In a debate about economics, the liberal side says, ‘Consumers drive the economy. When consumers have money to spend, they spend it. Spending money drives demand, which induces companies to increase production, which leads to more jobs, which creates more consumers.’
The conservative side says, ‘No. Giving subsidies and reducing or eliminating taxes on companies induces companies to hire more employees.’
The liberal says, ‘Thirty years of trickle-down economics have shown that to be untrue. When people needed jobs most, companies sat on trillions of dollars in offshore accounts. When consumers don’t have money, they don’t consume.’
The conservative says, ‘Bollocks! Only by giving subsidies and tax breaks to corporations does the economy improve! It’s Economics 101!’
The problem is that macroeconomics isn’t a science that can be distilled down into simple cases and proven. There are a vastly of uncontrollable number of variables, and no possibility of a control case or replication, that any analysis, even at a 101 level, can be feasibly interpreted into many different answers that are very difficult to disprove.
I’m not an economist, nor do I play one on TV, but I’ve been told that the only thing that will compel a provider of goods or services to increase their work force is demand for their product that exceeds their ability to provide said product. I believe it. ‘Trickle down’ economics is pure BS.
The conservation is a oversimplification, especially as to what conservatives supposedly say where it’s more like what liberals say conservatives say.
Informed liberals or conservatives don’t think some magic mechanism of giving ‘consumers’ money will create growth on a secular basis. Nor do either think that tax reductions on corporate income eventually go to anyone except consumers. Purchasers of products of the companies (perhaps lower priced because of less tax on profit) are consumers, moreover the shareholders of the companies also consumers, to the extent the tax cuts would induce higher after tax returns, and so are the executives of the companies, to the extent one believes tax policy affects their compensation. All tax cuts (and govt spending increases) have the direct result of ‘putting money in consumers pockets’.
It’s a question of which consumers, what they do with the extra money, and how that advances which particular economic goal. There is a reasonable debate about how best to cyclically stimulate the economy with ‘money in consumers pockets’, since some methods of getting it there to some mixes of consumers might result in more of the money being saved, which is not the goal in a stimulus. OTOH in the longer run it is important to have a healthy level of saving and investment. The huge increase in living standards over a long time in the modern period has been partly much greater capital per worker not only use of different technologies per se, and the capital had to be saved. And investment will be affected by tax incentives. No reasonable liberal wholly rejects that argument. The debate is about how much given policies affect incentives, what’s practical politically in terms of a tax system and, related to the first two, the overlay of goals other than strictly economic growth (eg. distribution of wealth).
Real economics would say that the economy is more like a hydraulic system where, for the most part, it’s just a closed looping system and if you expand or shrink any one tube, that just increases pressure on the rest and results in a quicker flow through them, such that not much has actually changed. Raising the minimum wage, for example, causes businesses to raise prices, which raises the living cost, resulting in the minimum wage staying where it was in all practical senses (after a brief shock to the system where it wasn’t).
So, if you make it easier for businesses to hire, by giving them more money, or you make it easier for consumers to spend, by giving them more money, the end result is more or less the same. In both cases it is, effectively, just a financial stimulus to the system. You’re pumping in more water to the system, causing the whole thing to circulate faster.
The real economic question isn’t how to provide a stimulus. Most things will work. The real question is when and by how much. And, conversely, when to constrict the economy.
The other question would be how to make changes so that they aren’t uselessly diverting water from one pipe to another, without actually making any lasting changes.
Economics textbooks may say a lot, but it doesn’t mean a damn thing.
All the Phd economists in the world failed to see the massive collapse of 2008—even though it was obvious and they all knew that they were trading derivatives based on worthless paper.
Economics is to science what homeopathic herbal treatments are to medicine:
Sometimes the quack doctor happens to get it right, so you feel better for a while. But nobody knows why, and nobody can repeat the same treatment later on and get the same results.
Similarly, sometimes the economists happen to get it right, so you feel better for a while(i.e. you make a little more money.) But nobody knows why, and nobody can repeat the same economic policies later on and get the same results.
The entire field is just talking heads spewing hot air.
Like the comedian at www.StandupEconomist.com once said : “economists have successfully predicted 9 of the last 5 recessions.”
Conduct an experiment in your kitchen, to see trickle down in action. Put some ice cubes in a glass, then pour in some iced tea. See how nicely it trickles down? Proof of the trickle down theory in economics, right?.
But now put a straw in the glass and see how little effort it takes to suck it all right back up again. The glass is still empty when you are finished, and the iced tea is in the belly of somebody fat and rich.
Actually, I’d say that it’s not so much that any mechanism of stimulus will work as that a diverse set will probably work best. A stimulus should be temporary affair, and dumping a massive quantity of money into the system (or no longer taking money out of the system) at a single, specific spot is more likely to create a dependency or to cause a shock. The Fed’s control over national interest rates is a nice lever because loans are taken at all levels across the economy. Via a single spigot they can affect everything from a corporate merger to a guy buying a motorcycle.
Other, more targeted, locales are probably less wise and really only serve as a mechanism for politicians to appeal to certain segments of the population.
The problem with trickle down is that the additional investment that the wealthy did as a result of lower taxes was supposed to spur things. That additional investment was a trivial amount (even if it all had been invested) because the denominator in the ratio to the current value of all previous investments.
A company will hire additional employees, in general, only when they think they can sell what they produce for more than their salary and benefits. The job creator tax break is a myth.
Government spending as a stimulus can work but not just arbitrary spending. Take a hypothetical widget factory. If the government says they want to buy 5,000 widgets, the owner will use a combination of overtime and temp workers to fill the order. If the government says they want to buy 500 widgets per month for the next five years, more employees will be hired.
Mandating benefits can hurt hiring but only in the sense it changes the break even point for value produced versus cost of employing.
My opinion is that in the 80’s Reagan cut taxes and increased spending and both sides learned the wrong lesson.
The problem is that is some sense, the economy is the net effect of billions of individuals making decisions. General trends can be identified. Manipulating via policy usually has short term benefits and then the economy (those darned individuals) adjust to the policy and frequently there is an opposite reaction.
I’m not even sure that’s true. Suppose I manufacture sprockets. Each sprocket costs me eight hundred dollars to produce and I sell it for a thousand dollars. I produce and sell ten thousand sprockets each year, for a profit of two million dollars.
My marketing director tells me he’s done some polling and he’s found that there’s a larger market for sprockets out there. At a thousand dollars apiece, I could be selling fifteen thousand sprockets each year.
I think about this and I ask my marketing director how many sprockets I could sell at fifteen hundred dollars apiece. He checks his date and tells me I could sell ten thousand of them.
So which makes more sense for me? Manufacture more sprockets or raise my prices? If I manufacture more I’ll pay twelve million dollars to produce fifteen thousand sprockets and sell them for a thousand dollars apiece: a profit of three million dollars. If I manufacture the same ten thousand sprockets I’m making now for eight hundred dollars but sell them for fifteen hundred dollars apiece, I’ll make a profit of seven million dollars.
If you consider the term to be a rephrasing of the Invisible Hand, I think that you’ll find that the ability to produce more wealth, more quickly has certainly risen since the 18th century. And while the rich are still rich and the poor are still poor, the poor now live in houses, with TVs, own cars, have internet access, and aren’t suffering the death of 1/3rd of their children to famine and disease.
There is at least a nugget of truth that encouraging businesses to do businessy things helps to lift the poor up, even if it’s not doing so at a social level.
What “Econ 101” says is utterly irrelevant. Econ 101 discusses completely hypothetic markets with features that never actually exist in reality. Attempting to make political decisions based on a mere Econ 101-level understanding of Economics is a fool’s errand.
Which isn’t to say that many politicians don’t try.
Economics 101 is a fable, whose purpose is to indoctrinate freshmen with all the dogma they will need in order to make higher level economics classes fit into the free-market paradigm. In most cases where free market economics has been tested in a closed system, it has crashed and burned (from Argentina to Zimbabwe), and no closed system applying a different economic model has ever been left alone to play out its experiment without threats of nuclear annihilation. So there is really no empirical data available upon which to evaluate free market economics.
Economics is the intersection of accounting and behaviorism. The problem is that its adherents believe that the rigor and precision of their accounting is applicable to human behavior.
I’m trying to get my head around marginal economics, though it seems pretty obvious to me. Given an extra $100, a family will spend most of it, and a corporation will save most of it. It’s not because corporations are bigger savers, they just have bigger margins. If this is true, policies that give money to consumers will result in more economic activity and more growth. Policies that give money to corporations basically lines the pockets of corporations.
Not sure if this is economics 101, I’m basically a struggling autodidact on the subject.
Consider the case of the Capitol Hill Babysitting Co-op, the struggles of which are often used to illustrate economics concepts. At first, the “currency” was in short supply, so nobody wanted to have their kids babysat by other members (i.e. a shortage of demand), and a recession happened. Management tried injecting “currency” into the system, but put in too much, and eventually everyone felt like they had enough “currency” in their savings and people weren’t so anxious to babysit other people’s kids (i.e. a shortage of supply).
There’s a lot more at work there, though; it’s worth reading the Wikipedia article.
Given the difficulty of successfully managing a walled-off economy involving just 20-200 economic entities all operating on the same level, it’s not surprising that it’s virtually impossible to make sense of (and successfully manage) a national economy comprised of hundreds of millions of economic entities operating on a multitude of levels with ties to other national economies around the world. If progress is desired, anyone who thinks they can explain/solve the problems of the day in just one or two sentences ought to be promptly excluded from the discussion.
