Tuesday, April 24, 2012

Krugman: The Austerity Multiplier

Paul Krugman shows how European austerity policies have contributed to European economic contraction.

1 comment:

bernard said...

adding to Krugman's remarks (he knows about this pretty well).

When the fiscal multiplier is estimated country by country, it is significantly less than 1.25 and as I recall even less than 1.0. This is because each inddividual country is a highly open economy.

For the Eurozone and Europe as a whole, the multiplier becomes larger, eg. 1.25, because as a whole the ese are not highly open economies - on the same order of magnitude as the USA. Short explanation, these are huge, vast economies, which can produce locally much of "what they need" (yeah, guys, I know about China too, numbers are numbers not opinions).

This actually increases the conendrum: we are witnessing a generalised, uncoordinated set of national austerity policies (based each on the small multipliers), but because they are happening everywhere, the actual multiplier is turning out much larger than each ignorant local politician was led to believe.

Last, OFCE for instance among many other serious economic think-tanks has done formal macroeconomic modelling work on this. The evidence exists, idiots choose to not read it at their own peril. Who cares about the resulting unnnecessary unemployed, right?