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They do. When the economy contracts, people lose their jobs or their hours are cut back, and automatic stabilizers increase spending on unemployment insurance and social services like food stamps. Tax revenue also falls. These increase the deficit, with more $ being put in through automatic stabilization and less taken out by taxes, so the deficit offset of non-govt saving desire comes into balance, bring the economy back toward full potential, unemployment falls, tax revenue rises, and the deficit drops.
2 comments:
Ok, now I'm really puzzled. I thought more deficits were supposed to increase demand and therefore decrease unemployment....
They do. When the economy contracts, people lose their jobs or their hours are cut back, and automatic stabilizers increase spending on unemployment insurance and social services like food stamps. Tax revenue also falls. These increase the deficit, with more $ being put in through automatic stabilization and less taken out by taxes, so the deficit offset of non-govt saving desire comes into balance, bring the economy back toward full potential, unemployment falls, tax revenue rises, and the deficit drops.
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