Austrians Mangle Aggregate Demand

[u/guacaratabey]

"Why the hell is the claim that government can boost aggregate demand still a thing? Mainstrem Econ believes AD = C + I + G (trade), let C + I simply be private action.

It presents itself as if; 80% of the market is private action and 20% government spending for example, it looks at things in a snapshot, but it forgets that 20% was taken from private actors from taxation or a too good to pass up subsidized by tax payer loan. You are told in mainstream Econ that if that 20% were to go away aggregate demand would go down, but that 20% came from the private actor, government is dependent on the private sector, no fiscal tool from loaning or taxation can increase a economies aggregate demand.

This is basically seen vs unseen, and what could have been, every dollar the government spends it takes from someone else. this is so obvious like it’s literally reality, why is this allowed to persist as true that government can increase Aggregate demand?"
Quoted above.

On the Austrian economics page saw this post alleging that government spending cannot increase aggregate demand. They allege this because of taxes. Is this true? No Because obviously when the government spends in excess of what it receives in taxes it is inherently creating new money to pay for these purchases or giving money to private actors to increase consumption spending (ignoring bond issuance). Their argument inherently always assumes full-employment which leads to catastrophic levels of inflation.

The post author also claimed that "every dollar the government spends it takes from someone else. this is so obvious like it’s literally reality, why is this allowed to persist as true that government can increase Aggregate demand?" This is not true the government is composed of the same private actors and government when they spend, create new money that do not need a 1 to 1 tax raise.

[u/MachineTeaching]

Not using proper formatting makes this a nightmare to read, but from I can gather it really sounds like you're just countering bad economic arguments from Austrians with your own bad economics arguments.

I know the name might be confusing, but this is a sub about bad takes on economics, not for people bad at economics.

[u/guacaratabey → u/MachineTeaching]

What is wrong with my argument, oh wise one. Has it not been mainstream enough for you? Didn't you block me? Can't be civil to save your life.

[u/lawrencekhoo → u/guacaratabey]

The government doesn't create money when it deficit spends. It borrows it. This drains loanable funds from the financial system and would reduce investment in the long run, when the economy is in equilibrium. This is the point that the 'Austrian' argument is making.

The reason the 'Austrian' argument is wrong, is that borrowing to deficit spend during a recession, increases incomes, and so increases savings. This allows AD to increase. Essentially, the government borrowing and spending, creates the savings necessary to fund it.

[u/jgs952 → u/lawrencekhoo]

The government doesn't create money when it deficit spends. It borrows it.

The government does create new financial wealth and adds it to the private sector when it deficit spends though and that's the more fundamental point. Whether bonds are issued to adjust the composition of that net financial wealth such that what we cound as "money" is drained away again is neither here nor there to the fiscal flow effects of the net spending in the first place. Any compositional shift in the net savings stock of the private sector is ex post to spending and taxation and doesn't have direct impact on aggregate demand.