What's the effect of fiscal policy during a downturn? Somewhat to the embarrassment of the profession, economists only agree that multipliers are somewhere between zero and infinity. In a bid to make at least someone happy, the new Spanish government has decided to find out just how contractionary fiscal consolidation in the middle of a crisis can be -- tax just went up, from one day to the next, by as much as 7 percentage points at the top (and the tax rises kick in pretty quickly). Then there are more spending cuts, amounting to several billion in expenditure per year. What is the likely result going to be? Here is my guess -- Spain is going to repeat some of the Greek experience. Growth - already negative as of late 2011 - will slump. The huge tax hike will hardly produce any extra revenue (and forget about the idea this is just temporary, for two years. If you have to make a mistake, make it for a long time). As in Greece, the absolute deficit will hardly fall at all as economic activity collapses even more quickly than forecast. Remember that Greek ABSOLUTE deficits in euros hardly declined in recent years, despite very large rate hikes. There may be some good economic logic behind it, too. Gautti Eggertsson of the Fed in NY and co-authors have a new paper on public debt dynamics and tax and spending multipliers. They offer a strong argument for why - in the presence of a zero bound on interest rates - raising taxes in a slump may cause particularly large contractions. In their calibration exercise, multipliers are particularly big when tax hikes and expenditure cuts are not accompanied by interest rate reductions. This continues earlier work that Gautti has done with Paul Krugman on debt and deleveraging in a crisis... I wish I could say they were wrong, but I fear they may be spot-on.