The Dangers of Fiscal Policy

by on October 4, 2017 at 7:25 am in Economics, Education | Permalink

Here’s the latest video from Principles of Macroeconomics at MRUniversity. As always these videos can be used with any textbook but they go great with the best textbook, Modern Principles of Economics. The video is on situations when fiscal policy doesn’t work well or can even reduce growth and GDP.

1 rayward October 4, 2017 at 7:51 am

A timely video as the Republican controlled Congress and the Republican president are about to adopt tax cuts that will add several trillion dollars to debt.

2 rayward October 4, 2017 at 8:16 am

A nuanced summary of why tax cuts don’t boost growth: https://growthecon.com/blog/Taxing-GDP/

3 rayward October 4, 2017 at 8:18 am
4 Ray Lopez October 4, 2017 at 11:08 am

B. Bartlett has been making a living the last 10 years explaining how he used to be a Republican supply-sider. A supply-sider scorned is…someone vindictive. But Bartlett makes good points: (“In fact, aggregate real gross domestic product growth was higher in the ’70s — 37.2 percent vs. 35.9 percent”) and it’s also true US government spending during the Reagan years was greater than during the 1970s, due to deficit spending.

5 rayward October 4, 2017 at 8:54 am

I really enjoy talking with myself. It’s always the most intelligent conversation I have on any given day.

6 rayward October 4, 2017 at 10:09 am

If imitation is the sincerest form of flattery, then I should be flattered that someone would pretend to be me by using my name to post comments.

7 rayward October 4, 2017 at 10:11 am

I am rayward.

8 Spartacus October 4, 2017 at 10:18 am

I am Spartacus!

9 Wayward October 4, 2017 at 10:42 am

I am wayward.

10 Groot October 5, 2017 at 2:09 am

I am Groot.

11 Ray Lopez October 4, 2017 at 10:53 am

Really bad video. For example, ‘plenty of debate’ on how much is too much debt (Argentina defaulted on a mere 150% debt-to-GDP ratio; England twice in its history had over 200% debt-to-gdp and did not default but in fact prospered), yet this is not mentioned until after AlexT claims too much debt is a problem, throwing in as an afterthought (‘if in somebody else’s currency’ as a sop). Also mentions in passing ‘crowding out’ as a bad side effect of fiscal policy, when in the US there’s no statistical basis for ‘crowding out’. Mentions “potential GDP” as a problem in AS shocks, when ‘potential GDP’ is a nebulous concept. Mentions politicians do not balance Keynesian spending during booms and busts, yet the diagram behind AlexT’s head suggests more spending is always good (the sine wave gets bigger).

The entire video is nothing more than textbook diagrams that pretend to represent the real world. Then again, textbook economics is a cartoon of reality, even less accurate than a patent drawing is to scale.

12 Ray Lopez October 4, 2017 at 10:56 am

And why does AlexT in the photo seem like he has rosy clown cheeks? IT is disturbing.

13 HL October 4, 2017 at 11:28 am

Good instincts on dropping the “rich american boomer with a penchant for Filipino women” part of your schtick for a while.

14 msgkings October 4, 2017 at 11:47 am

He’s not rich, that’s why he scrapes out a lonely life in the Third World. His parents have some wealth so when they die he may finally get to move back.

15 msgkings October 4, 2017 at 11:47 am

But agreed, Ray is a good poster when he doesn’t transparently troll.

16 JWatts October 4, 2017 at 2:07 pm

“But agreed, Ray is a good poster when he doesn’t transparently troll.”

I can tolerate the eccentricities for someone who makes good points, addresses the key points in rebuttals and is willing to admit he might be wrong. Ray’s a good poster.

17 Ray Lopez October 4, 2017 at 3:12 pm

+1 JWatts is also a good poster. msgkings has penis envy. You notice all his attacks are me are along the lines of “I don’t believe you’re in the 1%” (but I am) and “I don’t believe you have a hot Filipina half your age” (but I do).

18 The Cuck-Meister General October 4, 2017 at 3:17 pm

I believe Ray Lopez is in the 1%. He is also the ONLY poster on this blog who is NOT a cuckold. All of the rest of you are cucks.

19 msgkings October 5, 2017 at 1:08 am

Ray, your parents are in the 1% not you. And your ‘girlfriend’ is bought and paid for. I’m not denying these facts, I’m countering your trolly presentation of them. But I promise to stop, let’s be friends.

20 Al October 4, 2017 at 10:55 am

A solid video Alex.

The only issue with this video vs. many others at MR university is that the concepts presented here are very hard to model from 1st principles. That makes the video, even though it makes very moderate claims, seem less credible than your previous work.

21 Don MacLean October 4, 2017 at 11:07 am

I Have believed for over 50 years that macroeconomics is a fiction genre. I have never seen anything that would make me change my mind.

22 Ray Lopez October 4, 2017 at 11:13 am

But wait Don MacLean, “I Have” (sic) and “for over 50 years” (since 1970?) makes you seem like a crank and stopped clock. In 1970, it was not yet clear that Keynesianism would not work, as the Philips Curve had not been rebutted, among other things.

23 mulp October 4, 2017 at 3:44 pm

FDR would give the lesson an F. Fail!

To quote key portions of his 1935 lecture on fiscal policy.

On WHY?

“But the stark fact before us is that great numbers still remain unemployed.

“A large proportion of these unemployed and their dependents have been forced on the relief rolls. The burden on the Federal Government has grown with great rapidity. We have here a human as well as an economic problem. When humane considerations are concerned, Americans give them precedence. The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America. Work must be found for able-bodied but destitute workers.

“The Federal Government must and shall quit this business of relief.

“I am not willing that the vitality of our people be further sapped by the giving of cash, of market baskets, of a few hours of weekly work cutting grass, raking leaves or picking up .papers in the public parks. We must preserve not only the bodies of the unemployed from destitution but also their self-respect, their self-reliance and courage and determination. This decision brings me to the problem of what the Government should do with approximately five million unemployed now on the relief rolls.”

And then to the HOW?

“…There are, however, an additional three and one half million employable people who are on relief. With them the problem is different and the responsibility is different. This group was the victim of a nation-wide depression caused by conditions which were not local but national. The Federal Government is the only governmental agency with sufficient power and credit to meet this situation. We have assumed this task and we shall not shrink from it in the future. It is a duty dictated by every intelligent consideration of national policy to ask you to make it possible for the United States to give employment to all of these three and one half million employable people now on relief, pending their absorption in a rising tide of private employment.
:
“This new program of emergency public employment should be governed by a number of practical principles.

“(1) All work undertaken should be useful- not just for a day, or a year, but useful in the sense that it affords permanent improvement in living conditions or that it creates future new wealth for the Nation.

“(2) Compensation on emergency public projects should be in the form of security payments which should be larger than the amount now received as a relief dole, but at the same time not so large as to encourage the rejection of opportunities for private employment or the leaving of private employment to engage in Government work.

“(3) Projects should be undertaken on which a large percentage of direct labor can be used.

“(4) Preference should be given to those projects which will be self-liquidating in the sense that there is a reasonable expectation that the Government will get its money back at some future time.

“(5) The projects undertaken should be selected and planned so as to compete as little as possible with private enterprises. This suggests that if it were not for the necessity of giving useful work to the unemployed now on relief, these projects in most instances would not now be undertaken.

“(6) The planning of projects would seek to assure work during the coming fiscal year to the individuals now on relief, or until such time as private employment is available. In order to make adjustment to increasing private employment, work should be planned with a view to tapering it off in proportion to the speed with which the emergency workers are offered positions with private employers.

“(7) Effort should be made to locate projects where they will serve the greatest unemployment needs as shown by present relief rolls, and the broad program of the National Resources Board should be freely used for guidance in selection. Our ultimate objective being the enrichment of human lives, the Government has the primary duty to use its emergency expenditures as much as possible to serve those who cannot secure the advantages of private capital.”

These are the fundamental principles of Capitalism!

You pay workers to build productive capital assets with the savings of people with money, placing a priority on paying workers without jobs, and make sure the assets built will over the long term produce returns that pay for their construction.

Governments have the luxury of long time horizons, much longer than capitalists in the private sector typically have.

A great capitalist might get two decades before the savers must be repaid their investment.

For example, Bill Gates, et al, failed to begin liquidating the costs paid by savers for more than 25 years. Wall Street provides a means to speculate on the odds of the savings being repaid, and how much. Jeff Bezos took two decades before even showing a profit which would potentially begin liquidating the savings originally used to pay workers to build Amazon. Elon MusK is at 15 years of taking people’s savings and paying workers to build capital assets in multiple ventures and not one is profitable enough to begin repaying the savers who gave him money.

For a nation, the time horizon is often much longer. Lincoln and the Republicans before the end of the Civil War anticipated the need to pay workers after the end of the war, the legacy of the end of fighting the British still fresh in events like Shays Rebellion. Plus, the burden of the Louisiana Purchase investment remains. Thus the program to pay workers to build a railroad to the west coast and build towns along the way. All funded with government debt.

The investments made by government in railroads, local, State, and Federal, from 1840 to 1890 did not self liquidate until about 1950, and that required Federal government restructuring and more investment 1916-1920. This was a public private partnership where the private capital returned both high returns and total losses.

But for those who argue that the private sector always does a better job, then why doesn’t Africa and South America and Asia have railroad networks as robust as the US? Why don’t they have the road system of the US that augments and substitutes for rail, if private capital invests for the long term?

FDR put millions of mostly men to work building public assets, many still in productive use today. Of greater importance, giving these men jobs was an investment in them as workers as they moved into the private sector on average in two to four years, a jobs program that shifted to military work that was ongoing until the 70s.

And beyond the initial surge in investment rate in the early 30s, and then the 40s for the war, after 1945, the returns to public investment resulted in less and less savings being required to grow public investment. The debt burden of public investment in public assets fell from 1945 until 1980, indicating the returns on public investment were higher than the costs of the past investments.

It has been since Reagan that US fiscal policy has been in the model of Argentina. Reagan investments, ie, tax cuts to promote not paying workers, have failed to generate positive returns.

Reagan budget deficits were caused by policies to not pay workers, and to promote private capital cutting payments to workers.

Tax rate cuts on money not paid to workers, plus taxing money paid to workers by classifying paying workers as wasteful tax dodges to be eliminated, is hardly the way to produce increased jobs.

And forcing so much austerity on families that every member of the family must work at lower and lower productivity and return on higher investment is hardly progress. Demanding higher and higher personal investment to get lower returns is not progress. 70 years ago, ten years of education plus a public sector job for a couple of years would result in a job paying $50,000 in today’s terms. Today, 14 years of education plus student loan debt is often insufficient to result in a $50,000 a year job. The Reagan policy shift on fiscal matters has driven down returns on individual capital asset investment.

Since Reagan fiscal policy has used fiscal deficits and long term debt to fund increased relief, by way of tax cuts! If you work at a low wage dead end job, the government will put money in your pocket within a month of filing your tax return proving in work for poverty wages. It is an annual dole to the working poor. Funded with debt because the businesses paying poverty wages are taxed much less than before Reagan on the money NOT PAID TO WORKERS.

CUTTING THE TAX RATE ON MONEY NOT PAID TO WORKERS DOES NOT PROMOTE PAYING WORKERS MORE!

Higher deficits to reward not paying workers is hardly sound fiscal policy.

24 Daniel Jelski October 4, 2017 at 8:47 pm

In today’s context, when I think of aggregate supply shocks, esp. with respect to oil, I see them as positive, e.g. fracking. So this video was counter-intuitive, at least at the beginning.

25 Jeff October 4, 2017 at 9:57 pm

The video is on situations when fiscal policy doesn’t work well

Since there’s no empirical evidence that fiscal policy has ever worked at all, and since Ricardian Equivalence is what naturally falls out of optimizing economic models unless you build in assumptions to prevent it, I’d say that these “situations” are pretty much all the time. And we’ve known this for at least forty years now.

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