Mercury Rising 鳯女

Politics, life, and other things that matter

Best investment: government/updated

Posted by Charles II on October 8, 2012

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.

4 Responses to “Best investment: government/updated”

  1. Phoenix Woman said

    Part of the reason for China’s soft landing is that they have the intelligence to take much of the big-ticket green-energy items previous slated for export and installing them at home. This both supports their green-energy industry by providing price supports, and it aids their efforts to wean themselves from fossil fuels. That’s good news for everyone,.

  2. jo6pac said

    Who running the imf today because they seem to be off message, everyone know the only way to prosperity for nation is austerity for the citizens. It sound like imf is being run by commies;)

    • Charles II said

      Even genuine conservatives know that bleeding an economy until it collapses is unwise. Only today’s radical reactionaries believe they will profit from mass misery.

  3. MarkH said

    Of course Republicans will deny government spending is useful, but then they’re the same people who hailed the IMF statement that GDP will decrease (proving Obama is a failure). They’re the same people who say lots of other contradictory nonsensical things worth ignoring.

    Mitt Romney calls for a 20% across-the-board tax cut, but denies he will cut revenues to government. He says he doesn’t have a $5 Trillion dollar tax cut plan. Maybe he means it’s really $4.999 Trillion.

    Ignoring Republicans and especially TEA partiers is best for mental health.

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