Monday, March 5, 2012
Godley: Seven Unsustainable Processes (c. 1999)
Prof. Scott Fullwiler left a comment down thread where he referred to some projections the late Wynne Godley made in late '90's on what he viewed as seven unsustainable processes.
I've searched up a paper by the same name I found at Levy here.
Scott (to paraphrase) felt that all of Godley's projections have seemed to turn out as accurate at this point save those pertaining to the external sector. You can read for yourself but looks like Scott's assessment is fair.
Here is a link to a FRED chart that shows a cumulative total of "US Federal Debt Held by Foreigners".
Since Godley wrote this paper in 1999, it looks like the Federal external debt has increased by 400% from about $1T then to just over $5T now.
The FRED chart seems to be exhibiting a nice non-linear exponential increase over time.
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7 comments:
Here's some support to Ramanan's point wrt external deficit:
"While a relaxation in the stance of fiscal policy will ultimately have to be made, this by itself will not be enough to generate balanced growth in the medium term because, as matters stand, this would be accompanied by a continuing rise in the United States's external deficit and indebtedness."
Godley refers to "balanced growth" as being unobtainable via a fiscal adjustment only...
Resp,
The article on Levy's website is not the original one. It's a corrected version (v2) with one table corrected but the appearance was sacrificed!
The original one - which I got from Levy (scanned) - looks very very nice. I have requested someone from the multiplier effect blog to upload it.
Tom,
Net Indebtedness is different from "public debt held by foreigners" because foreigners hold other assets as well and US residents hold assets abroad.
The net indebtedness of US didn't increase to very high levels (still stays at 25-30%) because US companies make a huge killing abroad and this has surprised everyone. At the same time FDIs in the US have made next to nothing for foreigners.
Sorry that was addressed to Matt. I thought Tom posted this.
Ramanan,
roger on the differences there...
Has anyone ever extended his charts of what he calls CFTR and ATR to present day? I'd like to know more about what he was tracking here...
Ive never heard of these data series before (FRED certainly does not seem to track them)
Resp,
Matt,
Yes FRED won't have them because they are model constructions. You can find about it a lot in Godley's 1983 book Macroeconomics. In Godley's models, fiscal policy is dominant as far as ouput, growth etc are concerned and so is the external sector.
In a simple model with government, the long run output turns out to be G/t where G is the Government expenditure and t is the tax rate. It's called "fiscal stance" by him.
Of course there is private investment as well and the full model gets modified. Nontheless, the simple expression G/t can be used a lot for empirical analysis. So, in some periods private expenditure can drive the economy but if there is too much indebtedness, government expenditure has to increase to keep the output on track.
Also, if you bring in the external sector, there is X/mu where X is the exports and mu (Greek) is the propensity to import.
One can combine them to get an expression like (G+X)/(t+mu)
So there is some connection between a model world and the real world via the graphs.
It may happen that the exports are high but the government fiscal stance is low so higher output can be achieved. It may also happen that trade performance implies a lower gdp than actual and something has to be done with the foreign trade to keep the gdp growing at the present rate than converge to the one implied by the trade performance.
So these are measures such as a pilot is looking when flying a plane and so should the government do when managing the economy, except that in the case of an economy putting it on auto-pilot can be very dangerous. The "consensus" view is that auto-pilot is enough!
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