Sunday, November 15, 2009

Questions from a Novice Economist

First post!

1.) C. Romer has said that the government spending multiplier is 1.6. Government does not create wealth, it only redistributes it through taxation, debt, and inflation. This leads me to think that the multiplier could, at best in some magical world without leakages be equal to 1. Does perpetual motion exist in macroeconomics? If I am missing something in the whole multiplier calculation process, could someone enlighten me?

2.) Is all involuntary unemployment, with the exception of an individual being fired for incompetence, a result of government action? Examples are price controls, taxation, regulation, and labor contract enforcement.

3.) Is a system of voluntary government funding, a lottery for example, sustainable?

I know it's a short post...but I need to get back to the Macro hw.

P.S. Sam, thanks for inviting me to contribute!


  1. My intuition on the multiplier is: if Y = C(Y-T) + I + G, and G increases (say they spend via bonds), money that is spent on government goods and services goes to households. So if ^G = 1, then consumption will increase by C*1. (let's say c=.8, s=.2). Consumers will spend .8 of that 1, and they will spend it on things produced by households - so Y goes up again by c*.8, .64... and so on. So if ^G = 1, then ^Y will be (1+.8+.8^2+.8^3... .8^inf).

    Of course, it begs the question of where that increase in G comes from. If it comes from money in mattresses, okay, but if it comes from savings, and we're assuming savings and investment are tied... then great, government spending creates (1+c+c^2...) wealth by taking away from investment which would create... wait for it... (1+c+c^2...) wealth. And in the long run, it probably hurts, because instead of spending money on things that create wealth, the government will spend it on, you know, things the government spends it on.

  2. 2) Involuntary unemployment can be of a few different stripes. The stripe that the government is usually responsible for is structural, though plenty of that happens quite without the meddling of any politician or bureaucrat.

    We've also got to remember that labor markets are heterogenous. Government interference typically harms only marginal workers.

    Involuntary frictional unemployment? I"m inclined to believe that state and local employment agencies are a net benefit to job seekers, particularly in places that have worked to eliminate perverse incentives for agency workers.

  3. Involuntary frictional unemployment vs. being "underemployed." Those who refuse to be employed because they are searching are unemployed voluntarily. I see frictional unemployment as voluntary with the exception of the marginal workers that are willing but unable to find low-skilled work while searching due to government intervention in the labor market.

  4. These are some hard questions. I'm just going to guess.

    1) b
    2) b
    3) b