Why Include Population Growth in Fiscal Policy?

Hey everyone, the comments section was excellent from the last post. So much there I can’t even come close to responding to everything.

Here was a good question about population growth from Noam, and it’s inclusion in the TC rule.

“I don’t understand including population growth. Say a nation has 10% population growth. Should it be running 10% of GDP fiscal deficits while it’s at target inflation and unemployment?!”

It’s true, you’d think hitting the targets would be enough. For the answer, I turn it over to Godley:

“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.” (Bold Mine)

The entire passage is remarkable.   Note the 1998 date, so this observation is 45 years old.

Then, Note the “Therefore” in that sentence, the brutal, unarguable mathematic logic.

This is a theorem.

It should (?) probably be stated more broadly.

Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the net fiscal stance should rise: Government expenditure or bank credit must rise relative to the average tax rate.

The only way we can get growth in the long run is for there to be a government issuance of NFA or for there to be growing credit.

Do these have to rise exponentially? Does there need to be a rise of x% per year over last year? Haven’t thought this all the way through or pulled out an envelope yet, but probably…

I had included the population growth as an intuitive strike during the wee morning hours, thinking as population grew, we needed more NFA to keep the per capita GDP the same.

But Godley’s observation is more than this – we need the extra spending to grow the economy from a steady state…

So perhaps we need to add more spending.  And note, please note, this does nothing to plug the other deficit – the BoP deficit/surplus. We need some sort of plan for this! Does anyone – anyone – have any ideas on this at all? 😉



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2 Comments on "Why Include Population Growth in Fiscal Policy?"

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Mike Jackson
5 years 4 months ago

The only way you can have economic expansion is to have more inputs or less waste (externalities). you need more labor, knowledge and resources. You can’t beat the laws of thermodynamics. Currency is an attempt to create a common denominator between those inputs so they can be acquired and disposed off, nothing more. Currency in the long run doesn’t create or destroy anything, at best it redistributes.

Tom Hickey
5 years 4 months ago

It would seem that net exports could offset, too. I believe that Norway has a high tax rate that is not offset as much by govt fiscal deficit as the trade surplus. This is possible for resource-rich countries in particular at least until they deplete their finite supply.

The US and developing have to deal with the Great Leveling, that is the persistent gap in compensation level among the undeveloped, emerging, and developed world. The developed countries are importing inexpensive product and exporting jobs. The MMT solution proposed by Warren Mosler is to use the fiscal deficit with an ELR program to maintain full employment in developed countries like the US in the face of this. The alternative seems to be some form of restriction on imports and control on capital flow, or else a Vickrey type solution as proposed by Carlos (Beowulf) Mucha. (It was David Colander who got Vickrey thinking in this direction.)