Is it my imagination or is Biden getting slaughtered

[WellSpyder]

So I thought that Y = G +C + I plus other term we don't care about. Since saving = investment, the effect of moving 100 dollars from personal consumption to saving/investment has no effect on Y. on the other hand the increase in government spending increases Y. As a understand it buying a bond is usually counted as savings.

With apologies to mike777, I'd like to continue this debate just a moment longer. The underlying problem, I think, is that the fact that S will equal I does not mean that it is helpful to substitute one for the other in an expression like the GDP expenditure identity. S and I will only be equal as a result of adjustments elsewhere in the economy, including for example adjustments in C. It is also true that the purchase of gov't debt does not actually increase savings - it merely turns an amount of savings from cash into bonds.

[phil_20686]

With apologies to mike777, I'd like to continue this debate just a moment longer. The underlying problem, I think, is that the fact that S will equal I does not mean that it is helpful to substitute one for the other in an expression like the GDP expenditure identity. S and I will only be equal as a result of adjustments elsewhere in the economy, including for example adjustments in C. It is also true that the purchase of gov't debt does not actually increase savings - it merely turns an amount of savings from cash into bonds.

 

So I specifically mandated that the money to purchase bonds came from a reduction in C in my example, with a consequent increase in the savings rate. Obviously that is not very realistic, but I wanted to illustrate why I thought the default NGDP multiplier could be one even if real output is fixed by definition. If you assume that the bond was purchased by savings that were already existing in cash form, then we would have G=>+100, C unchanged, and S unchanged. Now the NGDP multiplier would be one in this case, despite no change in real output. Now its obvious in this case that this is just inflation - the extra competition for goods and services driven by the increase in G+C will simply raise the price level so that output is maintained.

 

If moving $100 from consumption to saving removes it from the calculation of Y, then I do not see how the expenditure and the income pictures can add up: Suppose that a worker has whose income has not changed, decides to save more, and if we assume that he `saves' by hiding cash under his mattress, its extremely hard to see how GNI=GDP can be true. I will try to read something on the use of S=I in analysis, accounting identities are always tricky in maths.

 

Ok so I read a little more this morning: S=I should be treated as an equilibrium condition. It can be violated temporarily. That is not a problem for this model as we can assume zero friction = instantaneous adjustment. A more serious issue is whether bonds should be counted as Savings/Investment. Basically, from a theoretical standpoint, apparently you should treat bonds as Savings only if they are spend on Investments, not if they are spent on consumption. In my example, they are spend on consumption, so you should not consider there to be a change in S/I. If the government bonds are instead spend on S/I we should consider that C falls, I rises and Y is unchanged.

 

It still leaves an empirical question of what you actually count. If you treat bonds as an investment and they are spend on consumption, you double count, if you treat them as consumption, but the government spends them on investment you under count. Either way affects the measured multiplier.

[Flem72]

You miss the main point:

1) 99.99% of world has no idea what you are talking about

 

+500

 

Expertise in economic 'science' is a wonderful thing. It provides so much to talk about, such a specialized, impressive, highly nuanced descriptive language, and so little true understanding of what makes things work. Always has seemed to me that, if it were really a science, rather than black magic, we wouldn't ever be in economic trouble. We'd just tweak a nut here and a bolt there and solve the problem. Or is it just me?