With so much of a UK fiscal stimulus likely to leak abroad. The smart thing for the UK to do is to cheer on from the sidelines for a euro-core and US fiscal expansion and free ride their fiscal stimulus without us incurring the debt. So yes, US and Germany spend some more.


I was hoping for a more useful response to how a stimulus can avoid leakage abroad than a rather pointless snipe at my dismissal of people who own companies being relatively wealthy.

I do understand that companies tend to be owned by…

a) upper-middle class people (small business owners) and so spend a reasonable proportion of their wealth abroad, and keep relatively high proportions of increased disposable income in savings.
b) pension funds, and thus not much use to immediate stimulous
3) internationaly, as even public listed companies, though traded in a particular jurisdiction, are now owned globally.

Which comes back the notion that a stiumous focused on infrastructure helps avoid leakage better than alternatives, and can prove relatively effective.

It would be nice to see some recognition of this from the top.

“response to how a stimulus can avoid leakage abroad”

In an open economy, not very much.

Imagine infrastructure for example. So, err, how do we stop the Poles etc doing all the labouring? We can’t. Or the purchase of cement, machines, fuel, from abroad? We can’t: illegal for us even to try in the EU.

Trains? Heard of Seimens?

Sometimes it really is true that the correct answer is “Nope, sorry, no way to do that”.

I was hoping for a more useful response to how a stimulus can avoid leakage abroad than a rather pointless snipe at my dismissal of people who own companies being relatively wealthy.

You misunderstand. Tim W’s long stated position is that corporations cannot pay tax, and that the incidence of corporation tax is borne not by the shareholders but by the employees. If corporation tax is, in fact, paid by the workforce, then a tax cut is not a “benefit for wealthy people”.

That’s not (or shouldn’t be) a controversial point. Tax incidence is a fairly developed field.

12. Margin4error


Do you have a view on a non-fiscal stimulous (as it were) through investment in infrastructure?

Not that I disagree we should indeed cheer from the sidelines if Europe and the USA give us a free step-ladder out of our economic hole….

13. Leon Wolfson

And as usual they utterly ignoring the basics. That the driver of the economy, consumer demand, keeps falling into a hole, and the Government is slashing benefits which are spent straight back into the consumer economy.

With things like the HB cut, *billions* will be taken out of consumer spending.

I’m not sure why Tim thinks a double-dip will benefit this country…

“Tim W’s long stated position is that corporations cannot pay tax, and that the incidence of corporation tax is borne not by the shareholders but by the employees.”

Why should corporations have first amendment rights to free speech then, if they can’t pay taxes?

The Right likes to pick and choose the status of corporations. One minute they are non human organisations that should not pay tax. The next they should be treated as human for free speech and political donations.

One minute they are non human organisations that should not pay tax. The next they should be treated as human for free speech and political donations.

Unsurprisingly, you’re getting muddled. The argument is not that companies shouldn’t pay tax. The argument is that taxes that are ostensibly levied on companies are actually paid by the employees of that company. Tax incidence.


Incidentally, you do know that we don’t have first amendment rights in this country? What with the whole unwritten constitution thing.

16. gastro george


I’m just imagining the Germans or French saying that and rolling on the floor laughing. Build a new TGV line? No, can’t do that, the Germans might get the train contract. Next thing we’ll hear is that Bombardier lose another contract because they can’t deliver them down our decrepit infrastructure.

The answer, of course, is to run the government so that we have industries that can do things rather than trowel cash abroad.

“Why should corporations have first amendment rights to free speech then, if they can’t pay taxes?”

I assume that you’ll be calling for anyone who hasn’t paid tax to have all rights removed then? I’d hate to be a child in your utopia.

and what Tim J said, never took you for a septic.

I was talking about the US, and yes I did not make that clear. But the US Supreme court has increasingly been giving corporations more and more rights. For example they can now donate unlimited amounts of money to political candidates of their choice, but (and here is the kicker) they don’t have to declare they have given any money at all. At the same time the court has been stripping away human beings individual rights against corporations.

So when people like Tim tells us that these same organisations should pay no tax, it is time to get the mobile guillotine machines and pitchforks and torches.

19. Margin4error


Your approach seems flawed. You seem to look only at phase one of the stimulation and overlook the immediate impact resulting for the nation’s improved competitiveness.

I assume this is because you are defending a position rather than thinking.

While cutting corporation tax draws in companies that can do business in generic space with generic equipment and infrastructure needs (classically banks, which just need large office buildings and computing equipment) – cutting corporation tax makes little difference to companies that have unique equipment and infrastructure needs. (I’ll use windmill manufacturers, since there is a very good example of this economic equation in the North East right now)

Banks can up and move relatively easily and to practically anywhere. Internet connections are common and similar. Office buildings and computers are common and similar. As such cutting tax makes a big difference. But inertia makes that a long game. Large new banks employing thousands of people and boosting the economy thus – are rare. Most banks have settled homes and their bosses and senior staff tend to have attachments to those homes. (I’m using banks as a generic example here, I’m not knocking banks. We need them and we would rather they were in London than New York)

Windmill manufacturers can’t move operations easily. They need specific depths and capacities of ports. And they need significant land near those ports on which to build large buildings in which to put specialist robotic cutting and testing equipment. They need those ports to be near their markets too – as transport is not insignificant in such industries. (Unlike making little plastic toys, where millions of units fit on one boat)

This means they don’t move for tax breaks. They just don’t have that choice. Tax becomes such a small part of the equation that it is trumped by the lack of suitable locations.

The UK is well placed to generate immediate stimulation in this regard. And Sunderland has shown this. Far from wait three years until a new port opens or is expanded to start work on a new location – three companies (including Siemens) have acted rationally and based their decision to locate there on the expectation that the project will provide what they need. (They can also influence the nature of the project by getting in quick).

Ironically I don’t think Windmills are that great as a long term energy source – and I don’t hate banks. It just happens they are examples of different sides of this economic decision.

But this function allows for long term improvements in competitiveness to be combined with much needed short term stimulus. And that’s even before adding in the bit you have pretended would all go abroad. The supply chain, the staffing, and so on of actually building the infrastructure.


20. Margin4error

I tracked down that paper – makes for an interesting read. Long, but interesting.

Also – it has a great Albert Einstein Quote…

Albert Einstein sums this up quite nicely: “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”


Ah, no, you’re missing the point.

I’ve nothing at all against people building new factories. Or ports. Great, good luck. Heck, I’m off to Germany in a couple of days to talk to some people about doing exactly that myself (sadly, Germany’s the only place with the right mineral for me….but if we do get the go ahead we’ll be making those windmills more effective).

But that’s nothing at all to do with hte stimulus argument. That rest, absolutely and without doubt, on the idea that there is a fiscal multiplier.

No one coubts at all that building new factories increases employment. However, Keynesianism, this fiscal stimulus stuff, depends upon the idea that in a slump, when there are unused resources, government spending does more than this. Instead of just getting £1 more activity out of £1 more spending, we get a multiple. Say. £2 of activity out of £1 of spending.

And yes, really, all this fiscal stimulus stuff depends upon what is the size of the multiplier. And if the multiplier is zero then it doesn’t work. We just get, for £1 of spending, £1 of economic activity and that’s it.

At best we get that £1 actually: because of course it’s always entirely possible that government spending will be so catastrophically awfuly directed that we’ll have a negative multiplier.

@ 12. Margin4error

Multipliers are quite contentious. Generally speaking most sides agree that infrastructure spending has the biggest bang for a buck effect. However, the problem is that in the developed world it is hard to get any such thing as a ‘ shovel ready project.’ The likes of China can order a new rail line or a bridge to be built and that is what happens. Especially in this country we have endless debates, impacts on the the local spiders reports, inquiries, objections, appeals and protests before anything happens. The UK is known as the BANANA economy, build absolutely nothing anywhere near anyone.

With the construction industry depressed government spending on affordable housing, building new schools and hospitals, repairing our existing roads and eliminating bottlenecks would be good for the economy. Whether the government could get those type of things moving fast is another matter. I tend to ignore the multiplier arguments and just see improving the UK infrastructure as good for the supply side of the economy. It seems unlikely to be a coincidence that the most productive economies also tend to have the best infrastructure. If we have a road it is better for us to have one without pot holes than one with pot holes seems obvious to me. If kids must go to school a good building rather than the rain pissing in on their little heads is another no-brainer. More affordable housing allows people to move to where there is work. It is actually quite heartening to see that the Conservatives recognise the housing problems in the UK. Moreover, they seem willing to piss off some of their natural constituency to deal with the problem. Infrastructure spending probably would have a healthy multiplier in the current UK economy, but could be justified on supply side arguments alone without even considering Keynesian multipliers.

23. gastro george


Ah, but you’re also missing the point. If we had the factories and the skills, then the leakage on infrastructure expenditure would be less, so the multiplier would be more. I realise this is a chicken-and-egg argument, but to take the view that you just throw your hands up in the air and say “can’t do that” is plain stupid. As it is to expect strong industries to magically arise out of “expansionary fiscal contraction”.

Neither France nor Germany would expect their governments to do nothing. But I forgot, they’re the sclerotic old world …

If anyone has any pure keynesianism going spare, could you let me know? It’s the best form of fertiliser out there, and will bring my roses up a treat.

I see Mr Murphy has still not indicated how a crisis caused by debt can be solved by creating more debts – he just seems to believe it.

I’m pretty certain J. M. Keynes would have been horrified that his (developed and sensible at the time) views would be represented in this way – he at least believed there should be money to spend on stimulus, not the creation of money (he was well aware of the danger of debt and inflation).

26. Margin4error


I agree it depends on some form of multiplier – but what I meant was that I wasn’t specific about where that multiplier comes from.

Hence why I posted, since I genuinely did read this a while back and thought it was an interesting account of a valuable multiplier effect, just not the conventional one,

The view is that while other means of stimulus have weaknesses in how much they can achieve – and obviously they tend to come at a long term cost – investment in relatively small but many infrastructure improvements can have a relatively rapid response and long term benefit on top.

As I say, I would imagine this is not an approach that would work well in Germany, since its infrastructure is already very good. But where it is weak, the relatively improvement results in a bigger return in economic activity than the ammount initially spent – partly because companies respond based on reasonable expectations of improved competitiveness in the location effected.

It is an interesting take – and one that the UK is sadly not exploring.

Followers of reported internal debates between pundits in America and Britain can note a shift towards advocating more Quantitative Easing (inventing electronic money) by the respective central banks to buy medium term government bonds in order to keep bond yields down and so avoid increasing budget deficits.

A prime example is this from Martin Weale, previously director of the NIESR and now a member of the BoE’s monetary policy committee.

But more QE may not have much effect if banks just hoard the extra base money in the system to bolster bank reserves. Keynes famously likened the use of monetary policy to boost depressed economies as pushing on a piece of string.

28. Margin4error


I agree that as a stimulus, something big like HS2 is pointless. By the time it was underway as a project, one would hope the economy has recovered somewhat anyway – otherwise we really are in trouble. (We shall gloss over that the Tories are pulling out of HS2 anyway and edging it slowly towards the trash-can…)

But there are literally hundreds and hundreds of relatively small road and rail projects that could be started within 12 months on government say-so. Pot-holes is not a bad example, though a very small one. But in regards to by-pass connections of (often) less than a mile in length, improved broadband to business parks, new passing positions on single-line railways, etcs – the return is in part the relatively immediate improved business interest in the area affected. Companies act rationally on expectations – which government often hinders but in this case could support.

This, tied with surrounding development support (new housing estates, shopping developments attached to improved railway stations, etc) could serve as a significant stimlus.

“that could be started within 12 months on government say-so.”

I don’t think you understand how cocked up the micro economy is. It takes 3-6 years to gain planning permission for housing for example. There just aren’t “shovel ready” projects out there because we’ve enswathed the entire country in ribbons of red tape.

No, I agree, government could cut through all that red tape and insist on developments starting sooner. But if the red tape is all unravelled then we wouldn’t need the government money. Because red tape is a cost, a huge cost, of doing something. Get rid of it, you’ve reduced the cost and thus more things will be done.

30. Margin4error


I just disagree about the red tape issue being a big factor in this sort of stimulus.

I’ve seen enough relatively small projects go through perfectly well without government forcing the issue to believe that with government impetus it could be done within 12 months.

I’m not saying we shouldn’t simplify and speed up the planning process. We really should. But even just the sort of marginal simplification that are seeing discussed for the LEZs would resolve the problem. And (returning to Seimens ironically) the new tech centre in docklands (pre-LEZ) went through in a few months.

So it can be done.

31. Leon Wolfson

“There just aren’t “shovel ready” projects out there because we’ve enswathed the entire country in ribbons of red tape.”

The ease of doing business index says you’re talking out your…

Moreover, again, you’ve failed to consider the effect of *withdrawing* billions in spending from the critical high street as a result of a 10% effective inflation on the poor, AND cuts in benefits which will translate to direct cuts in the high street.

We’re headed directly back down.

“It takes 3-6 years to gain planning permission for housing for example.”

Crossrail is pretty well already mapped out.

Planning approvals for housing development often appear beguilingly straight forward but with issues about building in flood planes and the regular downstream costs of providing for delivery of utility services, extra capacity in transport systems, schooling and healthcare, reality is a great deal more complicated.

The Conservatives in the borough where I live make a big issue in both local and Parliamentary elections of opposing housing developments in large back gardens where the downstream additional infrastructure and utility services costs are often relatively small – which explains why there have been so many such developments in the last few years.

Is there any information on builders’ land banks – or are developers holding back construction out of concerns that mortgage lenders won’t be forthcoming with mortgages, possibly because first time buyers are unable to meet stringent deposit terms in the depressed economy? There is a big backlog on building to meet the need for social housing.

33. Charles Wheeler

The message is: the bottom 90% must expect to pay for the reckless ideology of the top 1% sooner or later.

The 100% mortgage is back … if your relatives will lend a hand

Aldermore’s 100% home loan is available if a family member is willing to guarantee any borrowing above 75%

35. gastro george

You would get plenty of “infrastructure” stimulus by reversing the cuts …


That was a very enjoyable discussion to read, and very enlightening. Thanks Margin, keep it up!

37. DisgustedOfTunbridgeWells

At best we get that £1 actually: because of course it’s always entirely possible that government spending will be so catastrophically awfuly directed that we’ll have a negative multiplier.

When you’re right, you’re right.


38. Margin4error


Thanks – I’ll try.

I’ll also try not to trigger side-issue debates again. Not realy sure I have much interest in whether companies should pay tax on principle or not.

Not realy sure I have much interest in whether companies should pay tax on principle or not.

It’s lucky that we weren’t discussing that I suppose.

40. margin4error


I wasn’t. Other people seemed to be.


‘In theory, fiscal stimulus might not work so we shouldn’t do it.’

Except it did work. It worked in 2001 after the dot com collapse and 9/11, and it worked in 2009 before the Tories came in. Please forget your theories and look out of the window for once.

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  1. Liberal Conspiracy

    Without a govt stimulus our economy will sink further http://t.co/4rPl251


    Without a govt stimulus our economy will sink further http://t.co/4rPl251

  3. William Muse

    Without a govt stimulus our economy will sink further http://t.co/4rPl251

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