The Keynesian Fiscal Multiplier is so fudging FRAUDULENT that it's brilliant.Submitted by Cyril on Sun, 05/05/2013 - 04:22
All the credits for the homework done over Keynesian sources and references should go to the Tugwit the Terrible who has given us a simple, no non-sense method of debunking the fraud:
The Keynesian fiscal "multiplier" is academic and financial fraud, to falsely justify government spending.
In particular, it is used by Keynesians to justify further Three Stooges Math for:
- the Government Spending Multiplier
- the Tax Cut Multiplier
- the Balanced Budget Multiplier
- the Proportional (Income) Tax Multiplier
ALL of the above derive from their single fiscal "multiplier" FRAUDULENT math notion... ALONE.
Here's the complete derivation of the FRAUD, in its simplest expression, using their own definitions (read on):
Thus, with the following definitions:
Yt = total income
Yd = disposable income = (1-t)Yt = the non-tax fraction of total income
T = taxes = G = government spending
Disposable income Yd is the sum of:
C = consumption (including, a = autonomous consumption)
I = investment
NX = net exports
b = marginal propensity to consume
1-b = marginal propensity to save
1/(1-b) = their so-called fiscal “multiplier” aka "GSM" ... gov't spending multiplier
i) b cannot retain a fixed value, without illegally placing addition first in the math order of operations
ii) Equations 3 through 9 really are only the same equation. Equations 3 through 9, plus 12 and 13, can be set equal to each other, and therefore must give the same result.
iii) When G increases $1 through tax T, Yd decreases $1, so Yt doesn’t change, let alone get “multiplied”.
Now, let's use Tugwit the Terrible's simple way of debunking it...
Three Stooges Math
First, let's start with Keynesians' proud conclusion...
Keynesians say if b = 0.8, and $1 is added to G in equation 12, the $1 gets "multiplied" by 5, resulting in a $5 increase in national income.
Which is an INSULT to your intelligence if you understand the definitions, along with the above preliminary notes (i) to (iii).
But let's pretend we're innocent and, surprised by the statement, we decide to give a closer look at the derivation...
The First Disguise
First, notice how, in equations 3 and 4, the name of the tax variable T, is now changed to G, government spending.
3) Yt = Yd + T
4) Yt = Yd + G
This is an example of Orwellian doublespeak/doublethink. After changing the name of the variable, they refuse to acknowledge that T = G.
This does two things:
1) It now appears that G adds to income without decreasing disposable income.
2) Since T has now “disappeared“, when we later see -T, or -bT, or -(1-b)T, there doesn’t appear to be anything to subtract them from.
For instance, let’s substitute Yt -T for Yd in equation 4:
4) Yt = Yd + G ... or: Yt = Yt - T + G
See what I mean? G - T = 0 isn’t nearly as obvious as T - T = 0.
Disguising tax is key to the scam.
The GDP Equation
In equations 6 and 7, now they make (1-b)Yd disappear, by disguising it as a+I+NX.
More of essentially useless variables to add to the confusion and distract the suckers.
That's when Keynesian arouse themselves by invoking "the GDP Equation":
In equation 6, disposable income is thus itemized into C+I+NX to make it what they call "the GDP equation".
6) Yt = C + I + NX + G
So G appears to add to total income without decreasing C, I, or NX.
Isn’t it interesting to see the GDP equation, with no mention of tax?
Is it not?
But there's more...
The Asinine Substitution
We substitute equation 2, for the only visible instance of disposable income in equation 7, and get equation 8:
2) Yt - T = Yd
7) Yt = bYd + a+I+NX + G
8) Yt = b(Yt -T) + a+I+NX + G
It’s legal (under the condition that b can remain constant) ... but ASININE.
Equation 7 is just a rearrangement and restatement of equation 2. We’re substituting an equation back into itself. And we’ve already seen the results of substituting equation 2 for Yd, in equations 3, 4, and 5.
Total income equals total income. Duh.
And if we add $1 to total income, total income increases $1. Duh, bis repetita. Nothing is multiplied.
The only difference here, is that the second instance of disposable income in (1-b)Yd is now hidden in a+I+NX in equations 7 and 8.
Do you see how the scam is working?
This is another example of Orwellian doublespeak/doublethink.
Having substituted Yt-T for Yd, some Keynesians then remove the label from Yt, to get Y-T, and never use the term Yd, to make it difficult to debunk their three stooges algebra.
But this scam is blown six ways to Sunday, already:
From equation 8 and on, it doesn't make any mathematical sense any longer...
NO WAY that adding $1 to government spending in equation 4, thus decreasing the disposable income, Yd, as much, and leaving Yt constant there, can somehow "magically" increase the latter, seen as the GDP in equation 12.
... if only because the variable G is caught BETWEEN PARENTHESES of the right hand side of equation 12 already, and the rewritings done using b, Yt, Yd in equation 8 were mathematically FRAUDULENT from that point and on, since b CANNOT remain constant as G increases in equation 7.
The Keynesian Fiscal Multiplier is so fudging FRAUDULENT that it's brilliant.