Comments | skellington: Taxes vs. Borrowing..

skellington

Taxes vs. Borrowing..

Feb 11, 2010 14:06

In a discussion over here:

http://chapel-of-words.livejournal.com/308075.html

I stated that government spending is all that counts in terms of the availability of goods and services for private consumption and investment. Taxes and borrowing aren't directly part of the equation.

From wikipedia:

The definition of GDP (Y) is a sum of Consumption (C), ( Read more... )

Comments 5

jjhunter February 11 2010, 20:55:27 UTC

I stated that government spending is all that counts in terms of the availability of goods and services for private consumption.

The equation itself - those 5 "independent" variables and one dependent variable would seem to indicate that you are wrong on that count. People and companies can choose to use their "extra" $ to either consume or invest. The situation you describe seems to be one where *all* 'I' is essentially crowded out by G spending. The 'I' is, generally, how the GDP magically grows in the future. So, yes, I think it matters.

And then there is the eXport/iMport side of things. Why are countries trying to devalue their currencies? To make their goods cheaper, relatively speaking, and get that X side of things.

skellington February 11 2010, 21:06:19 UTC

Edited to say it's for "private consumption and investment".

The point is more that taxes, "government saving", paying off debt, etc. only indirectly impacts GDP and consumption. And/or the ways it impacts them probably have more to do with the chosen tax policy (i.e. R&D tax credits, income tax, VAT, estate tax, etc.) than the fact that the government is paying down debt.

(Well, except for maybe that depression thing..)

I'm avoiding X/M for the moment.. Perhaps a later post.

jjhunter February 12 2010, 01:58:41 UTC

What I like about the equation is that it is simple, true by definition, and makes intuitive sense. If a country produces more than it consumes, the excess is exported out or is saved (I). (And in the other case, it sells assets (negative I) and imports goods.

What I don't like about it is that the variables *appear* independent of time and each other. Of course, something representing the true complexity of the system? It would win the Nobel Prize for the next 20 years. If it were comprehensible.

If I read you right, you're essentially making an argument that fiscal policy has more of an effect than monetary policy. Paying down debt lowers interest rates, making the I part of the equation easier. Tax credits are also an indirect way of directing money into *specific* portions of I. Offhand, I'm not inclined to believe that fiscal policy is *the* way to go. I'm also not inclined to pour through academic journals to make a case either way.

[As a note for above - you didn't explicitly state it, but add inflation to the list of 'taxes

chapel_of_words February 12 2010, 16:55:58 UTC

There is a point of irreducibility on complex systems where simple intuitive formulas tend to fall apart. They either have to become so complex as to become unwiedly or fragile and fall apart, or they're abstracted so much they fail to capture key realities and miss something key and then fall apart. You're right, anyone who can distill it to one simple formula we could live by *would* win the Nobel Prize, but human interactions cannot be surmised by formulas - I work in an industry that has tried very hard to do that on the business-process size and it almost always fails. Chaos and non-linear math systems may have more promise to these kind of problems, but that's way beyond my paygrade. =)

Tim C.

anonymous February 12 2010, 16:53:38 UTC

Good post! I agree with you on some of the points you make - especially how all the government can do is transfer costs (or wealth). The GDP formula you present, along with what you add, really could be

GDP = C (as affected by tax policy) + I (as affected by monetary & fiscal policy) + G (as affected by spending policy) + N (as effected by foreign trade relations).

As you point out, the government can effect any one of those three (C,I & N) to pay for it's G.

I'm with you there. And you're also correct that the stockpiling of goods represents a move forward in G (which is not created when their used, but rather created).

Now to your summary points:

And selling a whole bunch of paper assets the government has stockpiled, driving down prices and sucking up private investment, has roughly the same short-term effects as a tax hike that year. i.e. it's just a question of how you remove the "G" spending from the "C & I" categories.This assumes C and I are equally weighted at all times (now and over the future trend), so that ( ... )