Cutbacks can have a counterintuitive effect. The government knows precisely how much it custs in spending. However, it cannot know the extent to which tax revenues shrink in a non-linear complex economic system as the economy contracts. In addition, the treasury has to spend more as automatic stabilizers activate and payments are made to an increasing number of unemployed workers. The effect of this is that initially the deficit shrinks, but later it rises as tax revenues fall short of expectations and more spending takes place. The ironic part is that often the very indicator that promted austerity measurs, the defcit to GDP ratio, becomes worse than it was at the outset. We could observe this in Spain and Portugal where planned deficits have been repeatedly missed, as austerity measures (fiscal cutbacks) were introduced to deal with the effects of the 2008 financial crisis.
CUTBACKS OFTEN MAKE FISCAL DEFICITS WORSE
This model
shows the basic functioning and dynamics of a 'modern monetary system'.
The non-government
sectors, consisting of the private and foreign sectors initial y starts with
zero currency units. It is important to realize that after creating a new currency the government
must first spend currency units into the economy before they can be used:
without currency units the private sector could not even pay taxes! A government
that has its own freely floating currency can create a much money as it wants.
It does not need tax receipts to finance its spending, and any money it spends into
the economy above that collected in taxes represents income for the private
sector. The model show that the government initially created 9 trillion money units,
but spent only six trillion into the economy. The six trillion showed up as a government
deficit but as wealth in the non-government sector.
Since the government
can create as many money units as it wishes and transfer them to
the private sector to ensure an adequate
level of demand in the in the economy, austerity is unnecessary: money is available,
though real resource may be scarce. This also shows that the government can
contribute actively towards the creation of prosperity.
Please note that this model was originally
created by Gene Bellinger, IM 3206, from which this version was cloned.
Clone of Clone of Austerity vs Prosperity
A simple implementation of a Dynamic ISLM model as proposed by Blanchard (1981), and taken from An introduction to economic Dynamics - Shone (1997) - chapter 5. This model might serve as a framework to evaluate economic policies over GDP growth.
Dynamic ISLM Model
Simple causal loop diagram of a simple interest savings account in Dutch.
Causaal verband diagram van een spaarrekening - enkelvoudige interest
Adapted from Hartmut Bossel's "System Zoo 3 Simulation Models, Economy, Society, Development."
Population model where the population is summarized in four age groups (children, parents, older people, old people). Used as a base population model for dealing with issues such as employment, care for the elderly, pensions dynamics, etc.
Clone of Z602 Population with four age groups
Regulation of resource allocation to service in response to service quality. A non-price-mediated resource allocation system. From Sterman JD Business Dynamics p172 Fig 5-27
Clone of Service Quality Balancing Loops
This model shows the structure and operation of a simple economy. It can represent economic systems at different levels of abstraction (e.g. a single good, a group of goods, multiple groups, & an "economy.")
In summary, lower rates of consumption (based on production) result in higher rates of production and consumption in the long-run. Rates of consumption over 100% of production will diminish the savings stock and eventually cause rates of production and consumption to fall.
Clone of Simple Economy: Model 6
This model tries to replicate the economy as is considered in LTG "Limits to Growth" by Meadows et al.
Clone of Simple Economy: Model 5
HANDY Model of Societal Collapse from Ecological Economics
Paper see also D Cunha's model at IM-15085
Clone of Human and Nature Dynamics of Societal Inequality
Goodwin cycle IM-2010 with debt and taxes added, modified from Steve Keen's illustration of Hyman Minsky's Financial Instability Hypothesis "stability begets instability". This can be extended by adding the Ponzi effect of borrowing for speculative investment.
Clone of Minsky Financial Instability Model
Launch page for Macroeconomics Textbook 2019 by Mitchell, Wray and Watts. There is also a book companion site
Macroeconomics Textbook Overview
Implementation of a DSGE Model solved in a Macroeconomics class by Harald Uhlig (
link), using Rational Expectations, in this case, the Hansens Real Business Cycle Model.
It shows the capacity of implementing Dynamic Stochastic General Equilibrium Model Analysis using System Dynamics.
Clone of Real Business Cycle Model (DSGE)
Goodwin cycle IM-2010 with debt and taxes added, modified from Steve Keen's illustration of Hyman Minsky's Financial Instability Hypothesis "stability begets instability". This can be extended by adding the Ponzi effect of borrowing for speculative investment.
Clone of Minsky Financial Instability Model
Adapted from Hartmut Bossel's "System Zoo 3 Simulation Models, Economy, Society, Development."
Population model where the population is summarized in four age groups (children, parents, older people, old people). Used as a base population model for dealing with issues such as employment, care for the elderly, pensions dynamics, etc.
Clone of Z602 Population with four age groups
Adapted from Hartmut Bossel's "System Zoo 3 Simulation Models, Economy, Society, Development."
Population model where the population is summarized in four age groups (children, parents, older people, old people). Used as a base population model for dealing with issues such as employment, care for the elderly, pensions dynamics, etc.
Clone of Z602 Population with four age groups
Simulating Hyperinflation for 3650 days.
If private bond holdings are going down and the government is running a big deficit then the central bank has to monetize bonds equal to the deficit plus the decrease in private bond holdings. We don't show the details of the central bank buying bonds here, just the net results.
See blog at http://howfiatdies.blogspot.com for more on hyperinflation, including a hyperinflation FAQ.
Clone of Hyperinflation Simulation
MODERN MONETARY THEORY SHOWS HOW FULL EMPLOYMENT CAN BE ACHIEVED!
POTENTIAL GDP is a level of overall spending - by the government and the non-government sector - at which there is full employment. If the economy is not operating at
its potential, then the private sector
has failed to invested or spend enough to generate the necessary growth nor has income from net exports contributed enough. This only leaves the government to close
the spending gap. Conceptually, a government disposing of its own freely
floating currency could act using two powerful tools - spending in excess of tax revenue, and taxation - to ensure that the gap between the actual economic activity and potential
GDP is quickly closed. Achieving the full employment
that prevailed for 30 years between 1945 and 1975 in western economies is definitely possible!
MANAGING FULL EMPLOYMENT
Adapted from Hartmut Bossel's "System Zoo 3 Simulation Models, Economy, Society, Development."
Population model where the population is summarized in four age groups (children, parents, older people, old people). Used as a base population model for dealing with issues such as employment, care for the elderly, pensions dynamics, etc.
Clone of Z602 Population with four age groups
Like Model 6 this model shows the operation of a simple economy. It demonstrates the effect of changes in the fractional rate of consumption (or the converse the fractional rate of saving.)
In summary, government "spending" tends to slow growth of production and consumption.
Simple Economy: Model 7
Simulation of Goodwin01 Minsky Model CLD in IM-172002 Compare with Part3 slide 3 of presentation in patreon. See extension Goodwin02 at IM-172145
Goodwin Minsky Simulation Keen Economic Dynamics Aug2019
Sandbox for testing InsightMaker features using pipeline Construction & ROW land conversion as a driver of changes in ecosystem service value.
ESV Test
Very basic stock-flow diagram of compound interest with table and graph output in interest and savings development per year. Initial deposit, interest rate, yearly deposit and withdrawal can all be modified in Dutch.
Voorraad-stroom diagram - sparen - samengestelde interest
Adapted from Hartmut Bossel's "System Zoo 3 Simulation Models, Economy, Society, Development."
Population model where the population is summarized in four age groups (children, parents, older people, old people). Used as a base population model for dealing with issues such as employment, care for the elderly, pensions dynamics, etc.
[WIP] Z602 Population with four age groups, Czech Republic
Simulating Hyperinflation for 3650 days.
If private bond holdings are going down and the government is running a big deficit then the central bank has to monetize bonds equal to the deficit plus the decrease in private bond holdings. We don't show the details of the central bank buying bonds here, just the net results.
See blog at http://howfiatdies.blogspot.com for more on hyperinflation, including a hyperinflation FAQ.
Clone of Hyperinflation Simulation
