Main Essay Introduction
Eight things the main macro essay explains.
Six items of difference from present macroeconomics.
September 2, 2021
The new macro more effectively explains:
- How the “fundamental monetary constraint” easily explains what causes recessions, which all have similar characteristics: lots of (unsold) goods available to sell with weak demand for purchasing such goods. Some economic participants have plenty of money while others simultaneously lack sufficient money to purchase goods and who also experience high unemployment.
- How the “fundamental monetary constraint” produces a high amount of “credit” (money) supply simultaneously with many customers for that credit. This explains the easy growth of both public and private debt.
- Why the worst recessions/depressions occur when interest rates get stuck low because of wealth inequality—as likely happened in 1930 and is happening now after 2010.
- Why a little inflation is common and “normal” and is necessary to tamp down wealth extremes in an economy.
- Why “successful” economies easily develop greater wealth inequality over time. How such wealth inequality when it becomes extreme can ruin economies.
- Although debt as compared to GDP has for some historical periods has gone down, it explains why private and public nominal debt virtually always rise (very rarely falls) over time.
- How the 1929 stock market crash started the depression, which differs from most economists who believe that the crash was not causal, but coincident with it.
- Why low interest rates cause low velocity and therefore low GDP
Aspects of the economy that are described differently from traditional macroeconomics:
- Present macro assumes one agent—who represents all the participants at once. That obscures differences in income and wealth that exist among people in an actual economy. Some even discount the significance of debt, saying “we owe it to ourselves,” which is certainly true when there is only one agent that owes money to itself .
- When discussing economic supply and demand, “demand” is often tacitly assumed to be “desire” or “want” or even “animal spirits.” The present analysis explains how the “fundamental constraint of money” is also important to understand as having high influence on demand in an economy.
- This macroeconomics recognizes that although holding cash, loanable funds, stocks and physical assets are all ways of “saving,” each has quite different macroeconomic effects. Saving in these different categories often are not separated when describing effects upon the economy.
- Present macro asserts that Investment must equal Savings. The new analysis does not assume this; one person’s saving can be used for another’s consumption. This claimed equality is often used by “supply siders” to wrongly claim that investment must occur if savings are increased—by tax cuts to the rich in many cases, which nevertheless manage to get saved without “investment” in a meaningful sense that would increase greater productivity.
- Conventional macro makes government special, by showing “taxes” as negative income, and implies “government spending” as special—taxes taking away income, often being perceived as only a negative force to an economy–that taxes should always be reduced. Tax expenditures need to be judged as positive or negative on the same basis as non governmental expenses–is the positive benefit justified by the cost? Government expenditures are particularly effective to increase GDP.
- Monetary velocity is a number that can be defined for an entire economy, but also can be defined separately for every subgroup within that economy. People with high wealth or income have velocities that are lower than others, and thus can reduce GDP for an entire economy.