The Government has no clue!

•

The Economics

• Let us start with the definition of the all important government spending multiplier (GSmult)

• GSmult = ΔY/ΔG where Y = RGDP

• Classical Economists say it is zero or close to it – Keynesians argue it could be large, under the right conditions!

The Economics

• If GSmult is zero then when G goes up, C + I must fall, collectively, by the increase in G so that Y remains constant (closed economy assumption).

• Y = C + I + G

• This is not good for obvious reasons!

The Economics

• The Keynesians believe that the GSmult is large, so large that we can have our cake and eat it too!

• Y = C + I + G

The Economics

• The Keynesians also argue that to get out of this horrible debt situation, we need to spend more now and then save later when the economy starts to grow.

• S = Y – C – G

• S = I

The Economics

• Conditions that favor a high GSmult• If output is well below full employment

output, GSmult is high!• If the Fed is at the zero bound, the GSmult

is high!• If prices and wages are sticky, the GSmult

is high!• If the spending is debt financed, the

GSmult is high!

The Economics

The Economics

The Economics

The Economics

The Economics

• So all is well, the GSmult should be high, the conditions are perfect!!!!

• So what is the problem??

• Back to Aggregate Demand….what do we hold constant along any Aggregate Demand Curve???

The Economics

The Economics

• I want to focus on 3 of the other 18 variables that we hold constant along any Aggregate Demand Curve

• Consumer Confidence

• Expected Income

• Animal Spirits

• Expected Income First!

The Economics

Future Taxes??

The Economics

• What about consumer confidence and animal spirits????

The Economics

• According to the poll, which was conducted between October 19-24, 2011, Americans also have less trust than ever in the government's ability to make the right decisions: Just one in ten Americans currently say they trust the government to do what is right all or most of the time - down from 23 percent who said the same just a year ago. That figure - at just 10 percent - is a record low since the CBS News/New York Times poll first asked the question in 1976.

The Economics

• Impact on Aggregate Demand

The Economics

The Economics

The Economics

• Another way to look at it

The Economics

Applying this idea to the real world – the Romer Paper

The Economics

The Economics

• So Keynesian Economics can work, under the right conditions – but these are not them –

• Check out the next slide, the GSA, the “Watchdog” of all Government Spending recently got caught wasting tons of our tax payer money – the BROKEN WINDOW FALLACY ONCE AGAIN!

• Here for Jon Stewart