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Model in support of an article being written about Investment vs Austerity.

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Investment vs Austerity v2

This is a simplification of the Austerity vs Prosperity model in the hope that it will be easier to understand.

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Austerity vs Prosperity v0

Circular Flow Economy

Cutbacks can have a counterintuitive effect. The government knows precisely how much it custs in spending. However, it cannot know the extent to which tax revenues shrink in a non-linear complex economic system as the economy contracts. In addition, the treasury has to spend more as automatic stabilizers activate and payments are made to an increasing number of unemployed workers. The effect of this is that initially the deficit shrinks, but later it rises as tax revenues fall short of expectations and more spending takes place. The ironic part is that often the very indicator that promted austerity measurs, the defcit to GDP ratio, becomes worse than it was at the outset. We could observe this in Spain and Portugal where planned deficits have been repeatedly missed, as austerity measures (fiscal cutbacks) were introduced to deal with the effects of the 2008 financial crisis.

CUTBACKS OFTEN MAKE FISCAL DEFICITS WORSE

Model in support of an article being written about the relationship between investment and austerity. See Version 2

See also:
* Inv vs Aust Sim [IM-2736]
* Inv & Output 1 [IM-2740]
* Inv & Output 2 [IM-2741]

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Investment vs Austerity

The effect of austerity in the wrong place

The effects of Austerity

Francis Lambert

I propose we grow this sim model (or similar) over time to help ourselves better understand the opposing investment and austerity strategies now being advocated for the U.S. government. The hope is to build as simple a model as possible that subsumes the major underlying feedback loops that probably exist in the mental models of proponents of each of these positions. Starting this model was inspired by this Investment vs. Austerity discussion http://www.linkedin.com/groups/Investment-vs-Austerity-How-can-4582801.S.157876413

20120908a_InvestmentVsAusterity

Paul Newton

This is Figure 4 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.

http://www.economics-ejournal.org/economics/journalarticles/2012-34

If banks run down their reserves but there is a policy to maintain wages, the model shows a decline in household spending and an increase in bank spending: austerity and inequality followed by a partial recovery.

Austerity and Inequality

This is a variation on Figure 4 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.

http://www.economics-ejournal.org/economics/journalarticles/2012-34

If banks run down their reserves but there is no policy to maintain wages, the model shows a decline in total spending: severe austerity.

Severe Austerity

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.

Fallacy of Spending Cuts

WIP summaries of bill mitchell's blog postings related to the connections between macroeconomics and wellbeing, particularly via unemployment and inflation

Unemployment and wellbeing

This is Figure 4 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.

http://www.economics-ejournal.org/economics/journalarticles/2012-34

If banks run down their reserves but prices do not fall, the model shows a decline in household spending and an increase in bank spending: austerity and inequality followed by a partial recovery.

Austerity and Inequality - sticky prices

This model shows the basic functioning and dynamics of a 'modern monetary system'.

The non-government sectors, consisting of the private and foreign sectors initial y starts with zero currency units. It is important to realize that after creating a new currency the government must first spend currency units into the economy before they can be used: without currency units the private sector could not even pay taxes! A government that has its own freely floating currency can create a much money as it wants. It does not need tax receipts to finance its spending, and any money it spends into the economy above that collected in taxes represents income for the private sector. The model show that the government initially created 9 trillion money units, but spent only six trillion into the economy. The six trillion showed up as a government deficit, but also as wealth in the non-government sector.

Since the government can create as many money units as it wishes and transfer them to the private sector to ensure an adequate level of demand in the in the economy, austerity is unnecessary: money is available, though real resource may be scarce. This also shows that the government can contribute actively towards the creation of prosperity.

Please note that this model was originally created by Gene Bellinger, IM 3206, from which this version was cloned.

Clone of Austerity vs Prosperity

Diagram from a paper by James B. Rieley entitled "The Euro Financial Crisis: Making Sense of the Mess".

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Euro Financial Crisis

Eurozone members have given up their national currencies and adopted the Euro. In doing so they have forfeited their fiscal spending capacity to manage their economies and respond effectively to external shocks. Austerity in the face of economic downturns is not a choices for Eurozone members, but a necessity. The Euro as a 'stateless' currency does not make any sense, because it cannot be employed to pursue countercyclical policies, a primary and necessary policy instrument of modern democratic governments. The CLD shows how the pernicious dynamic that arises from these misguided policies leads social discontent and instability. The faulty design of the Euro will prevent the EU from fulfilling its promise to improve the lives of EU citizens and in this sense the Euro has already failed as a common currency.

The Dynamic that Threatens the Stability of the Euro

Austerity

Phil Waller

5 months ago

PO 2020

Andreas Romppel

This model shows the basic functioning and dynamics of a 'modern monetary system'.

The non-government sectors, consisting of the private and foreign sectors initial y starts with zero currency units. It is important to realize that after creating a new currency the government must first spend currency units into the economy before they can be used: without currency units the private sector could not even pay taxes! A government that has its own freely floating currency can create a much money as it wants. It does not need tax receipts to finance its spending, and any money it spends into the economy above that collected in taxes represents income for the private sector. The model show that the government initially created 9 trillion money units, but spent only six trillion into the economy. The six trillion showed up as a government deficit but as wealth in the non-government sector.

Since the government can create as many money units as it wishes and transfer them to the private sector to ensure an adequate level of demand in the in the economy, austerity is unnecessary: money is available, though real resource may be scarce. This also shows that the government can contribute actively towards the creation of prosperity.

Please note that this model was originally created by Gene Bellinger, IM 3206, from which this version was cloned.

Clone of Clone of Austerity vs Prosperity

emilio piccoli

Summary of Ch 19 of Mitchell Wray and Watts Textbook see IM-164967 for book overview

Full Employment Policy

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WIP Summary of Froud et al 2017 article from special Theory Culture and Society issue on Elites and Power after Financialization with WIP SIB social impact bonds katz AmJPH 2018 article

Outsourcing the State

An attempt to combine ideas from Joe Stiglitz's Book The Price of Inequality, Peter Turchin's book Secular Cycles and Khalil Saeed and Oleg Pavlov's Dynastic Cycles SD model paper

Inequality Crisis and Secular Cycles

3

Argentina Causal Loop Diagram (1.18.26)

Ben M

2 months ago

Michael Marmot's Eur J Epidemiol Essay 2017 See also IM-62760 Social determinants of health from Michael Marmot's ABC 2016 Boyer Lectures on Social Justice and the Health Gap

Social Justice, Epidemiology and Health Inequalities