An amusing video by Richard Murphy.

 


In his video entitled “Why we should be paying the nurses much more than 1%” he claims (about 1 minute 45 seconds in) that government thinks the NHS “does not add value” to the economy because it does “not sell anything”: i.e. government just assumes that the output of the NHS equals the cost of running the NHS.
 
Well assuming that by “government” he means the present Tory government as distinct from a government run by some other party, the problem there is that the Labour Party ever since the Labour Party was founded has employed exactly the same method of valuing the output of the NHS for the purposes of calculating the NHS contribution to GDP (and same goes for the rest of the public sector). Indeed, it’s a bit hard to see what other criterion CAN BE USED to measure the output of the public sector, defective as the latter measure is. And in fact every other government in the world does the same.

Moreover, very much the same problem applies where something IS SOLD. The reason in two words is “consumer surplus”. That is because you pay £X for something (which in turn will mean the costs of producing will likely be quite near £X), that does not mean the item concerned is worth £X to you because it’s quite possible that had the price been £(X+Y) you would still have bought it, in which case the item is worth £(X+Y) to you. Thus arguably we ought to count the item, when it comes to computing GDP as being worth £(X+Y). (Economists refer to that £Y as “consumer surplus”).  

 

The multiplier.

Second, Richard Murphy about half way thru the video trotts out an old canard about the multiplier (about half way thru - about 4 minutes 20 seconds). The multiplier is the increase in GDP derived from one dollar extra deficit, and that increase in GDP can be much more than one dollar or less than one dollar. The multiplier will be high if money spent on something tends to be spent quickly and it ends up in the pockets of people or firms which in turn spend the money quickly, passing the money on to others who spend the money quickly, etc etc.

Now a flaw in that idea (as I’ve pointed out a dozen times on this blog) is that stimulus money costs nothing in real terms to create (as Milton Friedman pointed out). Thus if government wants to expand output of something where the multiplier is LOW, that’s not a problem in that government and central bank simply have to print more money (which to repeat, costs next to nothing to print / create).

Of course stimulus appears to be more complicated than simply printing money, but that’s what it boils down to half the time.

There is, however, an argument in favour of attaching some importance to the multiplier, which is that where a form of public spending has a high multiplier, the rise in the debt and/or stock of base money will be lower for a given effect on employment than is the case with a low multiplier. And given that raising taxes so as to counteract the inflationary effect of an excess stock of base money at some point in the future may be necessary, and given that that may prove politically difficult, then clearly that’s an argument for skewing things in favour of high multiplier forms of spending.

But exactly how much importance should be attached to the latter point is near impossible to say with any certainty. In short, Richard Murphy’s point about the multiplier is more complicated than he seems to think.