"A Negative Fiscal Multiplier in Brazil"

Excerpts from the July 21, 2010 post by Antonio Carlos Lemgruber at Roubini Global Economics...

From the BRICs to Southern Europe, economic analysts are beginning to discuss the conditions for a negative fiscal multiplier.

I'm just gonna point this out now, and then I'll let it go: Lemgruber's article is not about Brazil. It is not about any negative fiscal multiplier in Brazil. It is simply about the notion of the negative fiscal multiplier.

An increase in current government expenditures tends to reduce real GDP through many different sources and channels, with an emphasis of course on financial variables such as the interest rate, the availability of internal and external credit for the private sector, the exchange rate, expectations of inflation, and the risk of government default.

If it is true that increases in government spending "tend to reduce real GDP" then it is important to note Lemgruber's "emphasis of course on financial variables." This is not the first time issues of finance have arisen on this blog. Arthurian economics identifies excessive finance as the cause of our economic troubles (and policy errors as the cause of excessive finance, to finish that thought).

I suggest that if increases in government spending now have a completely opposite effect than they did when times were good, that this change may be just another result of excessive finance in our world today.

This is perhaps the major macroeconomic debate of the day, which is behind the present discussion about increasing or reducing government déficits and government debts. On one side, we still hear hyper-Keynesian views, always talking about what happened in the thirties. On the other side, based on recent empirical work by Alberto Alesina and others, there is evidence from the last three or four decades, showing that the new globalized world is perhaps more prone to negative fiscal multipliers, due to financial globalization and to the international capital markets who penalize excessive government debt.

"Due to financial globalization and to the international capital markets who penalize excessive government debt."

My knee-jerk reaction is to look for excessive government debt. Just a glance or three.

I just don't see it. I don't see "excessive government debt." I just see excessive debt, most of it private.


Lemgruber writes, "An increase in current government expenditures tends to reduce real GDP." But since the 1980s economic performance in the big economies has been falling. And if economic performance has been falling for decades, then one could probably claim of anything, that "it tends to reduce real GDP."

Falling economic performance does not stand as proof of such claims.