The new taxes would decrease the amount of money people have to spend, but this would be exactly balanced by an increase in money available to spend due to people no longer using their money to buy government bonds.
This is exactly my point. The only difference (ideally) between the current world and 4. is the on-paper accounting.
If the supply of government bonds is reduced, most of the money that would’ve gone into gov bonds will go into other investments (because if you want to, e.g., save for retirement, the unavailability of gov bonds is not going to stop you from finding some way to save for retirement). Investment has a different effect on the economy than consumption (e.g., choosing to have a kid) does, and your policy proposal replaces consumption with (private) investment.
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.
This is exactly my point. The only difference (ideally) between the current world and 4. is the on-paper accounting.
If the supply of government bonds is reduced, most of the money that would’ve gone into gov bonds will go into other investments (because if you want to, e.g., save for retirement, the unavailability of gov bonds is not going to stop you from finding some way to save for retirement). Investment has a different effect on the economy than consumption (e.g., choosing to have a kid) does, and your policy proposal replaces consumption with (private) investment.
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.