Deficit spending to boost economic growth

Deficit spending to boost economic growth

The current US administration have suggested they want to increase the US budget deficit to enable higher rates of economic growth. What does economic theory state about this idea? “We need to have new deficits because of that. We need to have the growth,” Mulvaney said. “If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.” White House Budget Director, Mick Mulvaney. Source: Bloomberg Basically, this is an…

Irrational behaviour

Irrational behaviour

Classical economic theory assumes that individuals are rational. However, in the real world, we often see irrational behaviour – decisions which don’t maximise utility but can cause a loss of economic welfare. Irrational behaviour is not just isolated to a few ‘irrational individuals’ but can become the dominant choice for most people in society (e.g. Tulip mania/dot-com bubble). Irrational behaviour can lead to market failure, loss of economic welfare and personal issues such as drug addiction and poor health. Irrational behaviour has implications for formulating economic policy. It means economists…

Why Printing Money Causes Inflation

Why Printing Money Causes Inflation

Readers Question: One way to finance government spending is to print money, but printing more money leads to inflation. How economic theory justify this? Summary If the Money Supply increases faster than real output then inflation will occur. If you print more money, the amount of goods doesn’t change. If there is more money chasing the same amount of goods, firms will just put up prices. The Quantity Theory of Money The Quantity theory of…

Irresponsible tax cuts

Irresponsible tax cuts

The current US administration is proposing tax cuts which The Committee for a Responsible Federal Budget, estimate it will include $5.8 trillion of total tax cuts over the decade and a net cost of $2.2 trillion through 2027. The problem with these tax cutsIt is unclear how these tax cuts will be financed. An ageing population is putting upward pressure on government spending. Will increase the deficit and national debt at a time when economy is growing – it is the stage of the economic cycle when the deficit and…

Should we tax robots?

Should we tax robots?

Automation and AI have been called the fourth industrial revolution. Robots replacing the jobs of human labour will increase efficiency and enables higher economic growth But, others are concerned that rapid automation can create unequal outcomes, with some losing their job and struggling to gain new forms of employment. A robot tax would, in theory, make the winners from automation pay towards compensating the ‘losers’ of automation.However, critics of a robot tax argue that it will stifle innovation and encourage…

Cracking Economics – new book

Cracking Economics – new book

I have published a new book “Cracking Economics” (Cassell Octopus Press) It is an overview of economics, split into easily manageable topics. The book is illustrated throughout with diagrams, graphs and photos to give a visual explanation of the text and economic ideas. It is aimed at anyone with an interest in economics. Even a beginner in economics should be able to get something from the book. It is also very suitable for A-level students. There is significant overlap with the…

Human Capital definition and importance

Human Capital definition and importance

Human Capital is a measure of the skills, education, capacity and attributes of labour which influence their productive capacity and earning potential. According to the OECD, human capital is defined as: “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances”.Individual human capital – the skills and abilities of individual workers Human capital of the economy – The aggregate human capital of an economy, which will be determined by national educational…

Causes of business cycle

Causes of business cycle

The business or trade cycle relates to the volatility of economic growth, and the different periods the economy goes through (e.g. boom and bust), There are many different factors that cause the economic cycle – such as interest rates, confidence, the credit cycle and the multiplier effect. Some economists also point to supply side explanations, such as technological shocks.This graph shows quarterly economic growth in the UK 1979 to 1995. It shows two recessions 1980 and 1990/92, and the periods…