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? 😉