Spending stimulus

It is commonplace to read in the newspapers and elsewhere that spending more this Christmas is a good thing. The theory is an old one: if I spend $1, that dollar goes into the pockets of some business who pays their employees and suppliers who then spend part of that dollar continuing a virtuous cycle until it peters out. The initial spending creates a multiplier effect in terms of greater aggregate demand — something we are currently short of.

But I suspect that not all expenditures are created equal. If a business receives and unanticipated bump in sales this Christmas, it may well use it to pay off debt or retain earnings for next year, which they still anticipate to be a bad one. In that case, it is effectively saved and there is no multiplier effect. It is only when those increased sales translate into positive expectations of a better year next year that the virtuous cycle can start.

This means that your increased spending is a lottery on the fiscal stimulus front. In contrast, government expenditure bringing forward long-term projects on infrastructure and related areas is a better bet. These go straight into expenditures to workers and suppliers and so have the potential to create multiplier effects. My guess is that the government can target these things better than individual consumers.

I am not saying here that individual consumers should not spend. What I am saying is that if you want to spend more out of some concern for the economy you are better off lobbying for more government expenditure than trying to pick and choose and change business expectations all on your own.

One thought on “Spending stimulus”

  1. The debt that it pays off or retention of the income for next year may very well make the difference between sacking another employee or else deciding to hang on until things improve.

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