- Callahan gets it right.
- Jonathan responds to my claim that raising taxes is an austerity policy. He has a good graph of idle resources that relates to my idea that unemployment is not the same thing as a labor surplus. Except, if I were to put a dollar figure on it, I think I'd shade the transpose of the triangle he shades (factors of production to the left of equilibrium are being used - they're not idle - and what's lost is the productive capacity extending all the way up to the full employment demand curve). This is the crux of the point:
"However, within the context of depressed aggregate demand, this is no longer the case. The entire problem is that nominal expenditure has fallen, which is caused by either a failure in financial intermediation (unused savings) or an increase in the demand for money (basically also unused savings). If we abstract from real goods for a minute, the entire issue originates from the fact that there is a portion of aggregate income which is left unused. If there is no intention of using this income, then taxing it and redistributing it does not seem contractionary. In fact, it is expansionary, since it puts to use idle income."
I may be misunderstanding the argument, but I don't think this is right. It's not that some income is unused. It's that the income is unearned. Nominal spending (i.e. - nominal income) declines. You can look at the decline, call it "unused" and figure it can be taxed away relatively costlessly. The income isn't there and that's the problem.
Now, a better way of saying this might be to talk specifically about income that is held liquid - i.e. income that IS EARNED but then isn't subsequently spent (not income to the right of the equilibrium point that is never earned). You're basically raising the cost of staying liquid. This might have merit. That's the idea of a negative IOR, after all - and Gesell's evaporating currency. I'm not sure how to do this, though, without reducing spending further.
Now, the traditional way of saying all this is that if you tax a dollar from a consumer with an MPC that is less than one and spend it by a government that has an MPC of one, you're still coming out with a modest stimulus. This is true, and it's more or less what Jonathan is getting at. However, I don't think that makes it a non-austere policy. That argument basically boils down too "when you finance spending with taxes you're only elimintinating 80% of the stimulative effect - not 100%, so it's still stimulative". In my book, any policy that gets rid of 80% of a given stimulative effect is an austerity policy. You are reducing aggregate demand relative to the counterfactual. That's austerity.