I took the circular flow model from the previous post and I tested it for current conditions.
- Effective demand of $16.1 trillion (real 2009 dollars)
- Effective labor share of 74%.
- Overall savings rate below 5%.
- Consumption 71% of GDP.
- Government expenditures 18% of GDP.
- Net taxes (taxes - transfers) are 14% for both labor and capital.
- Marginal propensity to invest is 13%.
I put these constraints into the circular flow model and ran the Solver function in excel. The solver function asks for a target value.
- Target value is setting GDI equal to GDP. GDI is out-going income from firms. GDP is in-coming expenditures to firms from the economy.
Solver asks for numbers to change in order to find the meet the target value. Numbers to change are...
- Marginal propensity to consume for labor.
- Marginal propensity to consume for capital.
- Marginal propensity to import for labor.
- Marginal propensity to import for capital.
Things I find interesting...
- Capital has a 0% marginal propensity to consume. (Capital has an autonomous spending of $60 billion in the model.) This would imply that consumption is only a function of labor income and not capital income.
- Capital has a 0% marginal propensity to import. (Capital has an autonomous spending on imports of $200 billion.) This would imply that all imports are paid for out of labor consumption.
- Saving of capital income is at a maximum. This would imply that capital income is dedicated to saving and ultimately to investment.
- Investment is still in range of 14% to 18% of real GDP.
- Net exports come in perfect at around -4%.
- Government borrowing (deficit) comes in at a reasonable number of $644 billion.
- Saving rate is just a little positive.
- The saving of capital makes sense as corporate cash reserves are piling up.
- and finally the dissaving of labor is huge... -27.3%. The dissaving of labor, -$3,247 billion, almost equals the saving of capital, $3,340 billion. This implies a saving transfer from labor to capital. (note: It is said that financialization is the primary cause for low labor share. This transfer of saving from labor to capital supports that view.)
For the most part, these numbers make sense. It is just the dissaving of labor that seems extreme. But What does it mean if the model implies that all of capital's income will go to taxes and saving? What does that imply for labor income?
Solver gives a solution. It may not be the only solution though. There may be others. I tried changing some values to see if solver would find another solution. It kept giving the same solution. I conclude this solution is the only one that satisfies the constraints and parameters of the test.