I wanted to discuss the detailed Blanchard-Leigh WP at the AEA that brought up multiplier-mania again but still haven't read it in enough detail, so I thought I'd postpone before I came across a Noahpost that he deems incendiary. Why? Because it's conveniently titled (more web hits!) - "Why the multiplier doesn't matter".
That aside, there are some valid points here. Namely that the first thing he does is add these caveats:
The multiplier doesn't matter:
1) The 'Theoretical" multiplier
2) in the United States
3) At this time in history
And the basis for his argument is that it doesn't matter what the multiplier is period. The bottom line is that the US should be investing in infrastructure. That's why the multiplier doesn't matter. Theoretically, discussing the multiplier in a strictly Keynesian model makes sense if you assume that the Fed is deaf to what's going on fiscally and furthermore has been banned to react in any way. That much, is obvious.
That aside, there are some valid points here. Namely that the first thing he does is add these caveats:
The multiplier doesn't matter:
1) The 'Theoretical" multiplier
2) in the United States
3) At this time in history
And the basis for his argument is that it doesn't matter what the multiplier is period. The bottom line is that the US should be investing in infrastructure. That's why the multiplier doesn't matter. Theoretically, discussing the multiplier in a strictly Keynesian model makes sense if you assume that the Fed is deaf to what's going on fiscally and furthermore has been banned to react in any way. That much, is obvious.
As Noah points out further though, what about public goods? What if there's something the private sector can't provide or won't provide or maybe even shouldn't provide? If these goods are complements (in a good way!) to the private sector then a low multiplier shouldn't matter. Smith then cites the Baxter and King paper from 1993 (I haven't read it and am not likely to soon!) on "government capital" which describes a situation where 'government spending on "government capital" is efficient even without any aggregate demand deficiencies at all. Efficient, that is, as long as the current amount of "government capital" is below the optimal amount - in other words, as long as the country has recently been underinvesting in things like infrastructure.'
That's the point. If you're looking at investment in infrastructure as some sort of a counter-cyclical measure etc. then you're missing it totally. The benefits of infrastructure investment don't differ whether you're in the biggest boom or the biggest bust but the cost of borrowing does - and the cost of capital is so low!
The Keynesian multiplier doesn't have to be x or y or z to justify repairing a severely underinvested infrastructure.
If you can't see that, your vision is poor.
If you choose not to see that, you're a modern-day Republican.
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