Productivity, Growth and The Deficit
Keynesians love to say that the deficit will come down with growth. This is 50% wrong, because when Keynesians talk about “growth” we know they mean real GDP growth 100% of the time. But it is nominal GDP growth which determines the course of the public finances; tax revenue follows nominal GDP and NGDP is the denominator in debt/GDP. (When we talk about “debt/GDP” it is the only time that “nominal” is implicit!)
Japan had positive real GDP growth for some of its “lost decade”; but it never had any nominal GDP growth. That is why Japan’s public sector debt/GDP went off the charts; not merely because Japan had insufficient real growth (though that is probably also true).
Keynesians are also 50% right, because under inflation targeting real GDP growth “determines” nominal GDP growth. This assumption is embedded in many macro models; we read that improving productivity will improve the public finances, which is true because higher productivity ⇒ higher real GDP growth ⇒ higher nominal GDP growth – if inflation is always held constant.
Maybe I’m beating a dead horse here, but Keynesians should be more open about the insane implications of macro models which embed the assumption of price stability. For example, such models tell us that it is roughly true that the collapse in productivity since 2007 has caused the collapse in the public finances.