Re: RE: saving and aggregate demand

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

Max wrote:
> After observing the Feds up close, it is hard to imagine Congress
> springing into timely action to  implement a fiscal stimulus.  More likely
> would be the role of automatic stabilizers.  I wish somebody would write
> about what has happened to them over the past two decades.  Some sharp,
> liberal macroeconomist.  Oh well.

There was a snippet in BUSINESS WEEK a couple of weeks ago that said that
changes in the tax system weren't going to change the extent of the
automatic stabilizers. But the article ignored the other side of the
equation, the transfer system, which seems to have lost a lot of its
automatic stabilizing oomph.

> [mbs] Somebody has to explain why the past ten years have not seen deficit
> reduction/surplus generation cause the economy to tank.  I think it can be
> done, but nobody has done it yet.

My explanation has always been that fiscal restriction (i.e., budget
surpluses, paying off the debt) only tanks the economy _ceteris paribus_.
If the private sector goes hog-wild on a buying spree, so that ceteris
ain't paribus, that stimulates aggregate demand, counteracting the fiscal
austerity (not to mention the recessionary effects of the trade deficit).

Peter wrote: >The view of the world underlying Ehrlich et al. is that, in
the balance of payments, the capital account is active and the current
account is passive.  If the US has a large capital account deficit [i.e., a
big inflow of funds and a corresponding outflow of IOUs and equity claims
on US assets] (which it does), the solution is to alter the items in the
macro identity net national saving = capital import.  So save more and
reduce government spending, even run a surplus.  ...<

I don't get this. It's an _identity_ after all. It used to be that the
orthodoxy trumpeted the identity to talk about the "double deficit," i.e.,
the relatively small (by today's standards) trade deficit was a "result" of
the government's deficit. But identities don't tell us anything about
_causation_. After all, the government's deficit shrank and became a
surplus -- but the trade deficit (and the current-account deficit) _grew_.
The orthodox macro textbooks dropped the "double deficit," but they don't
seem to have examined the _reason_ they were wrong.

To see how useless such identities are to understanding the economy, it
should be remembered that a rise in the government's surplus can lead to a
small balance of trade deficit by stimulating a recession, which
automatically reduces imports.

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine