Supply versus Demand

[_beastie]

I'm not an economist. I haven't even read texts on economic theory. I don't want to. For one, the subject doesn't interest me innately: my interest is forced only when the economy is in trouble. Second, it seems to be a very soft science with few clear widely accepted truths. It seems too suspect to bias. There are also so many variables it seems almost impossible to come to clear conclusions.

So with that caution, I'm going to share my opinion which is based solely on common sense, not education. I'm interested in the responses of people who are able to discuss it somewhat objectively. In other words, not droopy, ldsfaq, or bcspace. I plan to ignore them if they pipe up. I don't want just another partisan mud fight.

I'm not stating "truths", but my opinion, so every statement should be prefaced with "I think", or "in my opinion", even if not explicitly stated.

I think that both supply and demand are crucial elements, and when one side is neglected, then the economy suffers. That's obvious. You both need businesses who have enough capital to produce goods, as well as consumers with enough money to buy the goods. There are times in our country's history when one side or the other struggled to maintain their part of the balance and needed government action to rectify the balance. There were times when the tax burden on businesses and the wealthy were so high that businesses had too little capital, and the wealthy didn't have as much to invest. That's when it was time to cut taxes. There were times when consumers, due to low wages for extended periods of times, just didn't have the money to purchase enough goods to keep the engine running. That's when it was time for government to invest in ways to improve worker income or improve the job market. IE, stimulus.

In other times of recession, republicans seem to agree that stimulus was necessary. Republicans voted for stimulus spending under Bush and Reagan. They just seem to struggle with the concept under democratic presidents. US corporations right now have a lot of capita, near an all-time high. http://knowledge.allianz.com/finance/ca ... -with-cash

Tax rates for the wealthy are, historically speaking, relatively low. The wealthy have been doing quite well for decades now.

It's clear that the problem in our economy currently is that consumers don't have enough cash to purchase. Wages have been stagnate for those fortunate enough not to experience unemployment. People are experiencing more long-term unemployment or underemployment.

So the answer seems clear to me. The government needs to invest in another stimulus. Reagan and Bush stimulated the economy by increasing defense spending. Our infrastructure is literally crumbling before our eyes. Isn't that a clear signal that it's time to invest in rebuilding our infrastructure? We really need it, and people need the jobs that would go along with that. Why is this so difficult?

[_Analytics]

I pretty-much agree with everything you said. Just to throw out a few more ideas, consider the following:

The success of an economy can be measured by two things: first, the overall quantity of the goods and services that are produced and second, the basic “fairness” with how the goods and services are distributed. Metaphorically, success is both maximizing the size of the pie, and about making sure everybody gets their “fair” piece of it. I put “fair” in scare quotes to emphasize that there is disagreement about what it means, but the point is the same regardless.

So how do you maximize the size of the pie? Again, I’d suggest two things. First, everybody that can work ought to work (note that by “work” I simply mean producing useful goods and services, which includes work inside and outside the home). Second, there needs to be an optimal distribution of the work people are doing. Some need to produce goods and services directly (e.g. growing vegetables, sewing clothes, waiting tables), and others need to work on creating the physical capital needed to improve society’s capacity to produce (e.g. building roads and factories, inventing new technology, educating the workforce).

Fundamentally, that is what it’s about—maximizing the size of the pie, and making sure everybody gets a “fair” piece. Notice that I haven’t said anything about money.

Adam Smith’s “magic hand” refers to a set of models that says that if the economy is full of rational decision makers who negotiate with each other about what they’ll trade to produce goods and services and then how much they’ll trade to acquire other goods and services, the natural result is that “in the long run,” both the size of the economic pie will be maximized, and everybody will get their fair piece—as if by magic.

Nowadays, people who have religious faith in Adam Smith’s economic model invariably blame the government when things obviously aren’t working out optimally. During the Great Depression, the government was much less involved in the economy, and that excuse was much less persuasive. John Maynard Keynes famous rationale for having the government actively interfere in the economy was that even if Adam Smith’s model is right it doesn’t matter because, “in the long run we are all dead.”

Anyway, I agree with your original premise. The economy itself is big and complex, and the study of it is the softest of sciences.

And I agree with your conclusions—our economy is capable of producing a lot more than it currently is—we have an abundance of both unused labor and unused capital. If private enterprise isn’t keeping everybody productive, the government ought to step up and make up the difference.

[_Gadianton]

I'm not an economist. I haven't even read texts on economic theory. I don't want to. For one, the subject doesn't interest me innately: my interest is forced only when the economy is in trouble. Second, it seems to be a very soft science with few clear widely accepted truths. It seems too suspect to bias. There are also so many variables it seems almost impossible to come to clear conclusions.

Libertarian economists would agree with you -- there are too many variables. Likewise, scientists would have difficulty building a better ant hill than a colony of ants. This has nothing to do with religious faith, as Analytics suggests, but respecting the vast number of variables programmed into human nature by evolution over billions of years. If you believe there are too many variables to come to clear conclusions, then Keynesian economics is going to be tough going, since the entire enterprise is based on modeling the economy with a handful of finite, well-understood variables. But in addition to the complexity of modeling human interactions scientifically, there is an additional variable usually known as "rational expectations" -- one that for an odd set of reasons is rejected by Austrian free-market fundamentalists -- that points out that people alter their decision-making in unexpected ways in the face of policy, unlike ants do. This makes it even more difficult, if not outright impossible, to manage the economy as an engineering project. I write this not to convince you to believe in a free market, but to convince you that it's Keynesians and central planners who consider managing the economy a tractable problem where one is working with finite variables and clear conclusions.

In other times of recession, republicans seem to agree that stimulus was necessary. Republicans voted for stimulus spending under Bush and Reagan.

You are exactly right. I have an old intro econ text printed several years before I went to college, during the Reagan administration. It's a text with a libertarian bent that shows up now and again, and it makes the point that the evolving policies of Reagan look very Keynesian. This contradiction is unacceptable, but humorous, and Republicans are so set on living the contradiction that the Heritage Foundation has figured out a way to define "government" such that it can sever the war department from all the other departments, and spend billions on war without really counting as "government", whose job is to "secure property rights".

Republicans aren't voting based on free-market ideals, but to preserve their status quo, just as Democrats, with a few idealists here and there.

[_ajax18]

At this point, I think overpopulation can shrink your "fair share" of the pie down to an unacceptable standard of living pretty soon. You can't tell people to stop having so many kids so that's one reason "it's so difficult."

[_Droopy]

Second, it seems to be a very soft science with few clear widely accepted truths.

False. I'd say that, indeed, its much more robust as an empirical and theoretical discipline than, say, archeology.

It seems too suspect to bias.

Economic phenomena are subject to varying interpretations but also to empirical checking. Most of the problems encountered in the study of economics comes because of its hijacking by ideology and the careful use of statistics to lie about it.

There are also so many variables it seems almost impossible to come to clear conclusions.

The core laws and principles of economics are as clear and as empirically, theoretically, and historically explicable as one could desire in a social science.

I think that both supply and demand are crucial elements, and when one side is neglected, then the economy suffers.

How are either supply or demand "neglected"? By whom? How?

There were times when consumers, due to low wages for extended periods of times, just didn't have the money to purchase enough goods to keep the engine running.

How are wage rates determined in a free market in which the laws of supply and demand function freely within various labor markets?

That's when it was time for government to invest in ways to improve worker income or improve the job market. IE, stimulus.

How does shifting money from one area of the private sector to another in the public or private sector "stimulate" the economy?

In other times of recession, republicans seem to agree that stimulus was necessary. Republicans voted for stimulus spending under Bush and Reagan. They just seem to struggle with the concept under democratic presidents.

Then it would probably be better not to discuss partisan politics per se but matters of first principles (i.e., political philosophy).

Tax rates for the wealthy are, historically speaking, relatively low. The wealthy have been doing quite well for decades now.

Almost everyone in America has been doing "quite well" in a relative sense, for decades now. America's multilayered and multitudinous taxes on the wealthy are, in absolute terms as to both rates, multiple taxation on the same earned dollars, and effects on incentives to invest and risk capital, well beyond rational or constitutional limits.

It's clear that the problem in our economy currently is that consumers don't have enough cash to purchase.

Wrong. Fear and insecurity have gripped the investment climate in the United States to the point that hiring, expansion, and new business start-ups have all but stalled. Obamacare, Dodd-Frank, and a pervasive climate of business hostility are what's driving the almost nonexistent "recovery," not consumers strapped for cash. Their are a little over 300 million people in America. For a little over $300 million, every man, woman, and child in America could have been given a million dollars to put in the bank. We are now well over $16 trillion in inflation-generating debt, and you are asserting that consumers are strapped for cash. How can this be?

With effective unemployment at around 16%, most people are still working. Why are they strapped for cash?

Wages have been stagnate for those fortunate enough not to experience unemployment.

Do you mean that people no longer get raises, or that the money they have no longer buys the same amount of goods and services it used to?

So the answer seems clear to me. The government needs to invest in another stimulus.

This is a failed, dead, discredited, and economically irrational concept that was debunked in the first third of the 20th century by leading free-market economists and which has a record of failure and destruction long enough that no rational adult should be caught dead supporting it any longer. The present great Obama non-recovery, rapidly accelerating inflation, booming dependency on government, growth of the state, and the failure of the economy to create new jobs in anything approaching a reasonable rate are all classic symptoms of the Keynesian disease. If failed in the 30s, it failed in the 70s, and it must fail now.

Reagan and Bush stimulated the economy by increasing defense spending.

Defense spending stimulates nothing but defense industries and spin-off enterprises. It does not stimulate "the economy." "The economy" will be the same size after x billion dollars was shifted from one sector of the economy to the defense industry sector as it was before. Its a transfer of wealth, just as is building bridges, constructing statues of Obama, and moving a pile of bricks from one side of the yard to the other and then back, over and over and over again, with taxpayer funds. Fiat money created out of thin air without a concomitant rise in goods and commodities simply lowers the purchasing power of that and all remaining currency while the favored industries get to use the new funds during the lag time before general prices begin to rise.

Those industries and other entities supported by the wages/salaries of the employees in certain neighborhoods and municipal areas do well for a while, but nothing has happened to "the economy."

Our infrastructure is literally crumbling before our eyes.

Where did the $6 trillion go, Beastie?

Why is this so difficult?

The nation is broke. We have no money. The government has no money. The $6 trillion Obama spent and hundreds of billions more Bush supported never existed in the first place. Existing tax revenues cannot and never can be anything approaching the levels of spending required. Most of this was done with money vastly in excess of tax receipts. It was created out of the void by the magic of government borrowing. The Federal Reserve creates ex nihilo.

You clearly have no living idea what the future consequences of the debt we have already incurred is going to be, but we are near the cliff now, very near, and it is our children and their children who's economic lives and potential will be substantially reduced and cankered by the debt this government is leaving them. When the economy finally actually collapses, the consequences are going to be severe.

Then there's the other looming threat - a leviathan welfare/nanny state who's iron fist of conformity and enforced compliance with its countless rules, regulations, and meddling interest in every aspect of our lives (all for our own good, of course, and "for the children") will have essentially erased Republican government and the constitution as meaningful aspects of American life.

The road to serfdom is, in case you weren't aware, a toll road, paved with envy, division, covetousness, malice, and greed, and lit at night, not with street lights, but with piles of burning money.

[Anonymous]

Libertarian economists would agree with you -- there are too many variables. Likewise, scientists would have difficulty building a better ant hill than a colony of ants. This has nothing to do with religious faith, as Analytics suggests, but respecting the vast number of variables programmed into human nature by evolution over billions of years. If you believe there are too many variables to come to clear conclusions, then Keynesian economics is going to be tough going, since the entire enterprise is based on modeling the economy with a handful of finite, well-understood variables....

Just to clarify a few points....

The "religious faith" snipe was aimed at people who think that the free market will necessarily lead to optimal results all the time no matter what. It should go without saying that in general, the free market and profit motivation does a great job at allocating resources.

The part of Keynesian (read “mainstream”) economics that gets bad press in certain circles is the simple idea that we can detect when the economy is in a recession, and that when private-sector economic spending goes down, government spending should go up. If the government has to build a road anyway, why not delay or accelerate the project so that the work is done during a recession?

Saying that the government needs to be able to successfully understand every factor of the economy in order to know when it should increase spending is like saying a sailor needs to successfully understand every factor of the global weather system in order to understand when to adjust his sails.

[_Analytics]

Their are a little over 300 million people in America. For a little over $300 million, every man, woman, and child in America could have been given a million dollars to put in the bank.

Nice math.

We are now well over $16 trillion in inflation-generating debt, and you are asserting that consumers are strapped for cash…Why are they strapped for cash?...

The economy" will be the same size after x billion dollars was shifted from one sector of the economy to the defense industry sector as it was before. Its a transfer of wealth, just as is building bridges, constructing statues of Obama, and moving a pile of bricks from one side of the yard to the other and then back, over and over and over again, with taxpayer funds.

You really think if the government spends $10 million to build a bridge that proves to be worth, say, $50 million, it doesn’t create any more wealth than moving a pile of bricks from one side of the yard to another? You still have no idea what wealth is, and have no idea why Thomas Sowell said what is quoted in my signature line. Amazing.

Fiat money created out of thin air without a concomitant rise in goods and commodities simply lowers the purchasing power of that..

The nation is broke. We have no money. The government has no money...

The road to serfdom is, in case you weren't aware, a toll road, paved with envy, division, covetousness, malice, and greed, and lit at night, not with street lights, but with piles of burning money.

As long as we burn money and not the road itself, we’ll be fine.

[_Droopy]

You really think if the government spends $10 million to build a bridge that proves to be worth, say, $50 million, it doesn’t create any more wealth than moving a pile of bricks from one side of the yard to another?

The state taxes (shifts, reallocates) $10 million to build a bridge. Later the bridge appreciates in value to $50 million (meaning precisely what, I'm not sure). How does a government bridge that cost $10 million to build appreciate to $50 million? Who wants to buy a government bridge? What is this alleged $40 million dollar wealth creation? How is it measured and how can it be said that the economy as a whole has grown due to the bridges presence (how is this claimed $40 million understood to be a net increase in the size of the economy?)?

The bridge itself creates no wealth. While it may be said that the bridge encourages or facilitates wealth creation, that wealth creation itself takes place solely within the private sector due to private investment that creates goods/services that other people in the private sector want to purchase using wealth created in other regions of the private sector through other productive economic activity.

Calling a bridge, which facilitates or incentivizes wealth creation, itself a form of wealth creation is just the slight-of-hand, smoke-and-mirrors semantic game of statists. If this were so, then laws and legislation that facilitate and incentivize wealth creation could also be claimed to create wealth, i.e., tax cuts that incentivize risk, investment, and entrepreneurship can be claimed to create wealth (not the actual entrepreneurs and workers who manufacture products or provide services).

This is nice for leftists such as yourself, as no matter how you slice the cake, politicians, the political class, and the state can take credit for "wealth creation" while the actual wealth creators themselves are relegated to the role of grateful receivers of government grace.

You still have no idea what wealth is, and have no idea why Thomas Sowell said what is quoted in my signature line. Amazing.

No, its you who have no idea what wealth is, how its created, or what the moral, social, or economic implications of its generation, use, and relation to the state are or mean.

As long as we burn money and not the road itself, we’ll be fine.

When true hyperinflation hits our society, and the walls really come tumbling down, One can only sigh and, with deep regret, hope that people like you are hit the hardest and the longest, while the righteous, intelligent, and wise of the earth will be allowed by the Lord to escape the worst of it.

There will be many children and our children's children damning the names of those who supported this witless, evil insanity, but mine will not be among them, nor most of the Saints, nor many of the good and noble of the earth who are not only educated and knowledgeable, but intelligent.

[_Dr. Shades]

Reagan and Bush stimulated the economy by increasing defense spending. Our infrastructure is literally crumbling before our eyes. Isn't that a clear signal that it's time to invest in rebuilding our infrastructure?

Yes it is.

We really need it, and people need the jobs that would go along with that. Why is this so difficult?

The reason it's so difficult is because those who allocate the stimulus money have many more friends in the defense industry than they do in the infrastructure industry.