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Posts Tagged ‘deficit spending’

How much will this Deficit Reduction Deal Increase the Deficit?

August 24, 2011 Comments off

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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Orszag supports the linking payroll taxes to unemployment rate – aka the TC rule

August 9, 2011 8 comments

Peter Orszag – the former economic advisor to President Obama – really must like the TC rule.

He keeps bringing up linking the payroll tax to the unemployment rate. He talked about it in congressional testimony in June.

The Traders Crucible was the first to propose linking spending to the level of unemployment in April of 2011.  Beowulf – aka one of the guys who got the Trillion Dollar coin into the mainstream press  – and I started linking the level of spending of the TC rule to the level of payroll taxes just a few days later.

Orzag proposes a system of reducing or increasing the level depending on how much unemployment increases or the absolute level.

I think the TC rule is simpler.

Here is the TC rule again:

Spending Deficit =

1.8(current unemployment %-unemployment target %) + (target inflation-current inflation) + Population Growth = %G

I certainly hope some sort of way to link the payroll taxes to unemployment levels gets talked about all over the place.

I talked about why linking the level of payroll taxes to the unemployment rates hits a sweet spot of effective demand that’s really, really hard to target a while back.

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