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17 12 2020 05:58
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17 12 2008
05 30.
I should look futrtherr and deeer into Macro Economics and the 3 principles that govern our ecomonic strategies.
I should look deeper into Matin Friedman and find his publications and research second hand book shops for his best sellers.
I need to buy nooks..... Which books to but ? Dig out my book on European Economies urchased from Manchester university second hand book sale.
Contact Mabchester Un iversity - get Macro Economics reading list.
Research the 1830's recession and the rise of Keyesian Economics. Make comparison with 2008 recession.
Worjk through You Tube Macro Economics Lectture an Place hold Forumulae within Ptotopage.
Cross reference Formulae with 5 types of economic principles.
The course Martin Friedman word of Macro Economics. Recession.
Watch Martin Fridman and take notes - keystones.
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Everybody researching Global Economics should buy an Ecoglobe to make notes on of trade transactions between companies.
Do a camera Video on The World Pump Trade Analysis System - The System that never was.
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Economic Kreystones
Chrysler Bail out.
Government Intervention
The Motor Industry - Safety - C02 Emissions - Manahemebt - Greta Thunberg.
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The Great Recession of 2008 a Kensian View
1. Keynsian Ecomomics
2. Real Business Cycle
3. Moneytorist Approaches
4. Austrian School of Economics
4 Blind men grasping an elephant
Tail / Body / Head / Trunk all looking at different aspects of the problem
Keysian
Shortfall in Aggregate Demand
- Consumption
- Investment
- Government
Housing bubble in the American Economy
Consumption fell
Mortgages fell
less credit creation
less investment
Government taking in less money - investment.
Aggregate Demand
Aggregate Demand
Permanent income hypothesis
A key proponent of the idea that government spending may crowd out consumption is the economist Roger Farmer. His arguments start with a way of looking at the consumption function that is different from the familiar Keynesian one in which consumption is determined largely by income (Farmer and Plotnikov, 2012). The alternative is based on an approach developed by Milton Friedman called the permanent income hypothesis (Friedman, 1957, pp. 21–2). In Friedman’s view, consumption is closely linked to wealth rather than income. People take a long view and set a normal level of consumption according to their wealth. This means that people may borrow now to support a high standard of living if they expect their earnings to rise in future (because of, say, the anticipated rewards from their education, training and experience), or they may limit their consumption now in order to save enough for a comfortable lifestyle later when income is expected to drop (typically after retiring).
Fiscal Stimulus
Fiscal Stimulus
Stabilisation policy
Stabilisation Policy
Fine Tuning
butskellism
butskellism
In the UK, successive Conservative and Labour Chancellors of the Exchequer (Hugh Gaitskell and Rab Butler) were arguably so close to each other that their names were combined in an approach called ‘butskellism’: where the mixed economy, consisting of a viable private sector and a large welfare state, were championed. It was not until the 1970s, when problems of inflation reared their ugly head, that this postwar Keynesian consensus fell apart.
Automatic Stabiliser
Yet if the public sector is sufficiently large, in a butskellite type mixed economy, then its very presence can dampen down the business cycle. If growth slows, for example, and there is an increase in unemployment, then under a welfare state workers will receive unemployment benefit. So although they are not earning the wages that they earned under employment, unemployed workers are still able to consume, albeit at a lower level. Such a transfer payment can be thought of as a negative tax, affecting consumer expenditure in a similar way to a tax cut.
This second type of fiscal policy is referred to as an automatic stabiliser – a fiscal response to a slowdown in economic activity that happens without any active decisions on the part of the government. Governments, of course, have to choose to keep the system in place to facilitate this automatic spending, but they do not have to actively direct the spending from day to day.
Treasury View / Sound Finance
Rather than spending in a recession, the government orthodoxy (traditionally referred to as the ‘Treasury view’ or ‘sound finance’) has been to balance its budget by cutting expenditure. This ‘sound finance’ view, traditionally associated with the nineteenth-century Liberal Prime Minister William Gladstone, is not limited to recessions. It more generally states that the government budget should be balanced at all times (or in slight surplus so as to pay down past debt).
The Great Axe
The Anti-Waste League, formed by Lord Rothermere, had put up candidates and won three by-elections during 1921.
David Lloyd George, the prime minister, acted by appointing a businessman Sir Eric Geddes to head the new Committee on National Expenditure, which was soon dubbed ‘The Great Axe’. It highlighted waste in all areas of public spending, including details such as there being a ratio of one cleaner for every vehicle in the Army. Between 1921 and 1922 it recommended economies totalling £87 million, about 10 per cent of the country’s entire GDP.
Budget Surplus
If there is a budget surplus (tax receipts exceed expenditure), then the government may decide to use part of it to reduce its outstanding debt. If tax receipts exactly match government spending, then this is referred to as a balanced budget.
Loans / Bonds / Gilts
Keynes recognised the need, in times of crisis, for government borrowing to finance a sizeable expansion of government spending. The government traditionally borrows by issuing loans (referred to as government bonds or gilts) that it promises to pay back at a future date. In the meantime, interest is also paid to holders of these bonds.
Government infrastructure spending
In the case of Greece, during the European financial crisis that started in 2010, the main problem has been trying to service the interest payments on its debt. This problem has been compounded by the lack of confidence in Greek bonds in the world financial markets.
The ‘sound finance’ advice given by policymakers, in the European Commission and beyond, has been for Greece to cut government spending and increase taxes in order to meet its debt interest payments. From the perspective of Keynes, however, the problem with this austerity approach is that the reduction in government spending will, via the multiplier, reduce national income and the ability of the economy to generate tax revenue. In the face of this type of crisis, Keynes would have called for the government to boost income using government infrastructure spending.
Sound Finance ‘debt alarmism’ or ‘fiscal scare tactics’
But even if this orthodox classification of capital spending is accepted, it can still be argued that the Treasury view, under which government spending is cut in order to balance the budgets, is misguided in times of recession. Rather than viewing this approach as ‘sound finance’, it can alternatively be labelled ‘debt alarmism’ or ‘fiscal scare tactics’. In this vein, Neild (2012) has compared gross levels of debt in the UK since 1816, as shown in Table 2.
Debt to GDP Ratio
Neild (2012) makes three main points. First, the gross debt for 2010 of £1 071 000 million – just over one trillion pounds – is a large amount of money, and can easily make its way into the headlines, but it is not so high in historical terms. To show why, Neild examines what economists call the ‘debt to GDP ratio’ (ratio of total debt outstanding to GDP). In 1816, just after the Napoleonic Wars, this amounted to 260%; after the First World War, in 1919, it was 127%; after the Second World War it amounted to 225%. So the 75% of GDP in 2010 does not look so alarming in this historical context. Keynes argued that British governments are far too unwilling to spend during times of peace. They are often willing to wage a war on the French or Germans – but when it comes to attacking unemployment, governments are unusually peace-loving in their expenditure plans
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Harvard Reference 1
The economy as modelled by the circular flow diagram, below, appears to be a rather peaceful place, where expenditure is always identical to output and saving is always identical to investment. But saving decisions and investment decisions are made by different people, so it seems there is no reason why they should match, and Keynes’s model of change in national income depends precisely on expenditure being too great or too small to match output and hence on saving being too small or too great to match investment.
Harvard Reference 12 - Fiscal policy
A major factor determining the effectiveness of fiscal policy is the confidence that international markets have in government-issued debt and animal spirits. As Keynes puts it:If animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.
(Keynes, 1973, p. 162)
Harvard Reference 2
According to Keynes, there is a fairly stable relationship between planned consumption and current income. Households plan to spend a fairly constant proportion of each additional pound they earn. He calls this proportion the ‘marginal propensity to consume’. To present this diagrammatically, we start with two axes at right-angles to each other.
Harvard Reference 3
4 Modelling equilibrium
We have said that the economy will be in equilibrium when planned saving matches planned investment. So we need to use our diagram to explore this relationship. First, we need to show planned saving. Our diagram already shows planned consumption at each level of income, and of course planned saving is simply the difference between income and planned consumption. Having shown saving, we need to go on to add investment to our model to complete our analysis of equilibrium.
Harvard Reference 4 - Aggregate Demand
4.3 Modelling planned investment
At an income level of £600, households are planning to spend £520 on consumption and to save the remaining £80. But firms are not planning to invest at all! Let’s now incorporate planned investment into our diagram. This will mean two slight changes.
- We re-label the vertical axis ‘Aggregate demand’, as we are adding investment demand to consumption demand.
- We reinterpret the 45 degree line accordingly. Recall that at any point on the 45-degree line the variable plotted on the vertical axis is equal to the variable plotted on the horizontal axis. So in this diagram, at any point on the line, aggregate demand is equal to income.
The Keynesian model treats planned investment as an exogenous component of demand, that is, as not dependent on current income. It will therefore appear as a horizontal line on our diagram but, when we add planned investment to planned consumption, the aggregate demand line, which at present shows only planned consumption, will move upwards by the amount of planned investment we introduce.
Harvard Reference 5
4.4 And so to equilibrium
In our diagram, planned saving is shown by the vertical gap between the consumption function and the 45-degree line. Planned investment is shown by the vertical gap between the consumption function and the aggregate demand function.
Given the assumptions we have made about exogenous consumption, the propensity to consume and the level of exogenously determined investment, these two vertical gaps are equal at an income level of £600, so at this income level planned saving = planned investment. We have therefore illustrated an economy in equilibrium at an income level of £600.
Note that the AD line (C + I) crosses the 45-degree line at an income level of £600. Since at any point on the 45-degree line AD = Y, we can say that at an income level of £600 aggregate demand = income.
Figure 10 Equilibrium at an income level of £600
Harvard reference 6 - Fiscal Policy
It should be emphasised that the role of fiscal policy is highly contested by economists and policymakers. From a Keynesian perspective, the government has a vital role in stabilising the macroeconomy, because there is no automatic mechanism through which the economy can recover from a recession. For critics of the Keynesian approach, however, the government should leave the private sector alone: it is government intervention that prevents the private sector from bringing about full employment equilibrium. The purpose of this section is to introduce and explore the Keynesian point of view. Some critiques of the Keynesian approach are also explored.
Harvard Reference 7 - About Keynes
Keynes formulated his ideas during the 1920s, making a number of attempts to persuade the UK government to increase its expenditure in order to boost aggregate demand. Although the wartime British Prime Minister, David Lloyd George, had promised that there would be ‘jobs for the boys’ when soldiers came home after the First World War, this did not materialise. High unemployment in the 1920s led to the decline of the Liberal Party, of which Lloyd George was the leader, and its replacement by James Ramsay MacDonald’s Labour Party as the main alternative to the Conservatives – a position from which the Liberal Party (calling itself the Liberal Democrats at the time of writing) has never recovered.
In one final push, in the 1929 General Election, Lloyd George tried to regain his supremacy over the ‘spectre’ of socialism. Under his auspices, the Liberal Party published a pamphlet entitled ‘We can conquer unemployment’. He also marshalled the support of Keynes to develop his party’s manifesto. In his address to Liberal candidates on 1 March 1929, Lloyd George pledged: ‘If the nation entrusts the Liberal Party at the next General Election with the responsibilities of government, we are ready with schemes of work which we can put immediately into operation, work of a kind which is not merely useful in itself but essential to the well-being of the nation’ (Keynes, 1972, p. 88).
Harvard Reference 8 - Budgets
6.2 Government expenditure (2)
Lloyd George’s £300 million programme had three main planks:
- Transport: To modernise the rail and transport system, including electrification of railways and particular emphasis on roads, since they were under the direct control of the government sector. A capital sum of £145 million for road replacement and extension over two years was proposed.
- Housing: To build 200 000 houses a year: a million houses over a ten-year period would provide for slum clearance and reduction of overcrowding. Unemployed building workers would be set to work on these road- and house-building programmes.
- Small projects: A host of other small developments, such as telephone development and land drainage. All this required was a Treasury green light for ‘innumerable schemes pigeonholed in government offices’ (Keynes, 1972, p. 99).
Similar public spending programmes were announced throughout the world in response to the economic crisis of 2008. In the USA, President Obama introduced the American Recovery and Reinvestment Act of 2009, which resulted in US$831 billion of government spending on items such as infrastructure, health and education. In the same year, Australia launched a ‘Nation Building and Jobs Plan’, costing AUS$42 billion, on items such as building local community infrastructure and refurbishing schools – estimated to create 90 000 jobs and to boost annual GDP by 1% after two years (Vu and Tanton, 2010, p. 129).
Harvard Reference 9 - Categorising expenditure
Some elements of spending may form part of I at one time in history and part of G at another. For example, investment in railways in the 1920s would be categorised as part of private investment (I ), whereas after railway nationalisation in the 1940s such investment would be categorised as part of government spending (G ).
Harvard Reference 10 - Friedman
‘We are all Keynesians now’ (Friedman, 1965)
This period of sustained growth was attributed in part to the benefits of Keynesian intervention – in sharp contrast to the plethora of disasters that befell the world economy in the 1920s and 1930s. Postwar governments bought into the Keynesian idea that it was their responsibility to manage aggregate demand. In the USA, during the 1960s, the phrase ‘We are all Keynesians now’ (Friedman, 1965) was even used by the right-wing president, Richard Nixon
Harvard Reference 11 - Hannan (Debt)
The debt problem
You cannot spend your way out of recession or borrow your way out of debt.
(Hannan, 2009)
This common sense mantra has been espoused by those on the right of the political spectrum in response to the economic crisis of 2008, such as the Tea Party movement in the USA. The alternative political position is captured in the T-shirt below, worn by supporters of the anti-cuts movement.
