More demand is not the whole answer

Discussion in 'Economy' started by Wiseacre, Jun 25, 2012.

  1. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Is increasing demand enough? The lefties around here will tell you that all we gotta do is give more money to the lower income people, they'll spend it, demand goes up, and our problems are over. Sounds simple. Too simple. It ain't that easy, and this why:

    My first issue is with the idea that the extra money will all get spent; I think that is a fallacious argument, especially at a time like this when people are scared of losing their job or their home. I'd venture a guess that most people have had financial problems themselves or know someone who has, be it a friend, neighbor, or family member. Some of the money will get spent, say for school supplies in a couple months, or for Christmas maybe, but some of it will be socked away for emergency use should things go from bad to worse. IOW, you ain't going to get the boost you think you are.

    Then there's the question of how money are we talking about and how many people are going to receive it. Are we talking a one-time good deal stimulus, or a longer term program of redistribution of wealth? The last stimulus did give us a bounce, but it hasn't lasted. Sure, we're better off than we were in January 2009, but is that anything to brag about? The benefits we were told about then did not materialize, why should we believe the next one will do any better? Some talk of the stimulus we got as a result of WWII as a success story; but do you realize how much gov't spending went up during those 5 years from 1940 - 1945? $10 billion in 1940 to $107 billion in 1945, that's a tenfold increase. Our current spending is about $3.5 billion, anybody here wanna argue for a $35 billion dollar budget in 5 years time?

    Okay, say instead of a stimulus you do a permanent redistribution of wealth, with a sunset of 10 years like the Bush Tax Cuts. Raising the top marginal rate back to the 40% it was under Clinton gets you $70-80 billion in more revenue, I don't think that's gonna go very far spread around the bottom 70 or so million people on the south side of the income ladder. You going to borrow the rest? How much money will that be, and how do you intend to pay the interest payments when interest rates go back up eventually? They will you know, the historical average is around 5%, can you imagine how much we'd have to pay out just to service all that debt?

    Increased demand is obviously necessary; but that money has to come from somewhere. Seems like the solution to every problem for the lib/dems is to take more money from the rich guys. But they won't accept the idea that there are consequences for that, those who can will leave and those who can't will stop using that money to invest in startups or expanding businesses. If the reward isn't worth the risk, they won't do it; instead more money will go into tax shelters or offshore. Look at what's happening today in the PIIGS countries; they're taking their money out of the local banks and moving to London or somewhere else, and they're doing it in droves. You don't have to like it, but that's the way it is.
     
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    Last edited: Jun 25, 2012
  2. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    why would you say that when increased supply is obviously necessary?????
     
    Last edited: Jun 25, 2012
  3. DSGE
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    DSGE VIP Member

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    Was that the problem with the Great Depression? Not enough supply? :eusa_eh:
     
  4. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    who's talking about the Great Depression
     
  5. iamwhatiseem
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    iamwhatiseem Gold Member

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    Examples of government "demand creation"...

    1) The Savings and Loan crises
    2) The mortgage crises
    3) Cash for Clunkers
    4) The soon to be arriving "tuition crises"

    Any questions?

     
  6. DSGE
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    DSGE VIP Member

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    NGDP level targeting. By increasing the expected income people will have in the future - by the Fed making a credible promise to loosen monetary policy enough to allow nominal income to return near its pre-crisis trend - monetary velocity will increase. The amount of money people want to hold at this given price level will fall (because they're now expecting more in the future), so they'll begin shedding excess money balances (spending money that they're hoarding). On top of which the need to deleverage will also be reduced on expectations of more income; demand for credit will also increase.
     
  7. DSGE
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    DSGE VIP Member

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    It and the current depression are very close analogues. Not in depth, obviously. Thankfully this time around we didn't have Hoover's idiotic industrial labour program or a New Deal.
     
  8. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    This is essentially a stupid liberal concept since an economy progresses from the stone age to here because of supply side innovations, not demand side communist manipulation. The USSR didn't work out too well did it?
     
  9. DSGE
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    DSGE VIP Member

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    There is no demand side manipulation. It's demand stabilization. You set a target - say 3% NGDP growth, level targeting - and what would result there is nominal incomes grow at 3%, prices grow at 0% (complete price stability), and if there are any demand shocks (such that would cause inflation or a recession), those are offset as NGDP is returned to level.

    The important thing is: you're not allowed to deviate from the target! Central bankers become non-existent. Nobody gets to decide what the interest rate should be, nobody has discretionary power over the money supply. It effectively gets done by a computer. Central bank incompetence can't create inflation or recessions. Everything, under a stable NGDP target, will be supply side.

    It's just a constant money supply growth target offset for monetary velocity. And it's primarily been advanced by conservative economists.
     
  10. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Sure, we should be working the supply side too, not saying otherwise. We should be reducing the costs, thereby making prices lower; people look for value, it's not just the ability to buy but also the willingness, and one way to help that is giving people more for their money.

    I'm saying it's both sides of the coin. Not many companies will increase supply without some indication that they can expect more demand.
     
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