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>>My point is though, if you naively ignore V in the equation (and yes, usually it's considered to be a constant), then you might think that increasing price of labor can lead to decrease of production, because the term PY must be constant. The P represents the nominal price of goods/services, which is not the same thing as the 'real' price. When V is increased, P is increased correspondingly, which means the price of everything goes up, and the faster circulating money buys the same amount as before. So Y doesn't increase if you increase P. The PY side of the equation can increase without any logical inconsistency, since it represents the nominal price of all economic output, and not the 'real value' of that output. When PY increases without an increase Y, you're simply getting inflation, where everyone earns $2 increase of 1, but everything costs 2X as much. Anyway, the point is that increasing V has no effect on total consumption, so there's no benefit from deliberately boosting V. If that weren't the case, you could grow the economy simply by mandating that everyone spend more, which obviously would be magical economics. >>Redistribution in UBI has then potential to reduce savings (because savings really make rational sense only if you're powerful enough) and through that increase the economic production in the slump. Most savings are in the form of investment. Reducing the savings rate and savings not only will make the economy more fragile to shocks, but will also reduce the investment needed for economic expansion. The ultimate source of all economic growth is investment. A policy that reduces investment is harmful to efforts to grow the economy. |
Also, regarding savings, according to standard theory, savings are indeed equal to investment. But I think it is wrong, because in the real world, there is a difference in reversible and irreversible actions. So I consider investment/consumption to be only irreversible actions on the world (for example, building a factory), while savings are reversible actions (buying a gold brick from someone). In the real world, it makes sense to postpone irreversible actions if possible (you can always react to others), and so investments and savings are not the same thing!
In fact, this happens in deflationary crisis, people hold money (that is, postpone irreversible decisions, and by above definition, save) in expectation that the money will gain more value. And they are effectively deadlocked, waiting for each other to make move and make irreversible decision. This is bad for economy, because economic production requires people to make irreversible decisions (to invest and consume), and so giving everybody some amount of money (especially to people who have no option than to spend, in the form of UBI) can break these deadlocks.