Hope you had a nice summer break.
Ramaman has a great post up about a flaw in Steve Keen’s model, where it turns out he’s using a sliding and inconsistent definition of a relationship between Income and Expendatures.
I don’t agree with some of Prof. Keen’s work. Still, he’s a clearly smart guy and seemingly seriously committed to figuring out what is going on in the economy. Additionally, he’s aware of the importance of accounting in economic models.
If he can make mistakes like this, how much easier is it for economists who don’t even bother learning about Godley to make these mistakes?
It seems to show the vast importance of starting from the accounting matrix, rather than trying to keep these relationships straight on the fly. MR over the last year has changed somewhat, and the direction it’s changed is recognizing the primacy of the accounting matrix. Any macro which doesn’t build from that foundation will eventually run into paradoxes or dead ends.
This concept of fiscal stance is not new. It is thirty years since Carl Christ, of Johns Hopkins University, had the brilliant insight that should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments. It would then follow that if the economy were moving toward stock-flow equilibrium and if taxes were levied as a proportion of income, the GDP of a (closed) economy would always be tracking, perhaps with a long lag, government outlays divided by the average tax rate – the very same concept that we call fiscal stance. Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate. If the tax rate were held constant, government expenditure would have to rise absolutely for output to grow; if government expenditure were held constant, the tax rate would have to fall.
Christ’s finding was confirmed in two famous articles, Blinder and Solow (1973) and Tobin and Buiter (1976). But this whole line of argument has never been influential in the policy discussion and now seems to have disappeared from the literature. Perhaps the notion of a stock-flow equilibrium is too much of a will-o’-the-wisp, and the lags that would lead the economy to it so long and complex that this concept of fiscal stance has been thought to have no operational significance. Our first major contention is that the Christ conclusion, suitably adapted, has a practical application of decisive importance.”
The result of ignoring the accounting matrix is to forget we must have an ever increasing deficit in order to for the economy to grow. Reading through the papers by Buiter and Blinder, it’s easy to they knew this at some point roughly 40 years ago, but have forgotten it now.
(Update: Ramaman provides us the links to the papers Godley mentions.
Blinder and Solow is here :http://www.princeton.edu/~erp/ERParchives/archivepdfs/M144.pdf
Buiter and Tobin: