Re: Refuting supply-side economics

From: William F Hummel (wfhummel_at_comcast.net)
Date: 09/27/04 

Date: Mon, 27 Sep 2004 15:58:19 GMT

On Mon, 27 Sep 2004 02:59:52 GMT, William P.F
<catastrophic_success@wh.con> wrote:

>On Fri, 24 Sep 2004 20:03:16 GMT, William F Hummel
><wfhummel@comcast.net> wrote:
>
>>On Fri, 24 Sep 2004 18:56:39 GMT, William P.F
>><catastrophic_success@wh.con> wrote:
>>
>>>On Thu, 23 Sep 2004 16:11:55 GMT, William F Hummel
>>><wfhummel@comcast.net> wrote:
>>>
>>>>On Thu, 23 Sep 2004 05:30:57 GMT, William P.F wrote:
>>>>>
>>>>>Therefore its doubtful that debt/gdp will remain bounded. Direction is
>>>>>also important. After WWII the ratio was going down now its going up.
>>>>
>>>>On the contrary it is very unlikely the debt/GDP ratio will become
>>>>unbounded. A little algebra will show that the equilibrium value of
>>>> debt/GDP = (deficit/GDP) / (rate of growth of GDP)
>>>>
>>>"Equilibrium value"???
>>>I don't know where you pulled this equation out of but it is
>>>conceptually and algebraically wrong. very wrong. If you simplify it
>>>you get this:
>>>
>>>Deficit = Debt * (rate of growth of GDP)
>>>
>>I thought you might question the equation. But I am surprised you
>>would stick your neck out and declare it to be conceptually and
>>algebraically wrong.
>
>Then maybe you misrepresent/misunderstand it.?
>
>>I didn't develop the equation myself.
>> It appears in the book "The
>>Misunderstood Economy" by the late Robert Eisner of Northwestern U.
>>It is so important conceptually that I will recap Eisner's analysis to
>>dispel any doubts about its validity:
>>
>>Define B = the public debt, D = the deficit, and Y = GDP.
>>
>>Using d to represent the differential operator, we note that
>> d(B/Y) = (Y*dB - B*dY)/Y^2 = dB/Y - (B/Y)(dY/Y)
>>
>>For B/Y to remain constant, B must grow at the same rate as Y, or
>> dB/B = dY/Y
>>
>And here is were it breaks down because here you're assuming
>politicians do derivative calculus before they vote.

Good grief! This is simply a step in the proof of the equation's
validity. Are you now claiming the proof is invalid because
politicians don't do derivative calculus?

>Do you think
>congress reads Eisner before they vote on the budget? Are you writinng
>law here or are you making suggestions to congress?

You are really getting carried away now. I have not been addressing
policy issues. Rather I have been trying (apparently without success
in your case) to purge misconceptions in monetary economics so that
people can get their heads on straight about sound policy.

Policy makers can disagree about assumptions, but they shouldn't fool
themselves into thinking 1 = 2.

>There is NOTHING
>that dictates to congress to only grow the debt by an amout less than
>or equal to GDP growth. Look at the numbers for the years from 2001
>to 2003 if you don't believe me. Your math is supposed to work
>regardless of whether congress feels responsible.

The mathematical proof is independent of what people do or think.
Your attempt to make the validity of the equation dependent on policy
is absurd.

>This whole thing is
>based on a pipe dream, and wishful thinking. It does not say anything
>about what the debt or the deficit will be in the future. IOW, your
>equation has no predictive value of the debt/deficit or whether these
>will be disruptive or not to the economy.

How silly can you get? Obviously the equation does not predict what
course policy makers will take. An equation can only predict when one
inputs assumptions and those assumptions are reasonably accurate.

>Let me put it another way.
>All your formula is saying is how much the public debt can be
>increased assuming a certain GDP growth rate. However, NOTHING in it
>says your assumptions will pan out.

Now you are beginning to catch on.

>There are more factors that you
>have to account for so that you can predict that additional debt in
>the future will continue to be "affordable".

Affordability has nothing to do with it. The equation itself makes no
predictions, and is valid as it stands.
>
>>Substituting dB/B for dY/Y into the first equation sets d(B/Y) to
>>zero.
>>
>>Noting that D = dB, that is the deficit is the change in B:
>> d(B/Y) = D/Y - (B/Y)(dY/Y) = 0
>>
>>>From which B/Y = (D/Y)/(dY/Y)
>>
>>QED.
>>
>>In other words, the equilibrium debt/GDP ratio
>
>What exactly do you mean by equilibrium?

    dB/B = dY/Y as noted in the proof.

[Further irrelevancies deleted.]

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