Things I Wish Everyone Understood About Macroeconomics

Given some recent nonsense I have seen bandied about I thought I would do a quick write up of what I think is important for normal people to know about macro.

-More spending is not some magic expand the economy juice. More money does not equal more significantly more production under normal conditions, or else Zimbabwe would have become a paradise. More spending is really only useful if the economy is demand constrained which occurs when current prices are too high for the amount of money circulating. This leads to many resources(like labor) going unused, so the extra spending instead of diverting resources instead brings unused resources back on line. If all the resources are currently being employed than extra spending can only divert resources from some uses towards others.

-Price level is determined in long run by the money to stuff ratio, that is how much money is circulating next to how many real things are produced.

-Monetary policy should be judged by its output (inflation or NGDP growth take your pick) if these numbers don’t change enough, monetary policy is being too tight, if these numbers are changing too much change and it is being too loose period. Monetary policy is functionally infinite in power, unless your country has a fixed exchange rate or an incompetent central bank anything else that might affect the amount of spending doesn’t really matter. If your central bank is incompetent it probably also won’t matter what else you do anyway. Standard monetary policy runs out of steam when interest rates hit zero(liquidity trap), but there are many many other non standard tools that look scary and are hard for a layman to comprehend. Keep calm and look at projected inflation/NGDP growth.

-The typical nominal recession is a dumb thing which is really just an artifact of the fact we use money and prices are sticky, not some great judgment from above to repent for our sinful ways. The solution is to try to bring spending back to what will allow for full employment of resources. Recessions that occur for structural reasons are a different story. But your typical recession is best understood with the following story, you go to the grocery store with $100 picture the basket of goods you could buy, now go back to the same store with roughly the same prices but only $80, it is impossible to buy the same basket. It is impossible to buy the same output with similar prices and less spending. Since wages are especially hard to lower in nominal terms, labor tends to be hit disproportionality hard. But it doesn’t really matter what your price level is, only that the amount of spending can facilitate full employment of resources at whatever the current price level.

-All government spending is the result of a tax, current taxes are obvious, borrowing and spending is a tax on the future, printing money and spending is an inflationary tax on money holders, defaulting on the debt is a tax on holders of the debt(also an insane idea). Government spending is important, but it isn’t magic, those resources need to come from somewhere so they are going to come from other uses of those resources. Treat anyone who claims otherwise as someone who claims to actually be a wizard.

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