How do fiscal multipliers vary across different contexts and scenarios?

The state of the economy significantly impacts fiscal multipliers. When the economy operates below its potential, with a negative output gap and high unemployment, fiscal multipliers tend to be larger. This is because government spending can mobilize idle resources without crowding out private demand or investment. Conversely, when the economy is at or above its potential, with a positive output gap and low unemployment, fiscal multipliers are smaller. In such cases, government spending can compete with private sector demand, potentially leading to inflationary pressures and higher interest rates, thus reducing the overall effectiveness of fiscal stimulus.

How do public investments lead to positive effects on long-term growth and productivity? It is not market factors accounted for the investment, it is government or institutional (see EU) objectives. For instance, the Greek infrastructure roads financed by EU were focused on German vehicle production rather than cheap and sustainable transport, say railways. The latter killed the economy... Add to that the "Green Revolution" agenda, when the Greek government taxed (tariffs) cars coming from EU because of environmental reasons! (to subsidise EV taxis for tourism ESG and not nation-wide growth) Concentration to urban areas became a one-way street, allowing Deloittes to find cheap labour, trained using taxpayer money

The type of government spending plays a crucial role in determining fiscal multipliers. Multipliers tend to be higher for spending that has a direct and immediate impact on aggregate demand, such as transfers, subsidies, and public consumption, especially when directed toward goods and services with a high marginal propensity to consume. In contrast, multipliers are generally smaller for public investments, which have a more indirect and delayed impact, particularly in projects with long gestation periods and uncertain returns. However, public investment can enhance long-term growth and productivity, potentially increasing the economy's future output and income, thus contributing to sustainable economic development.

Government spending during high liquidity periods (see Greece entering the Eurozone; openness of the economy as well), altered the structure of the Greek economy. Demand-driven growth (debt-infused, see Covid globally), drive private investments in intermediaries/importers (SE Asian goods), and not the production of new products by SMEs (small businesses). Whatever comes up, by government-backed money, is doomed to come down... when liquidity is restricted (see all the crises that were preceded by interest rate increases). Government spending, once began, is difficult to stop (prospect theory) because of its political cost

In 2024, fiscal multipliers face unique challenges given the current monetary policy environment. With interest rates high and a tight money supply, fiscal policy's effectiveness is markedly different from periods when monetary conditions are more accommodative. In such a restrictive monetary setting, fiscal multipliers are generally smaller, as high borrowing costs and limited liquidity dampen the impact of fiscal stimulus on private demand and investment. This scenario contrasts sharply with previous periods under more supportive monetary policies, illustrating how fiscal effectiveness can vary significantly based on the prevailing economic context.

Monetary policy stance significantly influences fiscal multipliers. Fiscal multipliers tend to be larger when monetary policy is accommodative, characterized by low interest rates and loose money supply. In such conditions, monetary policy complements fiscal measures by stimulating private demand and investment, while reducing borrowing costs and debt servicing burdens. On the other hand, when monetary policy is restrictive, with high interest rates and tight money supply, fiscal multipliers are smaller. This is because restrictive monetary policy can counteract fiscal efforts by dampening private demand and investment, and increasing the cost of borrowing and debt service, thus limiting the effectiveness of fiscal stimulus.

The openness of an economy plays a crucial role in determining the size of fiscal multipliers. In more closed economies, where trade and financial flows with other countries are limited, fiscal multipliers tend to be larger. This is because government spending has a more concentrated impact on domestic production and income, with less leakage into foreign demand and savings. Conversely, in open economies with high levels of trade and financial integration, fiscal multipliers are typically smaller. In such cases, government spending may have a more diluted effect on domestic output, as a portion of the increased demand and income leaks abroad through imports or foreign investments.

It is not only that the FED (US central bank) is exporting printed dollars to import goods and raw materials, it is its leading role in global central banking game theory, as a leader, that makes other big central banks (laggards: UK, JAPAN, Europe) to follow through. As such, the fastest-growing economy in the fastest period of global debt growth (China), is expected to enter a massive financial bubble backed by unstable demand (as explained above) for its output.

Specifically in the US you can consider the overarching goal of controlling inflation, an area where the current administration had created significant challenges. Fiscal measures, ideally, should counterbalance inflation without stifling economic growth. However, with the restrictive monetary stance since Biden received office, fiscal interventions struggle to gain traction. This is a stark departure from previous strategies that might have allowed for more aggressive fiscal policies to stimulate the economy without exacerbating inflationary pressures. The government's struggle to effectively manage inflation through fiscal levers highlights the complexity of aligning fiscal and monetary policies to ensure economic stability and growth.

In addition to the factors affecting fiscal multipliers, it's important to consider the role of structural reforms and institutional quality. Countries with strong institutions, efficient public sector management, and transparent governance are more likely to implement effective fiscal policies that maximize the impact of government spending. Structural reforms that improve labor market flexibility, reduce regulatory barriers, or enhance infrastructure can also amplify the long-term effects of fiscal policy by increasing productivity and economic potential. These factors, often overlooked in short-term analysis, can significantly shape the effectiveness of fiscal stimulus over time.