Save the Economy

Great Debates
21

How about the part about reduced tariffs leading to higher prices? That was the most glaring innacuracy. Low wages and lax environmental/labor laws are indeed a problem, but they have little or no bearing on the fact that increased globalization minimizes deadweight loss. Protectionism does not stimulate the world economy, instead it serves the purpose of keeping higher living standards impossibly out of reach for most of the world’s population.

**

There is very little that is “pie in the sky” about lost gains from trade. Your theory that corporations will “chase lower and lower wages” is only half right, it is not borne out by the fact that corporations will always be willing to pay a premium for skilled labor. It is not borne out in that one of the major benefits of companies moving overseas is the technology and skill transfer that takes place during such moves. It is not borne out in the fact that wages which might seem unfair to your pampered sensiblities in America actually constitue a living wage in these places. Often it is a wage that might be out of reach otherwise. You can over-generalize the world economy into sweatshops in Asia if you wish, but I would rather be more realistic.

**

Case in point. Take your perspective outside of the US for a second and realize that in many places any electricity at all would be a massive improvement. Alternative energy sources might give you a warm feeling, the economic (and for that matter, environmental) reality about their hidden costs is another matter.

Infrastructure such as basic electrical services and road system might seem like annoyances to you, but they make the difference between a growing economy and a world that is stuck in the middle ages for much of the world. Domestic trade needs such things in order to flourish.

**

I live in Houston, believe me I feel your pain. Perhaps I didn’t make it clear enough but I am advocating building roads in places that don’t have the luxury of complaining about traffic. Places which would see a direct benefit from being able to transport goods to and from far away markets.

Humble Servant is right, the basic economics are being ignored here. Wealth distribution does not make the “pie” any bigger, research and development (which allow for more to be produced with less) and eliminating economic inefficiencies increase the pie. Tariffs and subsidies are a major source of inefficiency, the economic theory more than backs that fact up.

**

Unfortunately tariffs and subsidies are a major political issue, the consumer is diffuse while the producers that suffer from competition often represent discrete political entities.

Why bother to go to the pit? You as much as acknowleged that you did not understand the economics and then implied that that might make you specially qualified. You then went on to say that investment in banks and the stock market does not stimulate the economy so much as giving money to the “poor” would. While I do not hold the position that giving money to the “poor” does not stimulate the economy, it is my position that money that is invested works better to create more capital and jobs than handouts do. The “poor” pay very little tax as it is.

That being said I agree that we could go a month or two without sales tax, a tax which is disproportionately applied to the poor. I have no idea what you mean by a “realistic” upper income limit, or for that matter what you might want to “radically” raise the foodstamp cutoff level to. But I am listening.

22
  • Sigh *, Azael I am wondering if it is at all possible to request that you behave is a somewhat civil manner? Also I would like to suggest that you pretty please read my posts before commenting on them, as my impression is that you are not doing so.

Can you be kind enough to tell me where I did this?

As to a realistic assessment to the where poverty begins, looks as if it is pegged at around $18000 for a family of 4 I guess that I would contend that this is laughably low, and should be much higher.

23

**

Vague? Sure. My apologies.

**

Indeed this is low, maybe not everywhere in the country (and certainly not in most of the world) is it laughably low but in most cities yes. What would you propose changing it to? How would it help?

24

First of all, I will readily admit that I have no idea what a fair poverty level would be. My sense is that it would tend to vary from area to area and would probably be pegged to the cost of housing in any given area.

To use a specific example of how it would help, consider a family of four that would fall in to the category of Working Poor. Making enough to pay rent, mostly keep up with the utilities and eat cheap starchy food. Let us further suppose that one day, the poverty level is reassessed and they are now considered to be below it.

This changes a lot. They would now qualify for Food Stamps, Medicaid (or Medicare, I can never keep straight what is for the elderly and what is for the economically disadvantaged) and all of the other services that are currently unavailable.

The immediate effect would be that this family now has more spending money. They can now afford to catch up on their utility payments; suddenly they are making regular payments on their credit cards and so fort. Maybe they can afford to but new clothing rather than shop at the Salvation Army, and perhaps mom and dad go out to dinner (while hiring a sitter) every once and a while.

On a very real level, the economy at least in their little sphere of influence, is getting a bunch of money pumped in to it that it was not before. Now multiply this by millions of families.

Admittedly, the approach that I take towards manipulating the economy tends to be a humanitarian one, and I realize that this is not the filter through which many people view the world, but there you go.

25

In order to give welfare to this hypothetical family, taxes would have to be raised on others. That would mean that others would have less money to do those aforementioned things.

When you redistribute money like that, it doesn’t cause the economy to grow.

Oh, and as far as food stamp elegibility, the income cut-off is quite high. The government loves to give food stamps away.

26

First, the obligatory “Cite?”

Next, while some of what you say (in terms of having to raise taxes) may be true, I am not sure that this is the whole picture. I think that what I am talking about here is the potential salutary effect of cutting back on some people’s disposable income while at the same time enabling others to purchase the goods and services that they cannot at present.

To say nothing of the fact that a great deal of the money that is in the hands of the government is horribly wasted (another debate for another time). Chances that that if we wanted to do this as a society, we could.

27

It is not that simple. For one thing, the government can borrow money. In fact, Bush is basically proposing his tax cuts for the wealthy out of borrowed money. Most people believe that the government borrowing money in order to either spend or give tax breaks has a stimulative effect, at least up to the point where it starts to increase interest rates and crowd out other investment.

Second, people do different things with money. Poor people tend to spend just about everything they can get their hands on while rich people tend to invest or save a higher proportion of their money. So, transferring money from richer people to poorer people will tend to have a short term stimulus effect by increasing demand. (What it does long term is probably more open for debate.)

28

Come on, BinaryDrone, isn’t it obvious how society would evolve this way?!? I mean, first off, you’ve got the poor people’s lobby…See, they use their lack of wealth to buy off the politicians so that the politicians vote for generous benefits for the poor.

And, then on top of that, the poor vote in such great numbers that they overwhelm those whose money is being taxed to pay for the food stamps. Politicians are afraid to propose cutting taxes on the majority of the population and lowering benefits on the poor because they are afraid of being massacred at the polls (particularly once all those poor people put on all those nasty television commercials that they buy, again with their lack of wealth).

Simple logic thus shows us how a society will tend to evolve to giving incredibly generous benefits to the poor! So, who needs a freakin’ cite! I am frankly surprised you couldn’t figure this out for yourself! :wink:

29

Well, I am not an economist but I do have a MBA and some business experience (and I slept in a Holliday Inn) so I think I might be qualified to answer.

Money to the poor has to come from somewhere. As already mentioned, when you increase the supply of money you cause inflation and the real value of the money is reduced. Assuming we distribute the wealth of the entire USA (leave out the rest of the world for now for simplicity sake), the per capita GNP would be about $36,000 per person.
http://www.cia.gov/cia/publications/factbook/geos/us.html

What that means in real terms is if we split up all the finished goods built last year we would all have about $36,000 worth of stuff. Not really all that much. It’s the same reason you can’t solve poverty by simply writing everyone a check for $1 million.

Basic economic theory tells us that when more people are able to buy products, demand increases and the price goes up. Once again, the real purchasing power of the dollar decreases and you’re poor again.

Sticking money in a bank is kind of a waste since even with interest, you are slowly loosing value due to inflation. Investing in stocks, on the other hand, helps the economy. Stocks provide money for companies to expand and grow. It increases the overall “pie” instead of just shuffling pieces around.

You don’t need to be an economist but you should learn the basics laws of supply and demand and the relationship between money, inflation, unemployment, interest rates, and GNP.

30

Yes, inflation seems like a real concern at the moment. :rolleyes: When the economy is in a downturn, the concern generally isn’t inflation but rather getting demand up again.

This distinction isn’t really valid since the bank is free to invest the money or loan it out to people.

Well, your own views of economics seem rather selective. Most economists that I have heard of would call your demand theory expressed above simplistic at best.

31

What do you think happens to money when “rich” people invest or save their money? Do you think that if they save it, that it just sits in a bank vault collecting dust? Do you think that if they invest it, that it just sits in a bank vault and collects interest?

32

Inflation and real purchasing power always need to be considered because they are an integral part of any economic solution.

It’s valid to the individual investor. Besides, the bank does not loan out deposits. Money is created by the Central Bank. Banks then borrow money from the Central Bank at the interbank lending rate. The banks then lend out money based the desirability of loan candidates and consumers desire to borrow from banks.

The Fed lowers interest rates to encourage borrowing. The idea being to spur growth by increasing people’s ability to invest in new homes, businesses and other improvements.

So in other words, putting your money in a savings account doesn’t really help the economy because it doesn’t have much to do with lending money.

So what? I’m not writing a thesis here. I’m simply explaining some basic economic theory to someone who admits to not having much knowlege of economics.

Talk about simplistic. Do poor people spend whatever they can get their hands on because they don’t have that much to spend? Are they poor because they don’t save and spend recklessly? Giving a lot of money to the poor so they can buy useless crap (or even useful crap like food and clothes) does not provide much of a stimulus to the economy.

A big problem with the economy is that people are scared to spend money because there is so much uncertainty. Between the Internet bubble bursting, the corporate scandels, fear of war and terrorism, and unemployment people are just not confident in the financial system. Overall demand goes down so companies are hesitant about expanding. They lay employees off in large numbers which makes the problem worse.

So if you want to fix the economy, you need to do things that
A) restore peoples confidence
B) encourage companies to grow and expand
c) encourage new business

So in a sense, increasing the right type of government spending would help provided it does not go hand in hand with increased taxes.

33

I was already more generous to your supply-side point of view than I might have been by implying that there is more debate over the long term view of which is better. But, in the short term, I would like to see any serious economist argue that giving money to rich folks who will save and invest a lot of it will provide more short term stimulus than giving it to poor folks who will mainly spend it.

34

Well then, I am sure you will be able to find lots of economists that support your position that a stimulus in the form of a tax break to poor folks likely to spend the money right now would have bad inflationary consequences.

Again, I would like to see some verification from somewhere that this is the case. I don’t honestly even care one way or the other on this particular point…I just thought it was so incredibly bizarre that you were making all these distinctions between one sort of savings and investing and another. And, I am suspicious of your claim that the banks’ lending and savings functions are so independent of each other.

Well, I am just trying to keep your explanation in line with the facts.

For heaven’s sake, this isn’t rocket science. I just had this argument over in this thread and I sure as hell ain’t gonna go through it again. You can track down the references in that thread. The point is that poor folks have a higher “marginal propensity to consume” because they have more unmet needs than rich people. And, while consumer confidence does come into it, it won’t change this basic fact. In fact, my WAG is that it might make the difference between the poor and the rich even greater because the upper-middle class and above will be the ones who can afford to be more cautious now and not spend their money whereas the poor will tend to continue to spend regardless of their confidence because they are essentially living paycheck-to-paycheck.

The reason businesses are not growing and expanding is not because they are lacking the investment dollars to do so as much as that they don’t have confidence that the demand is there. It’s stupid to invest and grow when you have overcapacity!

On this fact, we agree. I have heard some economists argue that in fact this may be a recession where the most effective way to stimulate the economy is to have government invest since companies aren’t likely to at the moment and it is not clear how much of tax cuts will be spent by a jittery public. (However, all else being equal, clearly the poor are likely to spend more of a tax cut than the wealthy.)

35

Geez, we just went through this in another thread, but here goes again:

First of all, you CAN get a ‘stimulus’ by borrowing money and just raining it down on the population. Sure. But you’re also incurring a liabiity. That loan has to be paid back, with interest. So the ‘stimulus’ just means sacrificing future growth in order to maximize current production.

This can be a good idea when you have a lot of factories sitting idle, to the point where the infrastructure may actually be dismantled. So I’m not going to deny the possibility of a short-term stimulus being healthy for the economy in the long run.

But this is only in extreme cases. In general, transferring wealth to the poor by taxing the rich has the effect of punishing productive behaviour and rewarding non-productive behaviour. In the end, the economy will actually be damaged by doing this.

Remember, borrowing money to give to the poor for them to spend does not CREATE wealth. It CONSUMES it. As I said in the other thread - we don’t create wealth by buying lots of things. Rather, the ability to buy lots of things is the result of increased wealth. This is a basic, fundamental point that people seem to understand when it comes to their own finances, but seem unable to grasp when applied to the economy at large.

In the end, the ONLY way to increase economic growth is to be able to make more things with the same resources. That means increases in efficiency. Improving the infrastructure, improving communications, discovering new resources, etc. And the only way you do that is by encouraging people to work harder and smarter, and to invest more of their money in production rather than consumption.

It used to be that liberals wanted to help the poor through public works projects. The GI bill, workfare, ‘jobs creation’ programs, etc. That was still wrong, but at least things were being created that someone thought the economy needed. Now it seems, their strategy is to bleed capital away from where it wants to be and just hand it out so the country can throw a big party. This is simply a destructive thing to do. You’re taking some of your wealth and SPENDING it for short-term gain.

If you want to improve the world economy, here at the things that need to be done:

  1. Lower marginal tax rates in the countries that still have ridiculously high ones. The top rate should be somewhere well below 50%.

  2. Work towards world stability. Nothing destroys wealth like conflict. Part of the reason Africa and the middle east is so poor is because they keep destroying their infrastructure in endless wars.

  3. Global free trade. Free trade is always a good thing. David Ricardo showed us that 200 years ago.

  4. End subsidies and tariffs. The government is no better at picking winners and losers than the experts in the stock market, and those experts are rarely better than random selections. But yet, the government tries to encourage the things it thinks are ‘better’, and tax the things it doesn’t like. This is incredibly destructive. Let capital flow where the market wants it to go, and you’ll have the most efficient system.

  5. Lower regulation. Many industries are over-regulated, and their growth is constricted as a result. Some estimates for the cost of regulation in the United States go as high as 2 trillion dollars a YEAR - an amount that dwarfs any possible stimulus the government could afford.

  6. Streamline government and lower its cost. The reason Europe is underperforming the United States is because it has significantly higher taxes and increased regulation and social spending. Note that I’m just talking about how to improve the economy here - if you think social spending is a good thing, fine. But don’t confuse it with economic growth. Social spending is always a drag on the economy. The question is whether or not it’s worth the price, and that’s a philosophical question - not an economic one.

Of all of these, I’d say truly global free trade would be the biggest deal. The poorer countries have huge untapped resources, and a ton of under-utilized labor. The world average income is only about $8,500. The average income in the developed countries is more like $24,000. The average in the third world is less than a thousand dollars a year! That gives some idea of how much wealth could be created if the third world realized the gains of say, South Korea.

So how do we get the third world efficent, and therefore wealthy? Two things - stability, and infrastructure investment. People in third world countries make pennies not because the man keeps them down, but because they cannot leverage an infrastructure. On the other hand, an auto worker in Detroit doesn’t make $60,000 a year because of the union - he makes that kind of money because his labor is magnified by the millions of dollars worth of equipment at his disposal, plus his education, plus the quality roads to move goods, etc.

And the only way you can build infrastructure in the third world is through private investment. Governments can’t do it, and would screw it up even if they had the money.

Let capital be free to move to where it’s most effective throughout the entire world, and you’ll have set the stage for phenomenal worldwide economic growth.

36

I’m not saying that a tax break by itself would lead to inflation. In fact, deflation is probably more of a concern right now. All I am saying is that simply handing out more money to people does not necessarily provide a long term solution to economic woes.

There were really two points I was trying to make:

  1. saving is different from investing - investing helps the economy by generating growth, savings is the equivalent of stockpiling extra inventory (its good to have it on hand but it’s not doing anything for you and can, in fact, be wasteful).
  2. the relationship between your savings deposits and the loans made by the bank are more complex than simply taking your money and loaning it to someone else at interest. (After all, when you go to the ATM, it never says that you have to wait until Mr. Ed Johnson makes his mortgage payment)

It’s not my claim. There is plenty of info on the web regarding the banking system. It’s how the banking system works. A bank can lend out an amount equal to a multiple of its deposits. For example, if the reserves requirement is 10% and a bank has $50,000 in deposits, it can lend out $500,000. Of course, you can set the reserve requirement to 0% and the bank could lend out as much money as it wants.

It’s a Catch-22. Business are not hiring because they don’t believe there is a demand and there is no a demand because people are afraid to spend money. That is the where the government is supposed to come in and break the cycle.

Tax breaks for the poor are helpful because they reduces income disparity and provide a social benefit of not having people starve or end up on the streets. I just can’t envison the entire economy being driven by the purchase of DVDs and stereos.

37

msmith537, while I am pretty sure that your heart is in the right place with the way that you are taking the time to explain the basics of supply and demand to me, I would at least like to share that I have had the basic comic book economics required to get through college.

Maybe the fault is mine, in that I am expressing my ideas poorly. But, I will keep tilting at windmills.

See, I am specifically not talking about just printing a bunch of money and giving it to the poor folks, nor am I suggesting that we take everyone’s money away and put it in a big pot and then divide it equally. These are admittedly silly ideas that will cause obvious problems (even in my economics 101 worldview). As an aside, I find it interesting that folks always assume that this is what is being proposed when the suggestion is brought up that things could be handled better with the economically disadvantaged.

What I am suggesting is that we attempt to manipulate the market in a way that favors the poor. My contention is that we already do so (very aggressively) in a way that positively affects the folks that already have a bunch on money, and that it is time to try something different.

It seems that ways could be found to do this without stealing form the rich or printing a bunch of money. Progressive tax reform, redefining the poverty level so that folks that need it can take advantage of programs that already exist, cutback on government waste and so forth.

38

As a total side point here, I want to say thank the Magical Sky Pixie that I have finally heard one of the free market types say something like this. Honestly, this has been something bugging the hell out of my with these market debates, and it is wonderful to see someone thinking about the actual people represented by all of these numbers being crunched.

39

Yep. It’s an equilibrium. One of the great things about capitalism is that, within broad limits it is dynamically stable. If something becomes harder and harder to get, the price rises in direct proportion to how much demand for it there is. That acts to spur development of alternatives, invest in more production, and the increase price causes competitive solutions become economical, which absorbs some of the demand. Then an equilibrium is reached which represents the new intersection of supply and demand. i.e. reality.

In Communism, on the other hand, the government can’t act until it sees the symptom, because the economy’s behaviour is not predictive. You wind up just reacting to events, which creates a permanent series of gluts and shortages. And even then, most communist countries eventually tolerated a certain amount of black market activity in order to help distribute goods a little more efficiently.

40

ElJeffe was the first on in the door in this thread to give the sorts of things I’d think of for the U.S. Subsidies and tarriffs are not good: not for the world, and not even for ALL of the American economy.

One major thing to remember is the difference between unused capacity and real growth IN capacity.

In recessions, the major problem is that economic resources that COULD be producing wealth are not getting used. This is a problem of not using all the available capacity. This is a loss FOR ALL TIME: meaning that the world is permanently poorer for not having those resources producing when they could. That’s bad.

On the other hand, there’s the issue of a real growth in capacity: of all the resources in society actually being able to produce MORE than they could have before. Again, forgone opportunities are lost for all time.

Both of these sorts of problems are important. Not all policies will necessarily address both in the same way. As post-82 America demonstrated, you can acheive fantastic rates of apparent growth coming out of a recession, because you have unused capacity coming back on line, and this LOOKS like the economy truly growing very quickly. Unfortunately, this sort of growth cannot last forever: eventually everything available comes back online, and you hit diminishing returns.

Real growth in capacity, which is what you’re left with then, is much harder to speed up, because it’s far more long term, and depends on things like technology, education, and so forth, that are sometimes worth the cost to push, and sometimes not. That is, sometimes they increase average productivity considerably to blwo away the cost of spending resources on developing them, sometimes they do not. It’s a tricky thing, and the reality is that no one has any good idea about how best to do this. Even the best development ideas from economic theory has have only middling results in the developing world, and we’ve had cycle after cycle of new ideas: so far the only major successes are rather odd cases of Asian giants like Korea and Taiwan: which seem to have succeded with heavy regulation, centralized industrial policy, sweeping agricultural reforms, careful protections of domestic industry, etc. all in the face of military threat and relatively few democratic institutions until recently.

Traditional neo-cons probably don’t want to hear it, but in the developing world at least, the major problem seems to be that there is no strong state: that it doesn’t extend very deeply into the society.