Marginal Propensity to Consume 08: The Eternality of “Secular Stagnation”

 

In the year 2525 in the two “autonomous” cities of Anglo-America, everywhere endogenous was everything except for the public spending (G in macroeconomics), the communal investment (I), and the MPC (ΔC/ ΔY). Once upon a time in the South, on the other Earthly side, there were so many “commonwealths” where everything but the government and fiscal dis-spending (-----G) was endogenous.

             To begin, we vary a couple of definitions. First, Y= C+ I + G, all in “nominal.” Second, there are two kinds of constancy, that is, “fixed” yet discretional and everywhere “constant.” 

A Downturn and Fiscal Policy. When the GDP (Y) was expected to go on as ordinary (in the year 2525), the fiscal outlays (G) were constant, or “fixed” as often assumed “for the sake of simplicity.” The GDI (I in macroeconomics) was “fixed.” The MPC, defined as the cross-scenario gap in consumption vis-à-vis the gap in GDP, or ΔC/ ΔY, was consistently constant.  

             Now, let us check some numbers dependent on macroeconomic scenarios in the “fiscal-policy war room,” as it were. We assume ex ante that a financial bubble had burst in the 4^th quarter of 2524 and that ΔC/ ΔY =0.8 was steadfastly constant all across. “Rationally expected,” we were to have a “downturn” as in “the row 2525^(e).” 

            In everyday language, by  the way, the GDP was  to grow -5 % per annum in the year 2525 rather  than "per millimeter" as in the Solow growth model.   

National Income Accounting (in trillion thalers per annum)

Thinking@ War.Room	G (ΔG)	I	Consumption			Y (ΔY)	MPC = ΔC/ΔY
			C	APC*	ΔC
2524	200 (0)	150	700	0.67	0	1,050 (0)	0/ 0= ?
2525(e)	200 (0)	150	650	0.65	0	1,000 (0)	0/ 0= ?
Scenario 1	160 (-40)	150	490	0.61	-160	800 (-200)	0.80
Scenario 2	180 (-20)	150	570	0.63	-80	900 (-100)	0.80
Scenario 3	220 (20)	150	730	0.66	80	1,100 (100)	0.80
Scenario 4	240 (40)	150	810	0.68	160	1,200 (200)	0.80

      *APC for average propensity to consume: APC= C/ Y

Names in Fair. We may in the spirit of D.E.I. call from Scenario 1 down, “stagnation,” “recession,” “recovery” and “overheating.” Yes, “stagnation” was positively possible in the year 2525 on this “secular” Earth as opposed to that holy Eternity. 

Naïve Questions.  Q1: Would we be “rational” when the lower the total income the smaller percentage (APC) we consumed? Q2: Would any government on Earth repeat the same mistake as Scenario 1 “secularly”? If so, Q3: Where is the beef aka “fiscal multiplier” from the so many white elephants built in modern times all across the nation?

             Q4: Why in the first place is there a political gridlock in the Capitol Hill every once in a while? Q5: Which is “the market” in economics for, consumable products or financial assets?

             Q6 in fine: Would there be a Keynesian Cross if AVC the humble were more constant than MPC the glorious?

Paralysis of the Body Politic. By way of closing, we refer to a certain theory of former US Secretary of the Treasury Larry H. Summers:

As Keynes famously observed during those rare times of deep financial and economic crisis, when the “invisible hand” Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function. (As quoted in Gregory Mankiw, Principles of Economics, 6^th edition, 2012)

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In The Year 2525