Thursday, January 29, 2015

Take these 2 for help with symptoms due to some recent economic germs that have been going all around...





If any of our readers have been hearing a lot lately about "the deficit" and how this measure is allegedly most meaningful, then I recommend as a treatment reading this from Brian:

"You Cannot Judge a Fiscal Stance by the Deficit"

And if any of our readers have been hearing a lot lately about how tax cuts don't help, then I recommend as a treatment reading this from Peter:

"Taxes, Demand and the Importance or Otherwise of Incentive Effects"


Take these 2 and email me in the morning.


8 comments:

Ignacio said...

Not all tax cuts are created equal Matt, unless you are a firm believer of "trickle down voodoo economics" ;)

Matthew Franko said...

I,

Peter gets into that in his post... ie "efficacy" of the different kind of cuts, etc....

"Bottom up" works better, etc....


rsp,

Michael Norman said...

I can think of one (person) in particular. re: "deficit"

Matt Franko said...

This from Lavoie's book Chapter 1 page 19:

"The paradox of public deficits can be directly attributed to Kalecki (1971). He showed that higher government deficits play a role similar to that of higher net exports on corporate profits. Higher public deficits lead to higher corporate profits, just like higher public deficits lead to higher GDP and employment following the teaching of Keynes...."

Ok so "the defict" shot up in 2009 and corporate profits collapsed...

"The deficit" has been going down since then and corporate profits keep increasing to all time highs...

"the deficit" has been going down and unemployment numbers (as measured) are decreasing....

So how can one refute Sumner in the face of this data?

You can't.

http://en.wikipedia.org/wiki/Prediction

'In science, a prediction is a rigorous, often quantitative, statement, forecasting what will happen under specific conditions; for example, if an apple falls from a tree it will be attracted towards the center of the earth by gravity with a specified and constant acceleration. The scientific method is built on testing statements that are logical consequences of scientific theories. This is done through repeatable experiments or observational studies.
A scientific theory which is contradicted by observations and evidence will be rejected."

If you predict something and it doesnt happen, then you have to back and re-examine your theory... perhaps modify it.

Philippe said...

Matt, it's a question of accounting... Kalecki's profit equation (or Levy's similar equation) gives a good logical account of the sources of profits. The public deficit is a contributor, but not the only one, so a higher public deficit will add to profits *all else being equal*. Other things can change though.

Philippe said...

Wynne Godley:

"...private net saving is always identically equal to the government’s budget deficit plus the current account surplus. Though in themselves nothing more than accounting identities, these equations carry some important implications. Each balance implies an equivalent change in a stock variable: subject to the effect of capital gains, the budget deficit implies a change in the stock of government debt, a current account deficit implies a change in the net stock of overseas assets, and the private balance implies a change in net private wealth. As there is a limit to the extent to which stocks of debt can be allowed to rise relative to GDP, there is a corresponding limit to the extent to which the financial balances can (be allowed to) fluctuate, implying that the ratios of stocks to GDP have norms that can sometimes be used to evaluate strategic options....

... Although the three balances must always sum to exactly zero, no single balance is more a residual than either of the other two. Each balance has a life of its own, and it is the level of real output that, with minor qualifications, brings about their equivalence. Underlying the main conclusions of our reports is an econometric model in which exports, imports, taxes, and private expenditure are determined as functions of such things as world trade, relative prices, tax rates, and flows of net lending to the private sector. However, neither the knowledge that this is the case nor the perusal of any list of econometric equations will, on its own, impart any intuition as to why output moved as it did over any set period....

... Each balance is measuring an arterial flow of expenditure into the economy by one sector, less a counterpart outflow from the same sector, and therefore approximately measures its effect on aggregate demand. Figure 1 illustrates, for example, how each of the last three recessions (1982, 1991, and 2001) and each subsequent recovery was caused by a sharp fall in private expenditure relative to income, followed by a sharp rise. The first strong vertical line marks the beginning, in 1992, of the famously long period of relatively smooth and rapid “Goldilocks” expansion. The second vertical line indicates the year that the first major Levy Institute Strategic Analysis (Godley 1999) was published...

It is not easy now to remember the atmosphere of self-congratulation that enveloped the public discussion around 1999. The economy had enjoyed seven years of reasonably smooth and rapid expansion without inflation. The budget was in surplus, and the Congressional Budget Office (CBO) was projecting a rise in that surplus. The United States was supposedly possessed of a New Economy, and the good times were here to stay. The business cycle had been abolished, leading Alan Blinder to compare the U.S. economy to Ol’ Man River, which just kept rolling along. The use of fiscal policy as a regulator had forever been foresworn. And the budget surplus, shown in the figure as a negative balance in 1999, was seen as a good thing in and of itself.

We took a radically different view, however. As Figure 1 shows, the government and foreign sectors had both been falling rapidly throughout 1992–99, subtracting increasing amounts from aggregate demand. These falls were offset by private expenditure, which rose much faster than income, until private net saving—for the first time in history—became substantially negative, while private borrowing and debt rose to record levels. It should have been obvious to everyone at that euphoric time that this configuration of “drivers” could not possibly be sustained, and that a major change in policy would soon have to take place."

http://www.levyinstitute.org/pubs/sa_nov_07.pdf

Philippe said...

Re: the deficit and Warren Mosler: his point is that if you are below full employment, the deficit is too small... as a larger deficit would eliminate involuntary unemployment, and involuntary unemployment is just a waste of real resources.

Bob said...

US "unemployment" numbers are problematic.