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Self-defeating austerity in a figure

downloadable version of the CDF above (non-Mathematica users will need the free CDF Player program, which can be downloaded at no charge at this link)
Wolfram CDF technology allows one to interact with a mathematical diagram in a blog by moving a lever or changing some other control setting (requires download of a free browser plug-in). The CDF above (click here for a giant-sized version) illustrates the perils of a fiscal policy that focuses on deficits, compared to a countercyclical policy that applies stimulus at the appropriate times to stabilize output, at least in this small model. The CDF allows one to compare the effects of two different policy rules for selecting government spending and output levels. Policy 1, which goes into effect when button 1 is chosen, is the countercyclial policy. Policy 0, accessible with a push of button 0, raises spending when the government is running an surplus and lowers it when there is a deficit. In other words, it targets a balanced government budget. The latter policy rule of course moves spending in the wrong direction to keep the economy from spinning out of control. To wit, under rule 0, all pathways one can find by following the arrows lead toward the edges of the diagram.

The slider controls (operated by clicking and dragging, assuming that you have a ordinary mouse) allow you to explore further options for the policy rules, as follows:
(1) the effects of changing the speed at which spending is adjusted to steer the economy toward either the budget-deficit target (rule 0), or normal capacity utilization (rule 1); and
(2) the effects of changing the budget-deficit target for rule 0 to values other than zero. It can be set to either a deficit (positive values) or a surplus (negative values).

The model underlying both versions of the picture is of course a vastly simplified version of a real economy. It is especially important to note that the economy in question has its own currency and does not trade with other countries. Moreover, the distribution of income is held constant throughout the diagram. A separate section of this new site will feature some technical details; also, the journal article in which the model appeared is available on request to colleagues; just write me at the email address on the “About” page for this blog. More complicated versions of the model can even lead to chaos!



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