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The Government has no clue!
•
The Economics
• Let us start with the definition of the all
important government spending multiplier
(GSmult)
• GSmult = ΔY/ΔG where Y = RGDP
• Classical Economists say it is zero or
close to it – Keynesians argue it could
be large, under the right conditions!
The Economics
• If GSmult is zero then when G goes up, C
+ I must fall, collectively, by the increase in
G so that Y remains constant (closed
economy assumption).
• Y=C+I+G
• This is not good for obvious reasons!
The Economics
• The Keynesians believe that the GSmult is
large, so large that we can have our cake
and eat it too!
• Y=C+I+G
The Economics
• The Keynesians also argue that to get out
of this horrible debt situation, we need to
spend more now and then save later when
the economy starts to grow.
• S=Y–C–G
• S=I
The Economics
• Conditions that favor a high GSmult
• If output is well below full employment
output, GSmult is high!
• If the Fed is at the zero bound, the GSmult
is high!
• If prices and wages are sticky, the GSmult
is high!
• If the spending is debt financed, the
GSmult is high!
The Economics
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The Economics
• So all is well, the GSmult should be high,
the conditions are perfect!!!!
• So what is the problem??
• Back to Aggregate Demand….what do we
hold constant along any Aggregate
Demand Curve???
The Economics
The Economics
• I want to focus on 3 of the other 18
variables that we hold constant along any
Aggregate Demand Curve
• Consumer Confidence
• Expected Income
• Animal Spirits
• Expected Income First!
The Economics
Future
Taxes??
The Economics
• What about consumer confidence and
animal spirits????
The Economics
• According to the poll, which was conducted between
October 19-24, 2011, Americans also have less trust
than ever in the government's ability to
make the right decisions: Just one in ten
Americans currently say they trust the government
to do what is right all or most of the time - down from 23
percent who said the same just a year ago. That figure at just 10 percent - is a record low since the
CBS News/New York Times poll first
asked the question in 1976.
The Economics
• Impact on Aggregate Demand
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• Another way to look at it
The Economics
Applying this idea to the real world
– the Romer Paper
The Economics
The Economics
• So Keynesian Economics can work, under
the right conditions – but these are not
them –
• Check out the next slide, the GSA, the
“Watchdog” of all Government Spending
recently got caught wasting tons of our tax
payer money – the BROKEN WINDOW
FALLACY ONCE AGAIN!
• Here for Jon Stewart