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When Expansionary Fiscal Policy is Contractionary: A Neoklassikal Scenario

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  • WILLIAM COLEMAN

Abstract

The paper presents a simple theoretical account of how an increase in government purchases may reduce total employment. It is shown that in a ‘neoklassikal’ model – in which utility maximising consumption choices are combined with a fixed‐coefficient technology – an increase in government purchases will reduce the demand for labour at the given wage rate. The reasoning turns on the link between optimising consumption behaviour and employment in the investment sector. An increase in G will (as a matter of arithmetic) make current consumption scarcer relative to future consumption; and thereby reduce the valuation of future consumption in terms of current consumption. As labour is valued according to its contribution to future consumption (through its contribution to capital formation), it follows that an increase in G will reduce the wage at any given volume of employment.

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  • William Coleman, 2010. "When Expansionary Fiscal Policy is Contractionary: A Neoklassikal Scenario," The Economic Record, The Economic Society of Australia, vol. 86(s1), pages 61-68, September.
    • Handle: RePEc:bla:ecorec:v:86:y:2010:i:s1:p:61-68
    DOI: 10.1111/j.1475-4932.2010.00678.x
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    3. G. C. Peden, 1984. "The “Treasury View” on Public Works and Employment in the Interwar Period," Economic History Review, Economic History Society, vol. 37(2), pages 167-181, May.
    4. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
    5. Tony Makin, 1998. "When Contractionary Fiscal Policy Is Expansionary," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 5(4), pages 419-426.
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    Cited by:

    1. Ross Guest & Anthony J. Makin, 2011. "In the Long Run, the Multiplier is Dead: Lessons from a Simulation," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 18(1), pages 13-22.
    2. Anthony J. Makin, 2015. "Expansionary Versus Contractionary Government Spending," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 56-65, January.
    3. Ross Guest & Anthony J Makin, 2012. "Fiscal stimulus: an overlapping generations analysis," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 1-25, September.
    4. Ross Guest & Anthony J. Makin, 2011. "The Dynamic Effects of Fiscal Stimulus in a Two Sector Open Economy," DEGIT Conference Papers c016_045, DEGIT, Dynamics, Economic Growth, and International Trade.
    5. Ross Guest & Anthony Makin, 2013. "Special Issue. Guest Editor: Zhihao Yu," Review of Development Economics, Wiley Blackwell, vol. 17(3), pages 609-626, August.

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