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How much will this Deficit Reduction Deal Increase the Deficit?

August 24, 2011

Somebody else should do this math.  I just don’t have the time right now.

But following the logic of this post, reductions in spending when the multiplier is high can actually raise the deficit!

The logic:

  • Govt. spending directly reduces GDP by the spending * multiplier
  • Taxes are a percentage of GDP.
  • Under some conditions – which we probably meet – taxes collected go down by a larger percentage than the reduction in GDP
We’re probably not going to see that big of a deficit increase, but it’s possible the deficit will actually go up instead of down.
Of course, mainstream econ doesn’t recognize the stimulative power of increased deficits to the extent that MMT does.

Still, I am surprised the Brad Delong has not done the math yet.

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