Having fun with Steve Williamson's production curves.

Here is what's called the production frontier graph. The Y axis tells us how much consumption goods are produced and the X axis tells us how much time off from work we have.  If we want more consumption goods we have to give up time at home and spend more time on the job. The two lines called PPF1 and PPF2 are the production frontier curves, they are drawn by the boss. The Boss says if you want more time at home you get less consumption goods. So, each of those curves slopes down, more time at home fewer consumption goods. There are two lines because Steve assumes something went wrong at the factory, a machine broke and the boss drew a new curve. Before the machine broke we had PPF1 curve, after the machine broke we have PPF2 curve.  When the machine breaks it takes more time on the job to get the same consumption goods.

Since we have proof positive the government is the thing with the broken machines, we can see what happens to the government production curve.   Government breaks on of its machines about every eight years, on the presidential cycle when we have a recession.  That is why real growth has been dropping for 30 years. We are now at PPF5, which is not shown, but it is a production curve way down in the corner where the X and Y axis meet.  We simply do not have any more free time left if we try and obtain any government goods, that is Zero Bound.

So what happens? Well, we all know the problem and government cannot break beyond the zero bound. So we get an orderly restructuring of government, and we have many options within the Constitution to do this.  Government in DC cooperates because they are the first to know that government is in need of restructuring.

Now what is this error that I keep talking about with respect to the real business cycle? Simple, the Boss does not redraw the curve all at once. We all  notice the goofs as they come and we adjust the curve as the goofs are observed.  Hence with the greater incremental knowledge, we price in the cost of restructuring as we go. Finally when the event happens, we have the restructuring schedule computed as we go and keep reserves against the errors of government. We include the cost of restructuring in the production curve as we go down hill. The accumulated cost of restructuring is called the government debt, and the super wealthy keep that same percentage of reserves to cover government inefficiency.