Ball Boy | The Keynesian multiplier

Qué es el multiplicador keynesiano y bajo qué supuestos un aumento del gasto eleva la actividad y no los precios, explicado con la historia de un vidrio roto. Informe de abril de 2016.

Un grupo de chicos juega a la pelota en la calle. En el forcejeo, uno de los niños despeja el balón con tanta fuerza y mala suerte que va directo a romper uno de los mayores ventanales de la escuela del pueblo.

Disturbed by the noise, a group of neighbors comes to the scene and, as could not be otherwise, harshly reprimands the boy for having destroyed the window. Football is a good habit, but keeping the glass from breaking is also a good habit.

Las palabras se multiplican; los más opinan que no debería permitirse a los chicos jugar con la pelota en la calle. Incluso uno de los maestros de la escuela, quien vivía en las cercanías, sugiere que el mismo colegio debería aplicarle un castigo ejemplar.

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El anciano defiende al niño

Sin embargo, un anciano que estaba escuchando argumenta: “No entiendo por qué quieren castigar al niño. Más bien deberían premiarlo, ya que lo que hizo los beneficiará a todos ustedes”. Los presentes dudan, pero se disponen a escuchar sus explicaciones, más por respeto que por convencimiento.

The man explains. “Surely the school will need to quickly repair this window, an arrangement that will have to be paid for by the child's father. This will generate a profit for the glazier, who will surely earn some good pesos for the work.

Pero a su vez, el vidriero podrá utilizar ese dinero para pintar su casa, por ejemplo, porque todos pasamos por allí y nos damos cuenta de que le falta una mano de pintura. Eso probablemente lo beneficiaría particularmente a usted, señor José, que es pintor”.

He said, pointing to a brown-haired man who was at the back of the group of people who were complaining about the harm to the child. “I think it wouldn't hurt to be able to do that job.”

“But it doesn't end there. You would then have the possibility of using this money to invite his wife, Mrs. Celia, to dinner. “This money would probably be enough to go to dinner at Luigi's Restaurant, for example.” He said, while pointing to Luis, who was also in the crowd and was the owner of the restaurant.

“Y usted, a su vez, Luis, podría utilizar ese dinero para sus gastos generales, que, si no me equivoco, realiza en el almacén de la señorita Laura”. Y volvió a señalar a una de las mujeres que estaba entre el público presente.

Los beneficios llegan a todo el pueblo

“The increased sales will benefit both your suppliers and yourself, who will be able, for example, to buy better school supplies for your child who is starting first grade next year.

Y, por supuesto, esto beneficiará al dueño de la librería escolar, que a su vez gastará también sus ingresos como él decida”.

“Como ven, este niño no ha hecho nada malo; por el contrario, con su acción ha impulsado la economía de nuestro pueblo, generando mayores ingresos para todos nosotros.

And in the long run, also generating more employment, given that many of these products that we mention are manufactured locally.”

De esta forma, los presentes coincidieron con el anciano y dejaron en paz al niño. Estaban convencidos de que había sido una suerte que los muchachos decidieran jugar al fútbol justo en ese lugar.

Now, is it really like that? Because surely the intuition of many will be telling them that the child should be reprimanded. However, the old man gave some very convincing arguments.

Let's now think about this issue in economic terms. The questions we could ask ourselves are the following:

  1. What assumptions must be met for the old man to be right?
  2. In which case does the effect represent a price increase?
  3. In which case there is no impact on the economy?
  4. In which cases is there no immediate impact on the economy, although there may be a negative impact in the medium or long term?

That much-mentioned concept, which we call the Keynesian multiplier

The original text aims to explain a well-known concept in economic literature: the Keynesian multiplier.

El mismo demuestra cómo un aumento del gasto en una economía lleva a un incremento más que proporcional en la renta nacional. La explicación que da el anciano es bastante clara al respecto, pero podemos –y debemos– incrementar su nivel de tecnicismo.

In the Keynesian model, entrepreneurs respond by selling all the products necessary to meet demand. The increase in demand is met -at first- by a liquidation of stocks. Once these begin to reduce, business owners will want to replenish the desired stock level, increasing production.

Thus, in the goods market, imbalances between supply and demand are closed based on the response of businessmen, who increase production. In turn, increasing production increases income, which leads to greater disposable income in families.

Pero la historia no termina ahí. Una proporción del nuevo ingreso es utilizada para el consumo, lo cual conlleva un nuevo incremento en la demanda agregada, que nuevamente va a disminuir los stocks y provocará un ajuste de producción.

El multiplicador con números

Let's put numbers to the above. Let's assume an initial expense of $1000 and that - on average - families spend 80% of their income on consumption. The increase in spending leads to an increase in aggregate demand of the same magnitude, causing entrepreneurs to increase their production by $1000.

Now, this also represents an additional income of $1000 for families, who consume 80% of it. That is, consumption increases by $800 due to the new income, generating a new increase in aggregate demand.

Once again, the demand for goods exceeds their supply, generating a decrease in stocks, and a response from businessmen to increase the supply by $800. This represents a new increase in income of that magnitude, of which families will consume 80%, that is, $640.

 How big is the multiplier effect? We can see that the chain of increases follows the formula:

Solving, the final effect ends up being:

A little mathematics will allow you to notice that the greater proportion of their income that families consume, the greater the final increase in production will be.

Keynes y el gasto público en las crisis

The concept of the multiplier was widely used to justify increases in public spending during times of crisis. This explanation was given by John Maynard Keynes (1883 – 1946) to show that state intervention would multiply the impact on activity.

Asimismo, la aplicación de este tipo de políticas ayudaría a sacar a la economía norteamericana de la crisis iniciada en 1929. También vale aclarar que estas fueron puestas en marcha con anterioridad a la publicación del trabajo de Keynes.

But before continuing, it's important to note that increased spending is entirely financed by savings . In other words, an increase in spending (whether consumption, private investment, or government spending) is financed by an increase in savings (private or public). This is why, in Keynesian models, "investment creates its own savings."

What assumptions must be met for the old man to be right?

  1. It must exist unemployment In the economy. In this particular case, for example, the glazier must have free time to carry out the work entrusted to him. The same applies to the painter, and to any other agent. In turn, the companies that manufacture the goods that are purchased in the warehouse and bookstore must have sufficient idle capacity to increase production.
  2. The father of the child must actually increase your total spending to pay for the broken glass. If you simply skip buying a few things to spend on fixing the glass, you might think the net effect would be zero. That is, a redistribution of the objects of expenditure would occur, but without an increase in it.
  3. Even if the child's father saved part of his income and after this event increased his total spending, to ensure that the impact on the economy is positive, it must be evaluated how it was saved said money in advance. In particular, we would need to assume that you store it in a stocking or under the mattress, in order to ensure that the impact is positive. On the other hand, if the savings were deposited in a bank, it is not necessarily true that the level of activity will grow.

Breaking down assumptions: What would happen if there were no unemployment in the economy?

If the first assumption is lifted, the Prices en vez del nivel de actividad. El vidriero (o algún otro individuo de la cadena) decide aumentar los precios para tomar el trabajo, desincentivando a otros clientes. De esta forma, no trabaja más, sino que solo es mejor pago.

But the level of activity does not increase, because its higher income is offset by higher customer spending, so consumption in general is not affected.

This occurs because when demand increases for goods whose production cannot be increased in the short term, the owners of said goods value them more and begin to raise prices. This is what is commonly known as a “reheat” of the activity.

In all classical and neoclassical models, which assume full employment (or at least a low equilibrium level of unemployment), an artificial boost to spending is entirely absorbed by an increase in prices. This increase reduces the disposable income of the majority of the population, so less is consumed and the initial impulse is nullified.

That is why countercyclical policies are commonly advocated . In other words, when the economy is depressed, increased public spending can help restore economic activity.

On the other hand, at levels closer to full employment, much of the effect will translate into higher prices and not an increase in production.

Demolishing assumptions: What would happen if there is no increase in total spending?

If we lift the second assumption, nothing simply happens at the activity level. But people's wellbeing se reduce. Esta es seguramente la explicación más simple, pero sorprendentemente la que más escapa a las afirmaciones de sentido común. No todo aumento del gasto en un ítem particular implica un aumento del gasto agregado en la misma magnitud.

In this particular case, it is possible that the boy's father makes ends meet, and because he has to pay the repair to the glazier, he must stop paying for other goods, harming other agents who will see their income reduced and therefore Therefore they will consume less, giving rise to an inverse multiplier effect.

¿Cómo se financia el mayor gasto?

Trazando un paralelismo a nivel macroeconómico, cabe preguntarse cada vez que el Estado (u otro agente) incrementa su gasto: ¿cómo lo financia? Si un aumento del gasto público es financiado con impuestos, entonces la población tendrá menos dinero para consumir.

This can fully or partially offset the increased spending generated by the government. In general partially, given that the private sector will not only reduce its consumption, but also its savings.

Some theorists have gone so far as to assume that an increase in debt-financed spending also has a negative effect on private consumption.

¿Por qué? Porque se supone que agentes completamente racionales y calculadores se darán cuenta de que el Estado está incurriendo en una deuda y por lo tanto deberá incrementar sus impuestos en un futuro para pagarla.

Entonces, previendo esto, “suavizan su consumo”, dejando de consumir un poco en cada período para aliviar el golpe que recibirán en ese momento. Esta teoría es conocida como Ricardian equivalence, but the reality is that it has been widely refuted by empirical evidence.

One clarification is necessary. In this case, even if the level of activity remains the same, well-being decreases. Why? Basically, because resources are used inefficiently.

¿Acaso el padre no hubiera preferido gastar su dinero en otra cosa? Keynes dio en su “Teoría General” un ejemplo famoso, que decía que, si era necesario, el gobierno debía contratar gente para cavar pozos y luego volverlos a tapar, con el solo fin de generar empleo.

Claro, esto no implica que todo trabajo sea lo mismo, ¿no sería mejor para todos tenerlos haciendo algo útil? No nos olvidemos de que mayor bienestar no es solo mayor actividad.

Breaking down assumptions: What would happen if the new income was deposited in the bank?

If we lift the last assumption, that is, if the father deposits his money in the bank beforehand, it is possible that the level of investment will actually be reduced and future production will be affected.

Esto sucede porque cuando los bancos tienen mucha liquidez disponible para prestar, reducen la tasa de interés de los préstamos. Por lo tanto, incrementan la rentabilidad de los proyectos de inversión.

The result is greater private investment. If the child's father must withdraw savings to meet the expense, banks have less money to lend, they adjust the interest rate and therefore the investment falls. This compensates for higher consumption and reduces the impact on activity.

Drawing a parallel with macroeconomics, this is known as the crowding-out effect . In this case, a government that needs to finance itself internally to increase public spending competes with the private sector for these loans, raising interest rates and reducing investment. This results in a smaller overall impact on aggregate economic activity.

De todas formas, este es el concepto más discutido. Los economistas clásicos suponían que el efecto crowding out era completo ya que todo el ahorro disponible era ahorrado en bancos (o bonos) y los bancos prestaban todo el ahorro disponible y la tasa de interés subía todo lo necesario como para que la merma en la inversión igualara al mayor gasto público.

On the other hand, other economists propose that the banking system has the capacity to produce money out of nothing, given that it is not usually lending at its maximum capacity. In that case, increased spending does not necessarily crowd out investment.

To conclude, is the old man right?

Los argumentos aquí expresados explican en qué casos la política fiscal es más o menos efectiva como un arma para incrementar el nivel de actividad. Justamente, gran parte de lo que nos llevó a escribir este artículo es cierto fanatismo a favor o en contra de la fiscal policy, taken as a slogan.

En Argentina, los modelos keynesianos suelen ser especialmente populares en las universidades. Esto hace creer a los alumnos menos críticos que los problemas se solucionan gastando.

On the other hand, in other parts of the world, economists have found so many deficiencies in this policy that they do not even consider it, leaving monetary policy as the only intervention option.

En todo caso, tiene que quedar en claro que -como es habitual- no existe una respuesta única, al menos desde la teoría, y debería estudiarse con detenimiento cada caso en particular.

Volver un conjunto de políticas una consigna de aplicación para todo momento y lugar sencillamente puede generar efectos contrarios a los deseados.

En definitiva, un análisis técnico será necesario para que las buenas intenciones puedan seguir siendo buenas intenciones.

To learn more visit:

Turner (2013). “Debt, Money and Mephistopheles: How do we get out of this mess?” [Click here]

Open access, for use and citation

The report is available freely and without charge, under a Creative Commons license (CC BY-NC-SA 4.0):

Niño Pelota. Informes del Observatorio UNR N.º 24 — Serie Puente Académico N.º 8, abril de 2016. ISSN 2683-9067 / 2683-9091. Autor: Germán A. Tessmer.