Macroeconomic fallacies

24 May, 2013 at 10:10 | Posted in Economics | 2 Comments

Fallacy 8

If deficits continue, the debt service would eventually swamp the fisc.

Real prospect: While viewers with alarm are fond of horror-story projections in which per capita debt would become intolerably burdensome, debt service would absorb the entire income tax revenue, or confidence is lost in the ability or willingness of the government to levy the required taxes so that bonds cannot be marketed on reasonable terms, reasonable scenarios protect a negligible or even favorable effect on the fisc … A fifteen trillion debt will be far easier to deal with out of a full employment economy with greatly reduced needs for unemployment benefits and welfare payments than a five trillion debt from an economy in the doldrums with its equipment in disrepair. There is simply no problem …

Fallacy 14

Government debt is thought of as a burden handed on from one generation to its children and grandchildren.

Reality: Quite the contrary, in generational terms, (as distinct from time slices) the debt is the means whereby the present working cohorts are enabled to earn more by fuller employment and invest in the increased supply of assets, of which the debt is a part, so as to provide for their own old age. In this way the children and grandchildren are relieved of the burden of providing for the retirement of the preceding generations, whether on a personal basis or through government programs.

This fallacy is another example of zero-sum thinking that ignores the possibility of increased employment and expanded output …

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These fallacious notions, which seem to be widely held in various forms by those close to the seats of economic power, are leading to policies that are not only cruel but unnecessary and even self-defeating in terms of their professed objectives …

We will not get out of the economic doldrums as long as we continue to be governed by fallacious notions that are based on false analogies, one-sided analysis, and an implicit underlying counterfactual assumption of an inevitable level of unemployment …

If a budget balancing program should actually be carried through, the above analysis indicates that sooner or later a crash comparable to that of 1929 would almost certainly result … To assure against such a disaster and start on the road to real prosperity it is necessary to relinquish our unreasoned ideological obsession with reducing government deficits, recognize that it is the economy and not the government budget that needs balancing in terms of the demand for and supply of assets, and proceed to recycle attempted savings into the income stream at an adequate rate, so that they will not simply vanish in reduced income, sales, output and employment. There is too a free lunch out there, indeed a very substantial one. But it will require getting free from the dogmas of the apostles of austerity, most of whom would not share in the sacrifices they recommend for others. Failing this we will all be skating on very thin ice.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

2 Comments

  1. Fallacy 14 is just really bad economics using partial equilibrium logic to derive erroneous general equilibrium conclusions. It’s not valid even under its own premises.

    According to the analysis, the older generation is supposed to liquidate their assets to support for themselves at old age. In that way it, allegedly, eases the burden on the younger generation. But where will the government receive the funds to pay back its debt? By running a surplus in which taxes exceed spending. Taxes that will fall on the young.

    In the alternative situation in which the old has not saved, the same amount of taxes would still have to be imposed on the young generation in order to provide for the elderly. So it is true that debt imposes no *additional* burden on the future generation. But that’s called Ricardian equivalence.

  2. Reblogged this on PUSAT DATA & PENELITIAN.


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