For Cretin's On The Subject of Aggregate Demand

Was incensed this evening to read this; should make better efforts not to read twitter before bedtime:

It also makes some keen observations, very relevant today; namely, private investment’s dependency on aggregate demand from public investment and public consumption. Rightly the report notes that balancing the budget in the way the coalition is – in break neck speed – will shrink aggregate demand.

Now not being an economist by training I must profess a naivety in my understanding of "aggregate demand" so here is wiki on the subject:

In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country when inventory levels are static. It is often called effective demand, though at other times this term is distinguished.

With me so far? So it's basically a value attached to the accumulated goods and services bought at any one time.

An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources.[3]


AD = C + I + G + NX

C is consumption (may also be known as consumer spending) = ac + bc(Y − T),
I is Investment,
G is Government spending,
NX = X - M is Net export,
is total exports, and
is total imports = am + bm(Y − T).

Y'see this is what gets me so incensed about Fabians trying to justify theft from productive part of the economy by saying if it doesn't cough up it will suffer as a result; they appear to have got the I and the G mixed up as represented by the equation above. "Public investment and public consumption" (the latter I'll take as being procurement in the public sector) are nothing of the sort; they are Spending, G, and that spending now accounts for a little under 50% when you add up all those little taxes, stealth taxes and regulatory burdens place on consumers and probably over 50% when you stencil in the "opportunity costs" of the state dwarfing personal freedom and monopolising industries like healthcare or schooling.

With Gordon's PFI debt, Byer's botched handling of Network rail and the great ponzi scheme that is Public Sector pension liabilities (compiled here) our real national debt stands at £950Bn plus (we will use that figure for the moment; the other is too scary to contemplate); were we to pay it off this year we would need to put 70% of our economic activity towards putting this debt to bed, before you pay for public services. Let's have a look at that wiki article on what it says on debt:

If debt grows or shrinks slowly as a percentage of GDP, its impact on aggregate demand is small; conversely, if debt is significant, then changes in the dynamics of debt growth can have significant impact on aggregate demand. Change in debt is tied to the level of debt:[4] if the overall debt level is 10% of GDP and 1% of loans are not repaid, this impacts GDP by 1% of 10% = 0.1% of GDP, which is statistical noise. Conversely, if the debt level is 300% of GDP and 1% of loans are not repaid, this impacts GDP by 1% of 300% = 3% of GDP, which is significant: a change of this magnitude will generally cause a recession. Similarly, changes in the repayment rate (debtors paying down their debts) impact aggregate demand in proportion to the level of debt. Thus, as the level of debt in an economy grows, the economy becomes more sensitive to debt dynamics, and credit bubbles are of macroeconomic concern. Since write-offs and savings rates both spike in recessions, both of which result in shrinkage of credit, the resulting drop in aggregate demand can worsen and perpetuate the recession in a vicious cycle.

"debts are not repaid"? Could we substitute this for "money is taken out of government spending" in this instance?

If so debt repayment is set to reach £43bn this year, which is to say 3% of GDP which is a fairly massive impact on "aggregate demand" dont'cha think?

Whether you believe Keynesian economics actually work (there is not one example that it has been successful in existence) it doesn't take a genius to work out that the jump start in the economy will not happen by burning money in the engine of government; Mises and the Austrian School on the other hand felt that recessions were the economies way of telling us where we were going wrong; I'm putting my money on it being the states hiring of one half of the public sector to dig holes whilst the other fills them in again.

With an immediate 3% loss of GDP caused by debt any attempts to stop this getting any bigger are to be welcomed; there is only one monocular cretin to blame for the sorry state we are in.

No comments: