Deficit Management & maxed out GDP / unemployment

Democracy 4 Alpha Feedback
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The fact that the option of using both flat taxes and (progressive) income tax has now been removed has brought the difficulty of budget-managing into sharper focus. While for now it seems feasible to still do well at the game even with a Debt Crisis, I’m guessing that this will change with balancing to make the game more difficult and anyway I’d still like to avoid a debt crisis if I can! So this has led me to try and understand better the game mechanics. Either I would be helped by some explanation or it needs to be made clearer in game (or both!):

Especially when playing as Germany (where monetary policy isn’t available - not that I’ve fully got my head around precisely what the mechanics are for the monetary policies), sometimes one wants to reduce the deficit / balance the budget without increasing taxes or cutting spending. But I don’t presently think the effects of using spending to increase the country’s income base are all that clear.

  1. In the game, if I - for example - introduce a state health service or free childcare, then this increases national income by reducing unemployment, right?

  2. We can see by how much unemployment will be reduced when introducing the policy, but it’s not obvious how that translates into how much increased national income. Am I missing something?

  3. Does introducing an unemployment-reducing policy have any effect when unemployment is already at the very bottom of the graph? If my new policy says, for example, that it reduces unemployment by 5%, is that just wrong and to be ignored if I’m already at the bottom of the unemployment graph? If so, does that then mean that the policy can’t increase my national income?

  4. Similar questions when it comes to policies that increase GDP. For example Science spending increases GDP. That seems to mean increasing Science spending increases national income, right?

  5. Any way of knowing by how much increasing science spending by 50% (for example) would increase national income?

  6. If GDP is already at the top of the graph, then does eg increasing science spending have any effect in increasing national income?

  7. In a situation where GDP is at the top of the graph and unemployment is at the bottom, does increasing spending on for example state schools have any effect on national income (ordinarily it would reduce unemployment and boost GDP indirectly through increased education and productivity etc)?

  8. If no, then if there is no further national-income increase to be gained from raising GDP or lowering unemployment, then presumably there is no way to lower a deficit other than cutting spending or raising taxes (which can of course have counter-productive effects)?

I guess these sorts of issues are more pertinent if you’re playing in a socialist style, but I don’t think it’s an accident that presently the global averages for almost all countries are that people are winning elections playing as liberal capitalists… I will have to see if printing money makes deficit management any easier, but that’s not an option for eurozone countries anyway…

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Ok, so I’m guessing the lack of replies meant my post here was too long!

I think now the root cause issue is that when GDP hits maximum, economic improvements (I.e., things that boost GDP like more science or more productivity) appear to have zero effect on the deficit (which is clearly nuts). This is probably mainly because it shouldn’t be possible to max out GDP.

In my post above, I thought that there is actually a link between unemployment and national income. On reflection I’m not sure there actually is such a link - but surely there should be?! More people in work = more income tax revenue!

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That seems to be a reasonable assumption for national income.

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The game is still being balanced (and balancing it is horrendous, so this will likely go on a long time!), and the aim is that hardly anyone ever manages to max out GDP, because as you suggest, this then means further GDP-raising policies are in effect wasted.

Its a tough balancing act to get the GDP-influencing items balanced for all play styles, in all countries!

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Many thanks for the reply. Really helpful to have that confirmation about GDP. You have my every sympathy with the need for balancing: D3 (and Africa) was a fabulous and really enjoyable game but D4 feels significantly bigger, more in-depth & intricate; so it’s not surprising that makes balancing all the tougher. Your work is massively appreciated!

Do I have a point about unemployment (in that it should, but doesn’t seem in the game to, affect national income in a big way, as does GDP, because more people in work should mean more income for the state from income tax & payroll tax) or have I missed something / barked up the wrong tree?!

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Wages/Incomes are a part of the GDP calculation.

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I’m afraid that’s not right: In the game, there’s no direct link between wages and revenue: wages only impact on national income via productivity. There is a direct link from wages to costs of nationalised industries, but not from wages to tax revenues. There is a link from wages to productivity, but it’s one of more wages = less productivity. Likewise, I can’t see any link from unemployment to tax revenues, except via productivity. In the case of unemployment, the link is more unemployment = more productivity. But again that would be the wrong way round to achieve the surely logical effect of less unemployment = more people in work = more income tax revenue.

So, the point is that I don’t think the issue is what is there in the game; but I do think there is a major missing link between unemployment and Income from income tax and payroll tax.

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I meant that wages/Incomes are part of the GDP calculation irl. And if they aren’t in game, they should be. But this is GDP growth which is represented, so I Don’t know what would be the calculations for that.

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Hmmm interesting.
generally speaking we link GDP to income from taxes like income tax, or sales tax, because we assume that the percentage of total GDP that is captured by sales or income tax is constant unless the tax changes.
So if GDP goes up, income from sales and income taxes will go up.

It sounds to me (let me know if I’m wrong) that you are pointing out that the percentage of economic activity that is reflected by wages is assumed as a constant in the game, and that this is a simplification?
In other words, if GDP goes up, but wages are suppressed, then sales tax and income tax income should not change, but in fact they do!

I have sympathy with the view that this is not accurate, and is a simplification, but I am also wary of over complicating the economic model. To do the point justice we would need to model the percentage of economic activity that is captured by wages (as opposed to stock dividends for example), and use that as some intermediate modifier to accurately model income tax revenue…

There is an argument that we should have consumer spending as a simulation value (blue bubble). It could take input from GDP, but we modulated by wages. This could then be used to calculate sales tax correctly.

BUT…
Like everything its not so simple. Assume a situation where GDP doubles but wages remain the same due to heavy pressure from unemployment. That could mean that all the extra 50% of GDP feeds through not to wages…but to profits handed to the top 0.1% in stock market dividends.
However… those people will still spend that money (or lend it to the poor…who then spend it), so it will still attract sales tax, possibly even at a higher rate, as its likely purchases of yachts, not sales-tax exempt essentials.

Its a nightmare to model :smiley:

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Thanks for the considered reply. I think (but I am not 100% sure) that you’ve got my point.

Let me illustrate my point with an example from the game:

I raise Agriculture Subsidies to the maximum.

This costs the country say a couple of billion.

Apart from making farmers happy, more numerous and relatively wealthy (and irking capitalists), the main direct macro economic effect is to reduce unemployment by about 17%. The Agri subsidies do not directly boost GDP.

What main macro effects does the 17% fall in unemployment have (in the game)? It reduces productivity (and therefore GDP). It increases wages. Wages do not directly impact GDP, but higher wages do reduce both productivity and foreign investment. Both of which have the effect of reducing GDP.

So the overall effect in the game of putting 17% of the population, who were unemployed, into work on farms, is actually to reduce GDP and therefore to reduce national income.

That can’t be right. This 17% reduction in unemployment is, say, a million new farmers, who are now earning an income that they weren’t earning before and so they are paying more income tax. So, raising agri subsidies should not only cost the country more but also, indirectly, increase national income.

I’m not saying that the effects that the game has already charted between e.g. unemployment and productivity are wrong individually. I’m saying that surely there is a missing link and that one of the direct effects of reduced unemployment should be increased GDP (or increased income tax take, I defer to your knowledge as to which one would make more sense).

(I appreciate this would make matters worse when we already have a balancing issue with GDP hitting the maximum easier than would be ideal. But the present state of affairs incentivises a player who cares about the deficit / national debt not to create jobs.)

Obviously I’m more than happy to be corrected if I’ve missed something!

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Speaking on taxes, I think that porperty taxes need to be rebalance a bit.

Let’s start with the number that it shows, property taxes tend to be on the low one digit, in my case, Spain, it can range between 0,4% and 1,3% depending on what municipalities decide, but in the game it says 15%, that we can see that is a bit off. Even in USA, it says 8%, when in the country, even in the state where it is higher, like New Hampsire, it is around 2-4%.

And then with it’s evolution, property tax taxes two forms of wealth, land a properties.
Land values tend to increase with investment in infraestructure and services, for game desining purposes that could be GDP, but also raises with an increase in population, that isn’t currently modeled.
Poperty value may be modeled from GDP with a long inertia period.

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you make a fair point, which is that any government spending should really result in a boost to GDP, which is true, but ONLY if we also accept that any tax reduces GDP, because you are effectively confiscating some money that otherwise would be spent.

So in other words, a balanced-budget government is just re-allocating existing GDP, by taking money from some people in taxes and spending it elsewhere, which effectively hands that same money to some other people. Economists at this point would be eager to point out that this redistribution can in fact boost GDP overall, because often the government takes steps to boost domestically. (For example take money from people who would have bought chinese-made mobile phones, and spend it here on local workers building new roads).

Although this is all technically true, it would make the game a logistical and user-interface nightmare, because pretty much every tax would have to include a negative impact on GDP, and every piece of government spending would have to boost GDP. This would be UI and balance hell :smiley:

In effect, the game design cheats all of this out of existence by waving my hands and saying ‘it all kind of balances out’. The way I try to represent the positive impact of tax and spend, is by making productivity boost GDP, and hope the ‘spend’ part of the equation involves the player boosting productivity.

Basically you have pointed out a gross simplification in the game, which is true, and a fair criticism, but its done to make the game playable. The same is true of private debt (not modeled!) and also consumer interest rates (again not modeled!). Annoyingly macroeconomics is, at its heart, way too complicated to make a fun approachable game out of, unless you simplify it a lot :smiley:

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