The Debate over Spain's Austerity Program heats up

Reuters reports:

Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 . . .
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition. . . .
Madrid won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to 100 billion euros ($123 billion) from the euro zone's bailout fund for its crippled banking sector. . . .

The Economist magazine talks about the kooky claimed "Multiplier" effect from government spending. I am not thrilled by the increase in marginal taxes, but that isn't the concern of the Economist.

More important, this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial. There can't be much confidence that this austerity plan will generate any fiscal improvement given the likely cyclical hit to revenues and the resulting impact on banks, which could well feed back into greater sovereign obligations. It's more economic pain for no fiscal gain. . . .

There are two problems with this claim. 1) It ignores that the money has to come from someplace. 2) The multiplier implies that government spends all of times money, but private individuals don't. Yet, as I have tried to explain many times before, people essentially spend all of their money. If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money. To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. David Malpass says that this is a false austerity, that they are really just moving money to other areas of spending.