Class 3 - Macro Policy + Markets

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)