The IMF has a new report out that says a number of interesting things. The summary by FT is as follows: It predicts a soft landing for China. If so, this is great news for the world economy. It trims growth forecasts for next year, but by a modest amount.
Most important, it says that the estimates of how much money is saved by cutting government spending have been wildly overdone. It has been estimating the multiplier for government spending at 0.5. In other words, $1 in government spending generates 50 cents in new growth. So cutting spending was thought to be relatively cheap. If government captures 20% of that growth in taxes, it would take 10 years to pay back the investment. But now the IMF says that the multiplier is 0.9-1.7. Even accepting the midpoint of that for calculations, it means that government spending pays itself off in about four years and thereafter generates a 26% annual return on investment. And, of course, the rest of us get the benefits of higher growth, especially jobs.
Now, whether things have a high or low economic multiplier depends on how the money is spent. Spend it on bombs for senseless wars, and there’s no return on investment, unless one considers Al Qaida to be a good thing. Spend it on wounded veterans, and instead of suicides you get taxpayers. So until one specifies a use for the money. there’s a huge uncertainty in what the multiplier will be. And there’s a reason why the multiplier is high now, and might be lower during more normal times: there’s so much slack in the economy that government spending of all kinds reduces the waste of human lives. When unemployment is low, government spending just causes inflation.
But consider: how many businesses generate a 26% return on investment?
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Update: Naturally, Paul Krugman agrees with me.