Structural differences between high and low tax countries: Differing definitions of social contract. Provision of services approach. Much bigger provision of public sector
- So the US is in the lower 1/3 for taxes but upper 1/3 for spending per citizen, how? (spending relative to GDP is smaller but absolute quite large)
Difference between the deficit and primary deficit
The surplus at the end of the 90s
- What would we use if we didn’t have a government bond? Don’t worry, we got hit by a recession and Medicare Part D
- Norway, north sea oil budget surpluses
- In the 90s, we ran a 4.5% budget deficit, now we’re at 7%
Tax cut as mathematically equivalent to government stimulus. So stimulus either way but what’s the ground truth look like.
- A tax cut always provides less stimulus than government spending
- If you increase defense spending, 100% of that money goes into the economy but a tax cut could show up in a many ways (pay down debt, save, etc.)
- Tax cut of the same size (%) will have a greater proportionate effect for those at the bottom end
Pushing up interest rates b/c the gov borrows more, pushes the cost of cpaital (itnerest rates0, drives down the NPV of projects becuase it increases the WACC. What is the “savings” she refers to
- Ricardio equivalence: When households see a stimulus (so G goes up)… so this is temporary, they believe taxes will come in the future. The private savings should offset the government stimulus
“how would we respond to a crisis if we have less fiscal capacity”
Savings is a flow, when interest rates are high, then I have more incentive to save. Does the market being higher want me to save more? Unpack that.
Just take what you would get for an increase in G x m, so that’s effectively the tax shield of what would be government spending
Automatic stabilizer:
- UI is an automatic stablizler
- Also, as you make less money, you have lower taxes.
Greece
- Why do we care about debt in relation to GDP? If debt becomes a larger % of GDP it signals that we’re not getting more out of the debt we’re taking on.
- Eroding the real value of the fixed interest rate (high domestic inflation doesn’t help you w/ dollar debt)
RUn a big budget deficit, then devalue currency. Print money (ask how this works?)
Two body problem: GDP slows and deficit increases, amplifying each other
Greece tax of swimming pools example from Google earth
“It’s not a forecast, it’s a simulation” (other things held constant)