Economic Knowledge (2) — Public Debt Ratio & Deficit, Living Standard & Wage-Share in GDP

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Continued from here.

I have tried to figure out the following two questions from Bill Mitchell's most recent quizz:

1. If the inflation rate is steady and the central bank maintains a constant nominal interest rate, then under current institutional arrangements where governments match deficit spending with debt issuance to the private sector, the public debt ratio may fall even if the government deficit doubles (say, from 2 to 4 per cent of GDP).

True or False?

My answer: True.

Brief explanation of my answer:  

Government deficits may have a stimulating effect on the economy. In principle, therefore, it is conceivable that even an increaseing government deficit may bring about such improvement of economic activity as to expand GDP to a larger extent than public debt, thereby actually causing a diminuition in the ratio of public debt to GDP.

2. The neo-liberal era has been characterised by a declining wage share in national income in many nations. This means that the real living standards of workers have been systematically eroded in these nations.

True or False?

My answer: False.

Brief explanation of my answer:

This is a treacherous question. For at least two reasons. If standards of living fall, this is likely to be accompanied by a falling wage share in GDP. Also historically, this is what has happened, not least over the last 30 years, in many of the world's richer countries.

But a strictly analytical approach to the question should reveal that it is in principle absolutely possible for the standard of living of workers to rise while the wage share in national income declines—I suppose, contemporary China is a case in point, and post-millenium Germany, for that matter. If participation of wage earners in productivity growth is sufficient to enhance real wages, their standard of living will increase, even when the wage share in national income may fall compared to the share of non-wages.

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I shall deal with the third question (in this weekend's edition of Bill Mitchell's quizz) in a separate post. 

Continued here.