MODERN MONETARY THEORY SHOWS HOW FULL EMPLOYMENT CAN BE ACHIEVED!

POTENTIAL GDP is a level of overall spending - by the government and the non-government sector - at which there is full employment. If the economy is not operating at its potential, then the  private sector has failed to invested or spend enough to generate the necessary growth nor has income  from net exports contributed enough. This only leaves the government to close the spending gap. Conceptually, a government disposing of its own freely floating currency could act using two powerful tools -  spending in excess of tax revenue, and taxation - to ensure that the gap between the actual economic activity and potential GDP is quickly closed. Achieving the  full employment that prevailed for 30 years between 1945 and 1975 in western economies is definitely possible! 

COVID-19 Outbreak in Burnie Tasmania Simulation Model

Ocean/atmosphere/biosphere model tuned for interactive economics-based simulations from Y2k on.

The upper diagram shows the principal factors that have an influence on the budget deficit and indicates what needs to be done to correct it. But this is not the full story. The diagram below shows that  cutting public expenditure reduces aggregate demand and  increases unemployment. The reduction of aggregate demand  reduces  economic activity which has the effect of reducing  tax revenue.  In addition, the state has to pay out funds as there is a need for more unemployment benefit payments.   The result of these austerity measures  is often the opposite of their intended purpose: they can increase rather than decrease the budget deficit.

There is plenty of empiric evidence to show that this has happened time and time again. For instance, a report from UNCTAD (United Nations Conference on Trade and Development) found that between 1990 and 2000 in all the  cases examined where cutbacks in public spending and tax increases were used, the fiscal situation did not only not improve but worsened. Despite such repeated evidence, unfortunately calls for  austerity measures continue to be heard. 

Description:

In a Dasgupta review lecture I heard 'welfare is stock, therefore it cannot be measured by GDP, since GDP is a flow'. This fascinated me. Therefore I am trying to make a stock-flow diagram of this.