Because the economy seems to have the property that when you change a bunch of things at once it takes a while to reach a new equilibrium.
As you’ve noted, the people reducing their consumption (due to higher taxes) and different from the people increasing their consumption (due to buying fewer bonds). I expect the people lowering their consumption will react more quickly due to loss aversion leading to a short-term drop in aggregate demand.
The question is, can we find a mechanism to produce this adjustment instantly and painlessly.
As an example of the sort of thing, I’m thinking off: normally deflation causes unemployment in an economy due to phillips-curve effects. But if a country simply “crosses off zeros” from their currency, this has basically no effect on the real economy despite technically causing massive deflation.
The question is, might there be a “crosses off zeros” equivalent for lowering the national deficit.
But then… Why are you expecting point (2) to follow?
Because the economy seems to have the property that when you change a bunch of things at once it takes a while to reach a new equilibrium.
As you’ve noted, the people reducing their consumption (due to higher taxes) and different from the people increasing their consumption (due to buying fewer bonds). I expect the people lowering their consumption will react more quickly due to loss aversion leading to a short-term drop in aggregate demand.
The question is, can we find a mechanism to produce this adjustment instantly and painlessly.
As an example of the sort of thing, I’m thinking off: normally deflation causes unemployment in an economy due to phillips-curve effects. But if a country simply “crosses off zeros” from their currency, this has basically no effect on the real economy despite technically causing massive deflation.
The question is, might there be a “crosses off zeros” equivalent for lowering the national deficit.