OMNILIBRIUM
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julia1 5 May 2015 05:39 PM
62%

There are two scenarios: (1) this is a one-time occurrence. When economy improves, you pay down the debt, and everything is OK; and (2) this happens on a regular basis, and the debt only accumulates. I think the author meant (2). I guess the important questions are: (1) does deficit spending really improve the economy; and (2) if it does, does the government pay the debt.

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DanielLC 5 May 2015 10:23 PM
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Even if it is on a regular basis, it still isn't necessarily a bad idea. If you're offered a loan at 2% interest per year, and you can invest the money for a return of 3% interest per year, then you should keep getting in debt and not try to pay it off.

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julia1 6 May 2015 04:56 AM
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If you invest - yes, I agree. If you keep spending what you borrow, and keep borrowing more, this can become a problem.

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DanielLC 6 May 2015 01:42 PM
60%

Nobody's suggesting we do this so people can have more stuff. It's to help the economy. I'd argue that the moment you stop borrowing it will reverse any improvement in the economy that it caused, but if it wasn't for that, it would be an investment. The GDP increases exponentially. If you increase it now, it will be increased by a larger amount later.

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melian 7 May 2015 07:04 PM
70%

The GDP increases exponentially.


Not necessarily. It obviously didn't work for Greece.

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DanielLC 8 May 2015 12:34 PM
62%

Here is a graph of Greece's real GDP per capita. I was hoping to show that, despite the drop off near the end, it's still clearly generally increasing exponentially. But if you click that button to switch between linear scale and log scale, it's actually closer to a linear increase.

Out of curiousity I also looked at USA's real GDP per capita, which seems to be approximated very well by both linear and exponential increases, and the graph for the entire world, which is clearly linear. Extrapolating from that, the world GDP was zero in 1945. If you just look at the total, then it's about as close to linear and exponential.

Weird.

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melian 8 May 2015 02:00 PM
70%

Thanks for the links.

GDP certainly can increase exponentially, but it does not always do so. In fact, for the most of the human history it did not. Basically, GDP equals economically productive population times average productivity times the employment level. In the XXth century many countries experienced exponential growth of economically productive population with simultaneously rising productivity. This produced an exponential growth of GDP. These days in almost all Western countries the economically productive population is stable or declining, while the average productivity is pretty stagnant. Massive government stimulus can increase consumer spending and thus prevent employment levels from falling but this does not lead to an exponential growth of GDP. Therefore eventually the ratio of public debt to GDP will reach an unsustainable level resulting in government bankruptcy.

In Japan where fertility dropped earlier than in the west, the exponential growth of GDP ended 25 years ago. Other developed countries are catching up now.


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DanielLC 8 May 2015 01:05 PM
60%

I can't edit posts, so I'll just add another one. I also looked at China. That one's definitely exponential, and freakishly fast. I tried a few others, and most of them are pretty linear.

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julia1 7 May 2015 07:22 PM
62%

Is there any known statistics about how often, and by how much the GDP increases when government stimulates economy through deficit spending? At the very least, this better be enough to pay back the new debt over some reasonable period of time. If this doesn't happen, this is a problem - the debt can't accumulate indefinitely.

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