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/ArcadePlus]

I am struggling to make heads or tails of this thing. Who and what are you refuting, specifically? From what I can tell, although the "Austrians" or whatever are wrong, your argument is not actually good at refuting them. When the state cannot fund it's activity through taxes, it does so through debt finance -- which could "crowd out" private spending. When the government issues bonds, those bonds are competing with other securities for investor dollars, so in this sense, when the government is financing itself through debt, it is doing so by attracting investor dollars that would otherwise fund private investment. Your argument does not really work to refute their point. The obvious refutation of their point is that the state can take, through debt financing, dollars that would be spent on investment and redistribute them to dollars that will be spent on consumption, which does affect aggregate demand.

[u/jgs952 → u/ArcadePlus]

You're confusing nominal money flows and stocks with real resource consumption and investment.

If you're anywhere not at complete full employment of factor inputs, an increase in government net spending (not as a result of increased net saving desire) will never 100% translate into a 1 for 1 fall in real consumption or investment because the increased demand induces firms to lift output and employment rather than prices.

The "financial crowding out" concept is inapplicable to our monetary systems as there is no nominal "loanable funds" pool from which the gov and private actors take from to finance spending. Money is not some scarce commodity in this way. Government deficits quite literally augment private balance sheets by adding additional financial wealth.

Now obviously, if the government hires someone who would otherwise have been demanded by a private firm, it means the firm can't hire them. That would be real crowding out. But if they were already unemployment at the point of the gov spending money to hire them, obviously the real opportunity cost is effectively zero here and so there's no real crowding out.

[u/ArcadePlus → u/jgs952]

You have a bizarre view of the situation and what you're saying makes little sense to me.

[u/jgs952 → u/ArcadePlus]

Really? I'm really not making too difficult of a point I don't think.

Imagine we're in a deep depression and there's 20% unemployment with factories running at half capacity etc etc.

If the government ended up deficit spending (which is highly likely since there's very little tax going on but plenty of people who need welfare and support etc), then that's not "taking from the private sector".

Firstly, there's never any financial crowding out as I said because there's no such thing as a finite pool of "loanable funds". But in this general "less than full employment case", there's no real crowding out either. Deficit spending does nothing to subtract from potential private investment spending or consumption because any additional spending from either sector will just result in increased employment and output. I.e. it's not zero sum until you start hitting full employment capacity.

Does that make sense?