Ravi
Diamond Member
Makes perfect sense. This is why many businesses have credit lines. There are times when you aren't bringing in enough to pay your expenses so you borrow to do so with the anticipation of paying off the loan when things pick up. That way you don't lose business or employees and are set to go when the economy strengthens.No it shouldn't. Financial principles are that governments should borrow when the economy is in contraction and save when the economy is in expansion. Households and businesses often borrow or dip into savings when income falls in anticipation of growing income later. Government should do the same.
Oh my, that made me laugh. You have got some funny posts, Toro. You make a good Keynesian.
No. You've got it wrong. It's not Keynes. People decreasing net savings is Milton Friedman's Permanent Income Hypothesis.
Permanent income hypothesis - Wikipedia, the free encyclopediaThe permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.
Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.
In Friedman's permanent income hypothesis model, the key determinant of consumption is an individual's real wealth, not his current real disposable income. Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income.
People alter their consumption if they believe their income is going to permanently change. If they do not believe that, they don't change their consumption. So if you lose your job and you think you will get a similar one within a few months, you don't change your consumption (much) and you draw down your net savings to support your life style. But if you think you can't get a new job that pays as much, then you change your consumption.
So if you use people and businesses as the yardstick to measure what governments should do, then according to the Permanent Income Hypothesis, since most people won't cut back unless they believe there has been a structural change in their incomes, governments shouldn't either. And that means funding consumption during a recession with debt. BUT it also means running surpluses during good times and paying off that debt.