Introduction

The models of economic intervention pick up from where the models of the simple economy left off. It contains additional assumptions that relate to government consumption. I should point out before you proceed that the term government consumption refers to the rate at which government uses resources (in terms of economic units per year). At this point the model has nothing to do with taxation, borrowing, or the quantity of money. Initially this model depicts the impact of government "spending"—regardless of how government finances that spending.

I have based this model on the assumption that government directs economic units toward consumption; it does not invest them. Government consumption, therefore, contributes nothing to the improvement of production.

I have chosen to ignore the very few productive uses of resources by government, such as roads and bridges, because it amounts to such a small percentage of government spending and the timing of that type of "spending" calls its investment merits into question. The largest part of the government budget consists of defense, Social Security, Medicare, and other transfer payments. These all consist of either direct consumption of resources or the transfer of resources to people for the purpose of consumption. The construction of roads and bridges, done primarily by the private sector, does not overcome the net consumption by government of economic resources.

I will describe under the Variables tab the details of new and changed variables in this model.

Variables

To the basic structure of the models of the simple economy I have added a few variables and changed a few as I will describe below:

New Variables

Government Consumption

The flow titled government consumption consists of the rate at which economic units are taken from Savings based on the fractional government consumption rate times the production rate. This calculation is similar to the calculation for the private consumption rate (the retitled flow that I will describe below.)

Links from government consumption to the private consumption rate and the total consumption rate provide information for calculations described below.

Fractional Government Consumption Rate

The fractional government consumption rate consists of a decimal applied to the production rate used to calculate government consumption.

Total Consumption

The total consumption variable consists of a sum of the private consumption rate and the government consumption. This variable contains the total consumption rate of the entire system.

Changed Variables

In addition to the new variables mentioned above I have changed the names and nature of a couple of variables that were included in previous models:

Private Consumption Rate

I have changed the name of the consumption rate to private consumption rate to distinguish it from government consumption. I have also adjusted the calculation so that the fractional consumption rate is now applied to the production rate less government consumption.

This means, for the sake of this model, that the system consumes the same percentage of the production available to their consumption, i.e. private production less government consumption.

Growth Rate for Total Consumption

In previous models I had a variable titled "consumption rate growth." I have replaced that variable with one which I have titled "growth rate for total consumption." It performs the same calculation as the previous model based on total consumption.

Plotting this variable helps to distinguish minor changes in total consumption that may not appear readily visible in the plots of the consumption rates themselves.

Simulation

You now have enough familiarity with the structure of this model and the operation of Insight Maker that you can play a little on your own.

By adjusting the factional consumption rate and the factional govt consumption rate you can vary the private consumption rate and government consumption respectively. See the effects of changes in these two variables. Try a high consumption rate with low government consumption and vice versa. Try other combinations as you like.

What happens if private consumption turns negative in response to government consumption —the equivalent of government "spending."

Click the run simulation button and you will again see the values mapped out in the simulation panel as you did in the preceding models. This model allows you to adjust two variables when you run simulations—fractional consumption rate and fractional government consumption rate.

Savings, Production & Consumption

Under the savings, production & consumption tab you'll see results for the three variables plotted: Savings, production rate, and total consumption. Based on the initial values you will see all of these curves move upward to the right at varying rates. See how these values and the slopes of these lines vary as you change the value of the fractional government consumption rate (and if you desire the fractional consumption rate).

Consumption Rates

On this chart you will see the private consumption rate and total consumption plotted. The difference between the private consumption rate and total consumption consists of government consumption. You will notice how the gap between these values varies according to the value you place in the fractional government consumption rate.

Consumption Growth Rates

This chart plots the growth rate for the rate of consumption (i.e. the slope of the total consumption rate curve). As you run simulations look closely at the differences in the values. You will notice lower rates of growth for total consumption in conjunction with higher rates of fractional government consumption. More evidence of the drag on long-term consumption created by government.

Fractional Consumption Rates (Two)

Fractional Consumption Rate

The fractional consumption rate in this model has been set at a constant 0.9 (or 90%) of production rate. Although you have the ability to change this value, you may want to leave it as is and adjust only the fractional government consumption rate discussed below.

Fractional Government Consumption Rate

The objective of this model is to demonstrate the effect of government consumption on other variables in the model. The initial value for the fractional government consumption rate has been set to 0.2 (20%). We suggest that you run one simulation leaving the value as set; then run succeeding simulations with varying values.

Conclusion

After every increase in government consumption (what most people would call government spending) the rate of increase in total consumption slows. Government spending, no matter how it's financed, creates a drag on long-term consumption.

Not what the government "stimulators" want to hear.

Now, move on to the next version of the intervention simulation and see the effect that the upward ratcheting of government consumption has on our simple economic system.

Now a look at scenario 2…