I really found this to be interesting, particularly in light of recent economic discussions in class and also on the news. Professor Goldsmith outlines a really interesting flaw in the models we learn about in introductory economics classes.. the idea that we put "Government spending" as a part of our AD curve but don't account for the various effects government spending has on different aspects of the economy. I didn't fully understand the advanced theory he uses to explain how he would incorporate this into an introductory textbook, however the idea behind it is very cool. It is imperative that we, learning about econ and the impact various economic decisions have on society, are able to account for all the complexities of Government Spending. I also think his discussion of being able to understand, within those specifics, the difference between the long term and short term effects is very interesting. It would be great to discuss this some more in class.
This relates somewhat to the last article posted in the blog in that it stresses the difference between government spending and government investment even though the two are often clumped together. Goldsmith and Bartlett seem to share the opinion that a distinction between these two is vital, both for analysis of policy success and in addressing our current economic problems. It seems only natural that investment would drive long term growth but this shows how important the government's budget allocation really is.
What I found most interesting about this article was Goldsmith's use of models to discover the impact of consumption-based government expenditures. He uses a case where crowding out occurs from government spending, and as a result interest rate rises and the demand for loanable funds decreases. He concludes that this model proves how government spending harms production in the long run, and thus slows the economy's growth rate. While this model shows how government spending involves a trade off between long and short run prosperity, Goldsmith argues that this may only be true when spending is consumption based. He argues that additional government spending through fiscal policy (not just taxes) will actually shift the LRAS outwards. He believes that this expenditure can grow profit expectations, and thus long run production in the private sector. Walking through this model allowed me to see how types of spending may have very different results based on people's expectations. Households and their assumptions play a large part in how fiscal policy will alter the economy.
Goldsmith provides a good example in this article of how models can lead to false assumptions when taken as absolute truths. Although our basic models tell us that increased spending can limit potential output in the long run by raising interest rates and crowding out private competition, what we observe in the real world does not always necessarily reflect this. In this particular example, the difference between public consumption and public investment is lost in the model, potentially leading to false conclusions about the effects of spending. This goes to show how it important is to think about models in a practical sense and not as infallible laws, as they may appear in a text book.