Graph of the day. Borrowing by households and non-financial companies, Eurozone
The discussion about the size of the multiplier has flared up, again. This is all about the next question: will private parties (households, non-financial companies, pension funds etcetera) increase or decrease spending when the government cuts expenditure? When they increase expenditure (out of a smaller income!), this will at least partly offset decreased government expenditure (or, mutatis mutandis, increases in taxes). If households etcetera increase spending, the money has to come from somewhere – either they have to use their savings to finance it or they have to borrow it (remember: borrowing can increase the total amount of money). What do Eurozone households and non-financial companies actually do, at this moment? In austerity countries they are clearly paying down debt – i.e. aggravating the decline is aggregate spending caused by lower government spending. Which is, technically, an argument for a high multiplier. And against the fallacy of Ricardian equivalence.