Worthless and Weak

So here's an economics puzzle for you...

So we all know that Savings - Investment = Exports - Imports

Savings = Personal Savings + Taxes - Goverment Spending

Therefore we can expand the formula to be:

S - I + T - G = X - M

This has to hold for all economies.

So how is a stimulus possible?

If we increase G then...

Either (personal) Savings increases by the same amount; (Ricardan equivalence holds)

Or Taxes increase by the same amount (which means we aren't even increasing the deficit; at this point we're barely even Keynesians)

Or Investment falls (crowding out)

Or imports increase

Or exports decrease

Or some combination of all

Likewise, if we decrease taxes, somewhere else something has to increase/decrease by the same amount, canceling out the stimulus.

There has to be a flaw here somewhere; if it is true then wouldn't everybody who's against stimulus use this argument? And I can't possibly be the first person to have thought of this; surely somebody else must have an answer somewhere...

Labels: economics