Fiscal spending is back

A few interesting tidbits from the International Monetary Fund’s most recent fiscal monitor:

“For advanced and emerging market economies, the fiscal multiplier peaks at over 2 in two years”

Crowding in private investment is particularly strong in industries critical for the resolution of the health crisis (communications and transport) or for the recovery (construction and manufacturing)”

“New investments in healthcare, social housing, digitalization, and environmental protection would lay the foundation for a more resilient and inclusive economy.”

The multiplier refers to how much additional output every dollar of government spending generates. For a long time the case for government spending was attacked by those who argued the multiplier was less than 1, meaning each dollar of government spending produced less than a dollar of additional output.

The same goes for crowding in. Historically institutions like the IMF emphasised crowding out, where government spending reduced the allegedly more efficient and desirable private investment. Crowding in is the opposite logic, where government spending creates the certainty and confidence private investment requires.

A multiplier higher than 1 and references to crowding in are big concessions; a sign of how much the conventional wisdom on fiscal policy has shifted. This is especially so for the IMF which, less than a decade ago, was a loud cheerleader for the fiscal austerity that created a lost generation in Southern Europe.

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