Editorial
Macroeconomics Summarized
by Fred E. Foldvary, Senior EditorMacroeconomics is about the total production of an economy, the major variables determined by the market, and the economic policy of government. The total output is called the GDP, gross domestic product. Macroeconomics deals with the growth of GDP and its cycles.
To measure economic output over time, we need the real GDP, subtracting out inflation. Economic growth comes from an increase in population, capital goods, technology, and economic efficiency. Economically, investment is an increase in the stock of capital goods or in human capital (education and training). Investment comes from savings.
To have high growth, we need to avoid penalizing savings and investment with taxes. Taxes on income, consumption, and sales all penalize investment and production. Taxes on land rent stimulate investment and promote economic efficiency. Government should not borrow for current consumption, but only for productive investments. When private enterprise can provide the goods, government should stay out of that industry.
A person is unemployed if he is willing and able to work, but cannot find a job. The cause of unemployment is intervention, barriers that make labor too expensive, such as income taxes and minimum wages. Other policies that increase unemployment include generous unemployment compensation and laws making it difficult to fire people.
We now have fiat money, based on nothing but law and custom. In the U.S., the central bank is the Federal Reserve system, which creates money by buying U.S. Treasury bonds and paying for them by increasing bank reserves, or the funds banks have in the Federal Reserve. When money is created faster than the GDP is growing, that is monetary inflation that causes price inflation. A "free banking" system has no central bank, and avoids inflation with money based on gold, and bank notes redeemable into gold.
The "balance of payments" is the accounting of exports and imports. It balances to zero. If a country imports more goods than it exports, this is a "trade deficit" offset by a surplus in the capital account, assets such as real estate, stocks, and bonds sold to pay for the imported goods. Trade imbalances are also adjusted by variations in the exchange rates of currencies.
There is a structure of capital goods from rapid turnover such as inventory to slowly maturing such as shopping centers. When interest rates are low, there is more investment in the slowly maturing capital goods. An expansion of money temporarily reduces interest rates, leading to more construction and other long-lasting investments, but rising prices later make these turn out to be bad investments. Land speculation sets in to take advantage of rising land prices. High prices and rising interest rates reduce profits, so investment slows down, leading to a recession.
To reduce poverty, promote growth and efficiency, and eliminate depressions, eliminate taxation and generate public revenue from land rent and pollution charges. Switch from central banking and government fiat money to gold or private currency, with free-market banking. Free banking and the public collection of rent are the macroeconomic policies that promote smooth growth, full employment, and economic justice.
Copyright 2002 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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