Fall in Exch Returns - Keynesian negative multiplier?

So when the cuts were proposed, they were met with great approval from the majority on here. I and a handful of others warned of the danger of a negative multiplier.

The resultant fall in economic activity as a result of the cuts would be greater than the amount of the cuts themselves, went the argument.

€1bn in cuts could lead to €2.2bn in lost economic activity.

This view got short shrift at the time (have you ever heard of something getting long shrift? But I digress) but the facts look like the warning had more than a little merit.


The theory is fine, but ignores one practical issue;

The cuts were necessary, not because the government was attempting to cool or shrink the economy, but because there was not enough money in the government reserves available to continue spending at the previous rate.

The alternative was for the government to borrow even more money to maintain the levels of spending.

In essence, it would have been the same as a family, maxed out on a couple of credit cards, with a 10x income mortgage that they took out in 2006, an “investment” property interest only loan on a pile in Bulgaria, a couple of young kids, two car loans and some debt to the credit union for last years trip to Disney World, deciding that because the consumer is an important part of the economy they were going to do their bit by continuing to spend at mid 2000’s levels, applying for a couple of new credit cards, seeking a pay rise and looking to borrow more to keep it all ticking over.

The theory of how government, and indeed consumer, spending impacts on an economy is fine, but theory has to tempered with the realities of the situation.

Blue Horseshoe

Nobody disagreed with the idea that it would have a negative effect on the economy. The fact that the cuts were required was the main point of disagreement with you.

The theory of catabolic collapse works in the same way. Less economic activity bites the hand that feeds the surplus wealth needed to maintain the system and is self reinforcing, creating a downward spiral. Of course that theory goes a little further: government induced stimulus eventually makes things worse not better, if it cannot be put to use for genuine wealth creation as opposed to make work pork barrel project. Do you think they can?

Well the reality is that a cut of X leads to a fall in economic activity of 2X or more.

So, there will be a mini-budget where they decide to cut by €6bn. This will then cause a fall in economic activity of, say, €12bn.

So in November, we need another mini-budget where cuts of €10bn are made, leading to a May mini-budget…

This is a one-way process. The “savings” made by the cuts has been wiped out by the fall in activity. The next cuts will have the same effect, only greater.

We cannot unmake the error, but we can choose not to repeat the error.

So, do we make more cuts, knowing what the result will be, or do we learn from the mistake?


Well that’s bullshit for a start.

Depends which you think will be worse…the consequences of not cutting and continuing to borrow or the economic effect of the cuts.

I happen to believe not cutting will be much much worse.

When the official results are tallied, we will know exactly how much we have lost as a result of the cuts.

It might be a lot more than 2x the cuts, we’ll have to see.

Or indeed it might be less. Current thinking is that the government multiplyer in open economies is quite low and may be under 1.
seekingalpha.com/instablog/26862 … n-in-vogue

How much of the fall in economic activity can you blame directly on the cuts given that the economy was already in a deep recession?

On a related point. The working population is aware of the growing public debt burden. If you continually add to this debt consumers will consumer less in anticipation of higher taxes in the future.

Furthermore, even though most posters here do not think that the budget cuts went far enough (or perhaps that the right cuts were not made) - the international bond markets seem to have been convinced. Just look at what Greece is paying for new debt vs Ireland (6.5% vs 4.7%). Have you factored lower financing costs into your numbers?

How will we? If you do X and then Y happens, but at the same time A through W have also occurred, then you don’t know that Y is wholey, partially, or at all, because of X.

How much would the drop have been if we’d done nothing?

I’ll again point you to the excellent correlation != causation cartoon above.

Eh…? The game was up, Rock3r. The Emperor had been declared naked. We have to start tackling the waste/inefficiency and get our economy competitive again. I’m not really sure what alternative you suggested (a link to a previous thread would help), but sooner or later the Bond market was going to say ‘no thanks’ to more debt. I feel more comfortable defending a currency than trying to maintain inflated asset prices.

Its not a mistake . If you listen to what Cowen and Lenihan are saying " We have turned a corner " " we have stabilised the economy " etc you will hear them only talking about Irelands ability to borrow and not the economy . They have given up on the economy , have battoned down the hatches and the only show in town is Irelands ability to borrow .

In the 80’s we just borrowed but now whenever Ireland raises a bond on the international markets it actually makes the papers .
The economy is dying and there is nothing they can do about it as all their focus is on impressing ’ international markets ’ to keep the show on the road . Making those cuts was done to try and balance the books and to show the bond market that while we are a basket case we are at least credit worthy ( although at higher interest rates )

We are like a ship that is holed below the waterline . We can just about keep afloat if we keep on bailing , but we are not sailing anywhere .

I’m having a hard time reconciling all the deflationistas on this forum with their love of gold. Seems like people are advocating belt tightening, but actually expecting massive stimulus and hence inflation, which can only be defended with gold, no?

Gold, Silver and cash for me. I consider myself hedged.

Eh, that would be you.

The rest of us arguing that deflation is likely for the next while are saying that gold is a bubble too. Anyway, if you want to talk about gold, take it to the gold thread. Back on topic please.

That may be current thinking. Current thinking in 2006 indicated that the financial boom would continue for the remainder of the 21st century. Facts told a different story.

We’re seeing straws in the wind showing massive contraction while the rest of Europe was expanding.

Looks like facts are about to have another tiff with current thinking.

When tiffs like that happen, I find it’s best to side with facts and make drastic changes to current thinking. How about you?

Inflation ? I am expecting hyperinflation with the amount of money printing that has gone on in the last few years .

It’s easy: deflation has always been a local problem, when it even exists anywhere on Earth, which has been rare enough.

There are indications that inflation is over 10% in China, for example (not that the official Chinese figures are worth a donkey spit).

Prices of gold do not correlate well with the price of potatoes in Ireland.