It’s Been A While … .
Ok, so I’ve been busy for the past…oh…year or so…. but hey, whatcha gonna do? In other news I just finished typing up an essay on fiscal policy as a writing sample to get my happy ass back in to college. Which I share below. Warning it’s about 10 pages single spaced but if you’re interested in understanding Keynesian-style fiscal policy, Supply-side tax cutting programs, and why theoretically neither could produce long run economic growth feel free to read.
Edit: This is an uncorrected version so beware my dozens of type-os, misspellings and other nasty grammar errors I didn’t get around to spell checking.
Preface
While the occasion for authoring this essay is to provide a writing sample to the Political Science Department for admission the germ of my argument was planted several months ago after I had read The Liquidation Phase and Profit Margins: Getting Back to Breakeven by Paul F. Cwik and Harry C. Veryser, Jr of Mount Olive College, and the University of Detroit Mercy respectively, a short paper using profit margins as a tool for examining fiscal policy during recessions. I will have occassion to borough this insightful method of analysis in this piece. This piece is not a formal research paper as such. I will eschew complicated empiricle analyis and refferences to other works. Rather, in writing this piece essay I hope to put forward an argument just rises or falls chiefly based on it’s own internal logic.
A note on style: As a former and perspective student I have found one of the great difficulties of learning is the often linguistic incomprehensibility of academic papers. While jargon and technical terminology is no doubt necessary in many cases excessive use often obscures the subject more than it clarifies and leaves the reader to labour over parched dry prose. 1 It is my intention to present this essay in as clear and simple a form as possible so that it may be as easily understod by the layman with little experience in public policy or economics while also being informative and interesting to those well acquainted with the subjects it touches upon.
Introduction
The Recession of 2007-2008 is one of the great political and economic events of our times. The financial calamity that begun with the September 15th 2008 Bankrupcy of Lehman brothers sent shockwaves that reverberate even today, more than three years later. While the immediate effects, huge losses in global equity markets, were largely corrected the lingering secondary effects are all about us. In Europe the Eurozone Currency Block is in a slow-motion collapse, mired in an intractable sovereign debt crisis brought on by the 2008 recession and seems to be tottering on the brink of a second. Russia, poised in the mid-2000s to reassert someof its SOviet-eras global influence after a sucessful military campaign in SOuth Ossetia and flush with petrodollars was especially hit hard, laying bare the rampant corruption and fragility of the Russian state. Recent large scale protests in Moscow may be directly traced to the disenchantment felt by many in the wake of the recession. In late 2010, riots brought on by high unemployment and expensive food prices in Tunis led to a wave of revolution in the Middle East, ushering out longserving despots in Tunisia, Libya, and Egypt while threatening to do the same to Bashar Al-Assad’s regime in Syria. Domestically, in the throes of the collapse the American Electorate, tired of the policies of the Bush Administration and anxious about the future swept Barack Obama into office granting him margins in COngress approaching New Deal-Era porportionos2 … only to deliver staggering losses two years to those same majorities, angered at Democrats’ percieved failure to reduce unemployment.
So now, with the country in it’s fourth year of stagnant growth the question dominating the political debate continues to be: where are the jobs, how will we return to growth? It is my contention that regardless of which political party gains power in this year’s elections jobs and growth will contiunue to elude the U.S. economy. Generally, there are two ways goverfnment policy can directly influence the macroeconomy.3 The first is through monetary policy, which is typically the purvue of the a political central bank. The second is through fiscal policy, that is through taxing and spending policies controlled by politically accountable law makers. While proper monetary policy is vital to the health of an economy on the fiscal side because it is here where ideology and economic theory clash.
In order to understand why the best efforts of both the Bush administration in 2008 and the Obama administration since have failed to return the country normal levels of growth and unemployment it is important to understand the economic theories that are so intimately bound up with the political ideologies of the two main parties. This paper will examine the two main macroeconomic paradigms of the parties and demonstrate why neither Demand Management, in the case of the Democrats, nor Supply-side policies, favoured by Republicans can ever be effective tools in fighting recessions.
Demand Management
Demand Management, often rather crudely called Keyneianism has it’s origins in the theoretical writings of famed 20th Century English Economist John Maynard Keynes. Keynes’s theoretical work, explaining the cause, and more importantly the cure for recessions found it’s practical expression in many of the New Deal policies of American President Franklin Roosevelt. His idea, at the time radical, quickly took the academic and political world by storm. Following the post war-Bretton Woods economic confference in which Keynes was a central figure in organizing the post war financial world Keynesian Demand Management became the dominant macroeconomic paradigm. A general Deamand Management Program was studiously followed in this country by both Democratic and Republican administrations for thirty years thence. Even today the basic demand management framework is the standard economic theory tought in thousands of high school economics classes across the country. Today the foremost proponents of Demand Management regimes are New York Times Columnist, Princeton Professor, and Nobel Memorial Prize in Economics Winner Paul Krugman; J. Bradford Delong of the University of California at Berkley; Nobel Winner Joseph Stiglitz; former President of Harvard University Lawrence Summers.
To illustrate how Demand Management works it may be best to think of the economy as analagous to a car engine with money being the gasoline. A recession is caused when consumers, driven by (in some cases irrational) fear of the future increase their saving and decrease their spending, thus depriving the economic engine of the gas it needs. This creates a vicious cycle as businesses, faced with falling revenue must cut labour, creating even more downward pressure on private consumption. Eventually the cycle may halt but at a much lower level of employment than before. The solutuion is for the government to step on the gas, making up for the drop in private spending. A corollary to this is the idea of Countercyclical fiscal policy, that is that the government ought to goose the economic engine during the recession but gently apply the brakes at the peak of economic booms (to prevent heavy price inflation that often accompanies such booms) and to generally smooth the peaks and valleys of the typical business cycle.
The exact mix of taxing and spending the government should do is, atleast in theory, largely irrelevant so long as aggregat demand (public and private spending) is maintained or increased. Thus a government may either choose to undertake large scale tax cuts, returning taxed money to consumers for them to spend or it may simply spend the money itself. Typically, Republicans prefer the former (e.g. President Bush essentially made a Demand Management case for the Economic Stimulus Act of 2008 which issued tax rebate checks to most Americans) while Democrats prefer direct government spending in the form of infrastructure projects or transfer payments such as unemployment insurance. In any case the practical outcome is that the government must run a sizable fiscal deficit, perhaps equal to the drop in recession spending.
Let us consider an example of how this would work on the firm level. Suppose we have a confectionary that is operating at the profit maximizing level, or put simply that sells exactly as many confections every day at the market price that it’s profits would shrink if it deviates by a single cupcake. Now let us suppose a recession hits, brought on by a decline in the housing market and a collapse in the financial industry. Consumers facing an uncertain future decide to save more. As their new budgets do not let them eat cake, they shift their consumption habbits to cheaper baked goods like bread. Now our confectionary is no longer selling cinnamon buns and canolli at the profit maximizing level because the market price has fallen. Confections are sitting unsold in their display cases, growing moldy and our confectionary is rapidly losing money. Now the confectionary is in crisis for few businesses can last long if their profits are negative and are operating at a loss. They typical response for firms is to cut costs and the simplest way to cut costs is to reduce labour because in most cases labour costs are both the most variable part of a business’s operating costs and also the signle biggest share of gross operating cost. Thus our confectionary has no choice but to begin cutting the hours of it’s workers or even laying some off, lowering production and allowing the store to cut prices.
But, in the framework of Demand Management this is just the beginningof a vicious cycle. The laid-off bakers will then curtail their spending causing the business that rely on their patronage to lose money and lay-off their own workers, and so on and so on in spiraling rounds of cuts and lay-offs. So let us suppose that the government decided upona Demand Management programme as a solution for the recession and quickly apppoints a Baked Goods and Sweet Treats Administration to organize support for the confection industry. Let us suppose that our connfectionary is losing $500 a month and their average profit on each confection is $.25 thus, to brake even at current prices it must sell 2000 more cupcakes and doughnuts than it is currently. Administrators at the BGSTA accordingly use their budget to buy 2000 slices of pound cake, thus returning the confectionary to breakeven and removing the necessity to cut costs through labour cuts. The pound cake is then distributed free of charge to the needy.
While this may seem like an elegant solution to halt a rise in unemployment by making a closer examination of all the effects of such a policy we can see that society is left worse off in the end. The most obvious objection is such a policy is designed not to treat the underlying problem and not the symptoms. The reason why our confectionary is losing money is because consumer prefferences have shifted and it it not properly geared to meet those new prefferences. If nothing else happens and consumer prefferences remain the same then as soon as the BGSTA withdraws its support the confectionary will continue losing money. Secondly such a policy is very costly to the government and thereby to society. In order to make god the $500 in losses to the confectionary the government is obliged to spend quite a bit more than that on baked goods. If the price of a slice of pound cake is $2 and the average profit on each slice remains $.25 then the government must spend $4,000 to buy 2000 slices in order to make up a loss of only $500. The government could have achieved exactly the same result by simply issuing a tax credit of $500 dollars to the confectionary.
Now it may be possible to argue that since the slices of pound cake were given to the needy that the other $3,500 has been made up for because it has accrued to them. However it s important to realize that $3,500 worth of flour, butter, eggs, and labour was used in making those pound cakes, resources that, in the ascence of the BGSTA would have been employed in some other means possibly in much cheaper bread. Thus while the needy reciepents of this programme gained slices of pound cake somewhere else in the economy someone lost loaves bread. The loss to society is then the difference between the value of the pound cake and of the next best usage for the resources that went in to its production.
We must also consider what effect this programme has on the government, and through it to the macro economy. To better understand this I wish to introduce to concept of the Ideal Governemnt. The Ideal Government is a government that produces only those goods and services that cannot, for technical reasons, be produced by the private sector but are nonetheless desired by society4 and only at the levels in which the benefit to society of the programme is exactly equalled by the burden to society of the cost. Such a government would also always run balanced budgets.5 Generally such a government would be socially ideal, providing just as much value to society as it costs to operate it. Society will benefit everytime a government operating of a size and scope either to smaller or greater than this either increases or decreases respectively.
Let us assume our government is operating under such ideal conditions when it begins its anti-recession measures. To fund such an such measures there are three options for the lawmakers. They may increase taxes to fund the programme; they may cut funding to some other programme and use the savings to fund the new programe; or they may borrow money to fund the programme. If the government levies new taxes then effectively the value of the Baked Goods Buying Programme is nullified because exactly as much money that went in to the private economy from the programme already came out via taxes.6 The second option of cutting funding in some other area would likewise have the same effect and worse still would probably cause further harm to society: e.g. if the police force were cut to fund the Baked Goods Buying Programme. The third option is the one most favoured by Demand Management proponents, that is large scale public borrowing. This option is attractive because it seems to be relatively costless, aside from the interest that must be paid on the debt, but certainly, if successful, the value from cushioning recessionary pressures will more than make up for debt servicing costs.
However the mechanism is not quite as simple as that because of the effects such borrowing has on the credit and banking industry and the price of money. Consider the situation where there are a total volume of money in the economy is 10 billion.7 Suppose that 7 billion is in circulation in the private economy while the other 3 billion is held in banks and the government, because it is running balanced budgets holds only negligable amounts. Suppose the government decideds to embark on a billion dollar anti-recessionary programme and to borrow the money from banks through a bond issuance.8 The government will print one billion dollars worth of bonds an exchange these against cash from the banks. The cash will then flow through the government programmes to the private sector. But banks now have one billion dollars worth of bonds. And because bonds (government debt obligations) are de facto the same as money dollar bills (monetized government debt obligations) banks will still essentially have 3 billion dollars and will act accordingly. Thus the money supply will have increased from 10 billion to 1 billion or by 10%. This effectively is inflation and one would expect to see, as the new money moves through the economy a general price levl increase of 10%. The end result is essentially a wash. There may be 10% more money in the economy but all money is now worth 10% less. Worse still when the debt becomes due the government will be obliged to withdraw one billion dollars, plus interest from the economy through taxation or spending cuts to repay the loans and retire the debt. In effect, debt financed stimulus measures simply shift the negative impact of the recession from the present to the future.
To sum up the problems with the Demand Management approach are manifest. Stimulus programmes based on this approach are often inefficient, expensive, and can only temporarily alleviate the pain of a slump. The underlying problem with the Demand Management approach is that it fails to recognize the change and consumer prefferences and works to prevent the efficient reallocation of resources across the economy. By attempting to maintain prices and output in some sectors other sectors of the economy, judge more useful by society are effectively starved. Unless stimulus programmes continue indefinately recessionary conditions will reappear as soon as support is dropped. The only conceivable case for employing a Demand Management would be in the case of a temporary emergency in which consumer preferences and behavior are only temporarily alterred such as in the case of a natural disaster or a discrete economic shock. In such situations it does seem feasable for the government to “carry” the economy for a certain length of time, however because the reactions of economic actors are often unpredictable it would be very dangerous for a government to do so. Demand Management is the macroeconomic equivalent of using one’s credit card for paying one’s monthly bills during recessions.
The Supply Side
Beginning in the late 1960s the Keynesian Consensus began a gradual decline. Even as Republican President Richard Nixon declared himself an economic Keynesian9 a quiet revolution was asserting itself in the Economics Departments of the nation’s major universities, reexamining many of the orthodox Demand Management prescriptions. The experience of “Stagflation” in the 1970s seemed to signal the triumph of neo-classical approaches to economics over the standard Keynesian models. Part and parcell of this shift was a set of policy recommendations that came to be known as Supply-side Economics. Led by Nobel Memorial Prize in Economics winner Robert Mundell, Lawrence Kudlow and Arthur Laffer, Supply-side Economics reached it’s apogee under the Reagan Administration in the early 1980s. Suplyside economics continues to be associated with the Republican party, particularly with the more fiscally conservative wing of the party and especially former Reagan-era officials such as Kudlow and Laffer. The chief contributions of Supply-side theory is the rehabilitation of Say’s Law and the importance of incentives.
Say’s Law is a contention of classical economics, named after its promulgator, Nineteenth Century French Economist Jean-Baptiste Say. Briefly, Say’s Law states that economic growth is driven by production. Rational economic actors will only produce products that are more valuable to society than the sum of their factors of production and that no businessman will remain in business long by using high value resources to produce a low value product. Essentially producers will almost always produce goods and services that make society better off10 and that any increase in th supply goods and services will be a net economic benefit. John Maynard Keynes summarized this succinctly as “supply creates it’s own demand” and turned the law on its head: Demand Management, at it’s heart contends just the converse.
The importance of incentives is another area of emphasis. Supply-siders contend that when you subsidize an activity you invariably get more of it and when you tax an activity you invariably getless of it. Thus supply-siders turn to tax policy as it is the single best way for a government to influence consumer and business behavior. A government using a SUpply-side approach would encourage businesses to increase production. Given a tax code similar to the U.S. tax code this would entail slashing income tax rates, particularly the upper brackets where most small businesses and S-Corporations (corporations taxed at individual rates) are taxed as well as slashing corporate tax rates. It should be noted here that for these tax cuts to be efective they must not only be rate cuts (and not one time tax rebates as in the Demand Management model) but also must be semi-permanent (as opposed to counter-cyclical). The reasons for this are simply that economic actors are assumed to be forward looking and rational. One time tax rebates will likely be treated by both businesses and consumers as simply that, windfal profits and will not alter their economic behavior. One time checks will be used to retire debt or make one time purchases but immediately afterwards businesses and consumers will resume their pattern of action. Furthermore any tax cuts must be on a time frame beyond the normal time frame of businesses. If businesses know that a tax cut this year is likely to be followed by a tax increase next year will again be treated as a windfall profit with the only effect being the business to accelorate profits to this year, merely postponing the pain of the recession.
Let us again examine the situation of a confectionary losing $500 a month in a recession only this time let us suppose that the government opts for a Supply-side policy instead and thus announces a permanent across the board rate cut which amounts to $500 a month for this particular business thus returning the business to a break even point and forestalling possible layoffs. Now this may seem to be in all cases superior to a Demand Management fiscal approach. It is cheaper, can be undertaken quite quickly (government infrastructure programmes can take years to roll out) and involves litle or no overhead costs for the government. But once we examine the effect a Supply-side response in respect to the government budget we will see that like it’s Demand-side equivalent, the long term costs are likely to swamp any potential benefits.
Consider again the situation of an Ideal Government embarking on a Supply-side tax cut policy. Just as in our Demand-side example any financing of this tax cut policy involves a transfer either from another useful public programme, through borrowing, or through increases in some other tax11, all of which involve net losses to society. To further illustrate consider the case of a government of greater than ideal size and scope. Any spending above the ideal size is already a wasteful transfer of resources from the private sector to the public and any cut in taxes would do nothing to alter that, with the result indistinguishable for the case of a government engaging in Keynesian defecit spending save for minor economic gains from the lessening of the distortionary effects of taxation. Likewise consider the case of the government operating at less than the ideal state. Any tax cuts would further degrade already underfunded socially-useful programmes and lead to a net loss for society. In point of fact the only occassion when Supply-side tax cuts would not result in long term negative effects, either in the form of heavy inflation and chronic deficits due to excessive government borrowing is when the government is already running chronic surpluses (or if government spending can be brought in line concomittantly to the ideal level with the tax cutting plan).
Also, as in our discussion of Demand Management it is essential to understand the nature of the response of economic ators to policy. At it’s core a supplyside program does nothing to address the change and consumer prefferences that is the mechanism of a spreading recession. Instead, it merely ignores prefferences in the public sector to subsidize prefferences in the private sector. 12 This obscurring of the mechanics of economic change, of preventing a full expression of consumer prefferences in both private and public sectors creates a disconnect between consumers and producers leading to an over-all less efficient economy as we shall see in the next section.
I would however use this occasion to make comment on a corrollary issue of SUpply-side economics. Often times in popular media and informal discourse Supply-side Economics is boilled down to one of it’s sub-tenants, namely: The Laffer Curve. The Laffer Curve, named after Art Laffer who famously first illustrated it on a cocktail napkin of a Washington D.C. restaurant is a graphical depiction of the relationship between tax rates and total tax revenue. Drawn as an inverted U it demonstrates that at total revenue will be zero and both a zero tax rate and a 100% tax rate. That this is theoretically true is unquestionable however it is sometimes claimed that any reduction in tax rates will lead to increased revenue. Critics of Supply-side theory are perfectly correct to reject this claim. In fact, whether revenue will increase or decrease depenends on where along the Laffer curve the relevant tax rates are and on the precise shape of the curve (which is governed by individual prefferences between income and leisure). As prefferences are often in flux it may well be impossible to create a reliable aggregate Laffer Curve and thus detirmine whether tax revenue may be increased or decreased by a shift in tax rate, though at tax rates very close to either 100% or zero it seems probable there will be such Laffer effects.
In summation Supply-side theory is useful for it’s rehabilitation of Say’s law and for it’s recognition that tax incentives are much more effective at altering economic behavior than spending programmes it still leaves a great deal to be desired. Particularly dangerous is the prospect that defecit tax cuts will weaken the government’s fiscal health creating, over the long term, unsafe levels of debt and drive up long term interest rates.
A Third Option
Yet there exists a third option open to governments during recessions quite distinct from Demand-side Fiscal Stimulus and Supply-side tax cutting. It will be demonstrated that this third option is quite superior to both alternatives. Simply, it is for the government to do nothing.
Let us return to our confectionary in crisis. In the abscence of some government policy designed to ameliorate the situation the firm must resort to doing so itself. Thus the confectionary will begin laying off workers and/or cutting their hours with the least productive workers being cut first. Of course labour, while the easiest place for a firm to cut costs is not the only place and over the medium term the firm will find other cost saving techniques. Our bakery might then search out a cheaper source for flour. The confectionary manager might look for ways to prevent waste and spoillage, all in an effort to reduce costs. If successful costs will fall allowing the firm to reduce prices and return it to competetiveness. Indeed it is the firms that most ruthlessly cut costs and make the necesary adjustments to their productive process first that return to profitability first. Thus, once the initial recessionary wave is passed we would expet to see strong productivity growth as businesses across the economy are compelled to cut costs and do more with less.
However once firms reach a break even point and are restored to profitability the pressure to continue making productivity gains is not deminished. Because entrepeneurs and managers must make plans in an uncertain environment there is no garauntee that as soon as a firm returns to profitability it will stay there. In fact cost cutting will continue fuelling large windfall profits in the aftermath of the recession well before there is any appreciable job growth. Only when inventories begin to decline and pressure to expand production becomes greater than the pressure to cut costs will employment recover. Thus, in the case of our confectionary shop, having laid off employees, found new suppliers, and adopted more efficient baking techniques the manager of the confectionary is able to charge a much lower price. Consumers, who at the begginning of the recession preffered not to buy cupcakes and muffins at $2 now percieve them to be a bargain and will began buying them in quantities. As the reduced staff of the confecgtionary shop begins to have trouble keeping up the manager will rehire the labour he previously laid-off to meet the growing demand, thus completing the recovery phase of this particular business. The end result will be the business will be much more eficient than before the recession, prices will be lower than before the recession, and the quantity of goods supplied will be higher than before the recession.
It is fact the pressure of recessions that help propel the economy to greater heights of growth. It is precisely for this reason that Supply-side intervention actually has a negative effect on the economy if for no other reason then it preempts the productivity games that businesses from making needed, ultimately beneficial adjustments.
Government budgeting therefore must be done in a manner that completely ignores the short term economic situation. Instead it is the long term and relatively stable prefferences of the citizenry for public goods and services that should govern government spending and taxing policies. Actually, it might not be strictly accurate to say the government should do nothing. It would be entirely appropriate for the government to increase it’s expenditure for the express purpose of taking advantage of lower prices and for unforseen expenses related to the recession. For example if the government was planning on making purchases of military equipment in the next year and due to the recession the price of such equipment fell it would only be natural to accelorate those purchases into the current year. Likewise if the onset of recession were to lead to an increase in crime and criminal proceedings it would only be natural to increase funding for police and court services, though such contingencies would best be planned for in the long term in the form of a “rainy-day fund” of some kind. Rather the government should undertake no fiscal policy aimed solely or even partially at improving the short-term economic situation. Any such programme is likely to be only temporarily effective at best and give rise to dangerous long term costs.
Conclusion: The Politics of Fiscal Policy
In times of economic crisis the pressure on lawmakers to act is understandably immense. No one wants to been seen as having fiddled while Rome burnt. It is therefore no surprise that activist economic theories of one kind or another have found close kinship with political ideology. Both parties have strong ideological, historical, and political reasons for adopting their prefferred economic theory.
Republians, generally favouring smaller government, are invariably attracted to the tax cutting recommendations of a Supply-side programme, though are open to justifying tax cuts on Demand Management grounds as well. Democrats, generally favouring a more active government view Demand Management fiscal stiumulus, and especially in making infrastructure investment and public works. Thus economic theory can serve as useful reinforcement for ideology.
Historically, Democrats are strongly attached to the New Deal policies of the Roosevelt-era which featured large-scale public works programmes justified on roughly Demand Management grounds. Republicans are historically invested in the tax cutting policies, particularly the large tax cut package passed in 1981 of the Reagan Administration. Such economic policies form a large measure of the mythos of both Republicans and Democrats and to abandon their respective economic theories would seem a repudiation of their own historical champions.
Lastly, it seems like no coincidence that the economic theories of both Republicans and Democrats expressly favour large portions of their respective coallitions. In the case of Democrats, Demand Management policies offer direct benefits to public sector unions and to a host of preffered constituency groups to whom grants and projects may be granted. 13 Likewise, Supply-side tax cuts are necesarily tilted toward businesses and high income earners so it is certainly not surprising that business groups and high earners tend to support Republican candidates.
All in all,lawmakers have strong incentive to ignore longterm consequences of economic policiesand instead focus on the short term relief such policies might provide, however temporary. Thus it seems extremely unlikely that either party will forsake it’s chosen approach any time soon. The result can only be a higher than otherwise level of unemployment and a continuation of sluggish growth until the next crisis with continued political turmoil across the globe.
1For example: I had the occassion recently to read some of the correspondence between 20th Century Economists F.A. Hayek, J. M. Keynes and Pietro Sraffa, durring their famous public exchange in the 1930s. So difficult to understand was the plain meaning of what they said and the obscuity of the terms that other economists found it necesarry to enquire of them what exactly it was they were arguing about.
2 After Franklin Roosevelt’s 1932 landslide victory Democrats controlled 313 House and 59 Senate seats.
3The Third way a government can influence the macroeconomy is through trade policy, e.g. impossing tarrifs and import quotas.
4 The technical term for such goods and services is a “public good”. The classical example is the concept of a lighthouse. Because lighthouse owners have no way of effectively charging passing ships that make use of it economic theory suggests there will be an insufficient number of lighthouses. Other examples include courts, police, national defense, and to a certain extent public roads, lighting, etc.. The extent to which social safety-net programmes, regulations, and other government functions fit in to this definition is a subject for debate not suitable for present purposes.
5This definition may also include a ”rainy day fund” surplus if the prefferences of the citizenry was such that maintaining a reserve of emergency funding for government programmes was prefferable to the alternate uses in the private economy.
6 I assume the opperating costs of anti-recessionary programes to be negligable for simplicity but realisticaly that would not be the case.
7There are, of course, several measures of the volume of money and it is worth pointing out that what is “money” is in the eye of the beholder. Here I use a wide definition of all liquid debt instruments that can be relatively costlessly traded against goods and services or M2.
8Banks act as primary dealers in most cases of public debt auctions, thus while private individuals may purchase government debt generally the initial purchase from the treasury is made by large banking houses.
9 The famous phrase “We are all Keynesians now” is misattributed and somewhat misunderstod. See http://en.wikipedia.org/wiki/We_are_all_Keynesians_now
10Assuming we ignore externalities such as pollution.
11 Such as consumption taxes or import tariffs.
12Ofcourse, any sub-optimal government policy is, in effect a contravention of the prefferences of the citizenery.
13 The facility with which politicians may reward favoured interest groups under the banner of fiscal stimulus might very well account for its bipartisan popularity.
