## Sunday, September 20, 2020

### On Keynesian Economics

My friend asked me re her daughter college Econ assign:

Y (or GDP) = Y = C + I + G        (1)
C is household consumption, I is private investment, G is govt consumption.

C = a + bY           (2)
a is autonomous consumption, b is marginal propensity to consume (mpc).
a > 0 and 0 < b < 1

If government raises spending to address the pandemic by P708 billion and assuming that mpc is 0.35, calculate the expected impact of the government stimulus package to total output.

Y = (a+bY) + I + G

Y = (a + .35Y) + I + P708B

1Y - 0.35Y = a + I + P708B

0.65Y = a + I + P708B

Y = (a + I + 708B)/0.65

Y = a/.65 + I/.65 + P1,089 B.

A better equation for C would be:

C = a + bYd
Yd is disposable income

Yd = Y - T, taxes

C = a + b(Y-T)

Keynesian Econ only emphasizes multiplier effect of high G. Often silent on distortion effect via higher T to finance G + borrowings.

By 2021, if government will raise T by P1.5 trillion by 2021 on top of regular revenues to cover the higher G of P700 B 2021 on top of P700 B in 2020, the distortion can look like this, assuming mpc remains the same:

Y = C + I + G

Y = (a + b[Y-T]) + I + G

= (a + bY – bT) + I + G

= (a + 0.35Y – [0.35*1,500 B]) + I + 700

1Y – 0.35Y = 0.65Y = a – 525 B + I + 700

Y = (a – 525 B + I + 1,400)/0.65

= a/0.65 – 808B + I/0.65 + 1,076

= a/0.65 + I/0.65 + 268 B

Since I has significantly declined (-53% in H1 2020 over H1 2019 level), the overall Y would further decline.
Here's one slide of my talk at China Bank Savings (CBS) last week, September 11.

Keynesian economics is dangerous. Gives the false hope that more govt spending will solve problems created by govt itself in the first place -- the strict, draconian, prolonged and indefinite lockdowns.