Dr Kelton: Smart Fiscal Policy primer

Dr Stephanie Kelton has laid it out, nice and simple in two articles in New Economic Perspectives (links below) for those who really want to know, how  government fiscal policies workin a real as opposed the idealised neo-liberal  economy.  It is not the way most commentators and politicians seem to think it does. NB for Irish readers –  ‘teeter-totter’ is a ‘see-saw’.

What Happens When the Government Tightens its Belt? (Part 1)

By Stephanie Kelton

Imagine two people sitting on opposite ends of a 15-foot teeter-totter. The laws of physics dictate that the seesaw will balance if the product of the first mass (w1) and its distance (d1) from the fulcrum (i.e. the balancing point) is equal to the product of the other mass (w2) and its distance (d2) from the fulcrum. Thus, the physicist can show that the teeter-totter will be in balance when the fulcrum is placed 6 feet from the end holding a 150lb person and 9 feet from the end holding a 100lb person. Moreover, the laws of physics ensure that an imbalance will arise if the mass or the relative position of one of the people is changed.

The laws of accounting allow us to demonstrate that similarly powerful concepts apply to the science of economics. Beginning with the simple identity for GDP in a closed economy, we have:

What Happens When the Government Tightens its Belt? (Part II)

By Stephanie Kelton

In a recent post, I used a simple teeter-totter diagram to show how the government’s financial balance is related to the private sector’s financial balance in a closed economy. With only two sectors – government and non-government – I showed that a government deficit necessarily implies a surplus in the private sector.

As expected, this accounting truism ruffled the feathers of a flock of readers who have been programmed to launch into an anti-government tirade at the mere mention of the public sector and to regard the dangers of deficit spending as an unimpeachable fact. And while you’re certainly entitled to your own political views, you are not, as Senator Moynihan famously said, entitled to your own facts.

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