Monday, June 04, 2012

The Supply-Side Solution for a Real Recovery

"To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.

The Obama administration seems to think that individual incentives and serious fiscal reforms are of no great importance and policy should emphasize Keynesian-style demand stimulus (public works, prolonged benefits) along with bits of industrial policy (loans and grants to "green" energy companies). This approach has failed for three years."

~Harvard economist Robert Barro in today's WSJ

62 Comments:

At 6/05/2012 12:29 AM, Blogger Steve said...

This comment has been removed by the author.

 
At 6/05/2012 12:30 AM, Blogger Steve said...

Are you kidding me? Demand drives growth!!! If no one can afford to buy (demand), NO AMOUNT OF SUPPLY WILL CAUSE DEMAND!!!

The job creators are the buyers(Middle Class) and not the Business Owners(Upper Class or the top 10%).

 
At 6/05/2012 1:40 AM, Blogger PeakTrader said...

Steve says: "Demand drives growth!!!"

Which is more likely to drive growth?

An individual buying a low-price high-value good, or a voter forcing another to buy a high-price low-value good?

 
At 6/05/2012 5:09 AM, Blogger Jet Beagle said...

steve: "NO AMOUNT OF SUPPLY WILL CAUSE DEMAND!!!"

Despite the caps and exclamation points, this is an incorrect statement. It is exactly the availability of new and improved goods which causes consumers to strive for more income - income they then use to purchase those new goods.

Most consumers were content with their land line phones before wireless became available. It was only after suppliers created the product that the demand for cell phones caused an entire industry to flourish.

Supply creates its own demand even without creating new and improved products. When supply is increased, the price decreases. A decrease in price leads to an increase in demand.

 
At 6/05/2012 5:40 AM, Blogger Larry G said...

" If no one can afford to buy (demand), NO AMOUNT OF SUPPLY WILL CAUSE DEMAND!!!"

well you have the perfect situation with corporations holding billions of dollars but not using it to make stuff to sell because there is no demand for it.

that would seem to be the trick with supply side - i.e. to convince investors to make stuff to sell even if there is no demand for it just so they'd be hiring folks to make the stuff that there is no demand for.

why does this sound so bass ackwards?

when you have 8% unemployment - how do you create "demand"?

 
At 6/05/2012 6:45 AM, Blogger Duncan said...

It is even more fundamental, one must first produce something, before one can trade and demand. Somehow Supply became a bad word and a target for the progressives. Maybe we should call it innovation or know how or tech savy. It is what raises wealth at all level of society.

 
At 6/05/2012 7:03 AM, Blogger Jet Beagle said...

Larry G: "when you have 8% unemployment - how do you create "demand"?"

Oh, that's a simple question to answer. Stop government from interfering. Here's a few ways:

1. Stop paying unemployment and give workers an incentive to take care of themselves.

2. Stop taking money from consumers and using it to subsidize the politician's "favaorite" industries or companies.

3. Remove disincentives to hire workers, such as minimum wage law and Obamacare mandates.

4. Reduce the size of government.

5. Remove regulations which have encouraged businesses to move overseas.

That's just a few. I'm sure you can come up with more.

 
At 6/05/2012 7:04 AM, Blogger Larry G said...

" one must first produce something, before one can trade "

how would you know what to produce and how much to produce?

wouldn't you want to produce something for which there is a known existing (or latent) demand for?

If someone is unemployed and broke...how does supply-side convince them to buy something even if they needed it - if they were broke?

I just can't see investors building a plant and hiring people if there is no demand.

Doesn't thank describe what is going on right now...when we say there is a ton of money on the sidelines... that is NOT being spent on production?

What would convince these companies to hire more employees?

Would they just hire more employees even if there was no demand for more produced goods?

Why would they do that?

the investors would go ape-shit if GM hired more workers than demand would support - right?

wouldn't GM end up with a 300 or 600 day supply of cars instead of the more nominal 30-60 days?

re: "
the availability of new and improved goods which causes consumers to strive for more income - income they then use to purchase those new goods."

someone who has been unemployed for months.. is suddenly going to find employment so they can then buy something?

you know if supply-side actually "worked", counteracting recessions would be easy, right? You'd just convince Apple to build more phones than existing demand and more buyers would appear to buy the extra phones, right?

 
At 6/05/2012 7:12 AM, Blogger Moe said...

A healthy middle class with jobs and money in their pockets create demand - healthy demand - not the demand that's born out of credit card use.

Target wasn't in my town 15 years a go - it was a sleepy farm town - once people started relocating there, then you started to see Panera, Target and Pizza Hut. These companies open stores where they see demand and not until then.

 
At 6/05/2012 7:21 AM, Blogger Pulverized Concepts said...

What circumstance has led people to believe that state regulation is necessary for the existence of an economy? If one can trade baby sitting services for getting the lawn mowed without the intrusion of the state, why is it impossible for more complex deals to be made without government being involved? Where is the line drawn on the level of economic complexity where government supervision is required?

 
At 6/05/2012 7:36 AM, Blogger Jet Beagle said...

Larry G: "You'd just convince Apple to build more phones than existing demand and more buyers would appear to buy the extra phones, right?"

I'm not sure you've really represented supply side theory with your example.

Would you consider reading a short explantion of supply side economics before commenting again about the subject?

 
At 6/05/2012 8:02 AM, Blogger Ken said...

Steve,

Are you kidding me? Demand drives growth!!! If no one can afford to buy (demand), NO AMOUNT OF SUPPLY WILL CAUSE DEMAND!!!

The job creators are the buyers(Middle Class) and not the Business Owners(Upper Class or the top 10%).


So you're saying that the industrial revolution happened because all the sudden demand increased? This type of lazy thinking is why Keynesians can not ever be taken seriously.

 
At 6/05/2012 8:20 AM, Blogger Jon Murphy said...

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At 6/05/2012 8:28 AM, Blogger Jon Murphy said...

There is always some kind of latent demand. People always want more, better, faster ways of accomplishing their goals. However, they cannot articulate those wants to suppliers. An supplier (inventor, whatever) knows, if he can invent a better product, people will consume it.

For example, if demand was the sole driving force in the economy, why would anyone invent during a recession/poor economic growth? How many versions of the iPhone have been released? How many newer, smarter, better smartphones have been released? How many new enterprises have arisen?

Steve, you are half right that if no one will buy, there is no demand. But that is a call for greater investment, not less. In tough economic times, people need to make every dollar count. Creative minds will find ways to make that happen. Someone could invent a machine that will make life cheaper. Maybe someone will come up with a new food preservation technique. Who knows?

Let me just ask this: if a perpetual motion machine which could produce all the energy you need completely free were invented and sold on the open market, do you honestly think people will not be rushing to buy it?

 
At 6/05/2012 8:33 AM, Blogger PeakTrader said...

Food has to be grown before eaten. When government makes it harder to produce, e.g. through regulations and taxes, you may starve.

 
At 6/05/2012 8:35 AM, Blogger Jon Murphy said...

Another way to think of it is like this:

If people are not buying, then it is because they see little/no value in the products before them. How will the lack of invention and investment solve that issue.

 
At 6/05/2012 8:51 AM, Blogger Ed R said...

'Supply-side' policies when greatly below full employment & utilization is a formula for deflation and deeper recession. Prof. Barro (now at the appropriately-named Hoover Institute) surely knows this.

The case for more aggregate demand is obvious:

1.) Corporate profits are at record levels, yet new investment (to say nothing of employment) is far below historical levels. Corporations are also holding over $1.5 T of cash, which is far above 'normal' levels.

2.) Banks are sitting on $1.6 T of excess reserves at the Fed. The historic levels (before 2009) for excess reserves held at the Fed is very close to zero.

 
At 6/05/2012 8:53 AM, Blogger Moe said...

Food has to be grown before eaten

Food is only grown because we need to eat. If we could survive by just breathing air, nobody would bother.

 
At 6/05/2012 8:58 AM, Blogger PeakTrader said...

Part of Keynesian economics is smoothing-out business cycles, e.g. reducing taxes and regulations, or running budget deficits, when the economy is underproducing, and raising taxes and regulations, or running budget surpluses, when the economy is overproducing.

When there's too much rain, you want to save some rain for when there's too little rain, to avoid periods of feasts and famines.

 
At 6/05/2012 8:59 AM, Blogger Jon Murphy said...

1.) Corporate profits are at record levels, yet new investment (to say nothing of employment) is far below historical levels. Corporations are also holding over $1.5 T of cash, which is far above 'normal' levels

Given the rules and regulations due to go into effect this year that haven't been written as well as the traumatic experience many businesses had when they overleveraged themselves, are you really surprised that cash is king?

Besides, you may want to check your facts about low investment.

2.) Banks are sitting on $1.6 T of excess reserves at the Fed. The historic levels (before 2009) for excess reserves held at the Fed is very close to zero.

Before 2009, the Federal Reserve didn't pay banks to keep cash at the Fed. Also, at the current interest rates, banks make more money keeping cash at the Fed rather than loan it out (for some kinds of loans, banks are actually losing money when they loan it).

This isn't an argument for increased demand. It's an argument for changing incentives.

I could launch into a long winded explanation on why AD is a logical misstep, but I'll just say this: not all demand is created equal.

 
At 6/05/2012 9:09 AM, Blogger Jet Beagle said...

Ed R: ''Supply-side' policies when greatly below full employment & utilization is a formula for deflation and deeper recession."

Supply side economic policies include:

- reducing marginal income tax rates;
- reducing capital gains tax rates;
- eliminating government interference in markets.

In addition, supply siders reject the Keynesian belief that the Fed's printing press can solve economic problems.

Please explain how any of these supply side policies leads to deflation adn a deeper recession.

 
At 6/05/2012 9:11 AM, Blogger morganovich said...

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At 6/05/2012 9:20 AM, Blogger morganovich said...

moe-

"Food is only grown because we need to eat. If we could survive by just breathing air, nobody would bother."

obviously, any product is only created to serve imagined demand, but for their to be demand, there needs to be wealth to buy what one wants and for that, you need to be supplying somehting.

you can demand all the food you want, but if you have nothing to trade for it, you cannot act on that demand. you are free to demand a ferrari 458, but that does not mean you can have one.

increased production is what drives demand because that is what gives people somehting to trade.

until they have that, it's just a desire, not real economic activity.

 
At 6/05/2012 9:25 AM, Blogger morganovich said...

steve-

did you even read this before you commented?

your argument has zero to do with what he said.

double taxing investment hurts an economy. so do higher marginal top tax rates. taxing cap gains more is worst of all (and they are set to go up 50% next year)

regulatory uncertainty freezes business activity. lots of big, hard to predict and economically impactful changes driven by regulatory policy and government intervention into markets are a big part of what kept the depression going in the 30'.

if you want people to invest, they need to know what the world is going to be like and if you have the government dancing around the room like a drunken rhino, then everyone takes a wait and see approach and you get no recovery.

your response has ZERO to do with this (and is still dead wrong) as you cannot stimulate demand in the way you claim. how do you increase middle class demand? by what, giving them money? from where? taking from the productive and giving to the unproductive does NOT stimulate growth. and fwiw, the growth creators ARE the top 10%. they are the ones that invest. investment drives jobs, productivity, and wealth.

how is it you propose to magically increase demand without investment?

desire for somehting only becomes economic activity when you can do something about it and that requires something to trade. you need to supply something to pay for what you demand. claiming that you can just up demand without upping the amount of production to trade is flat out magical thinking.

not only are you fighting with a straw man, but you are losing.

 
At 6/05/2012 9:37 AM, Blogger PeakTrader said...

Obamanomics gave the weeds (government) too much water and the nutritious plants (private sector) too little water.

Now, there's little water left for either the weeds or nutritious plants.

 
At 6/05/2012 9:49 AM, Blogger PeakTrader said...

We borrowed lots of water from the rest of the world, to grow lots of weeds, because we didn't save any water.

 
At 6/05/2012 9:54 AM, Blogger Paul said...

If Keynesian economics actually worked, we would currently be in the midst of the biggest economic boom in history. Instead, Obamacare, energy policies, and trillion $ deficits are scaring the bejeezus out of the productive side of the American economy.

The most amazing thing to me is all these "smart" people who think Obama's vehemently anti-business agenda will somehow produce a jobs creating machine. These people are actually surprised by the economic squalor that has been produced instead.

 
At 6/05/2012 10:00 AM, Blogger Larry G said...

re: double taxing and related -

even with heavy taxing.. if there is a market demand - investment will occur - even in heavily taxed places like Sweden.

but people who lack money will not buy no matter how many widgets are being produced, how cheap they are or even how good they are.

(@Jet, yes we did read the reference and have read many others)

If money on the sidelines only had to be actually invested to create jobs...then we could end recessions at will.

The govt would follow policies that would encourage more investment.

Cutting taxes will not spur more investment if there is not aggregate demand. The people who invest when there is no aggregate demand (no matter the tax rate) will just lose their shirts and end up owning warehouses of inventory. That's why the money sits on the sidelines or buys treasury notes.

 
At 6/05/2012 10:01 AM, Blogger PeakTrader said...

Paul says "If Keynesian economics actually worked, we would currently be in the midst of the biggest economic boom in history."

Keynesian economics doesn't work well when government squanders too much in both economic expansions and contractions.

 
At 6/05/2012 10:10 AM, Blogger Ed R said...

To: Jet Beagle

Please show us the transmission mechanism for how reducing capital gains tax rates leads to higher factory utilization or additional hiring.

 
At 6/05/2012 10:19 AM, Blogger Moe said...

increased production is what drives demand because that is what gives people somehting to trade.

Bear with me Morganovich - If this were the case, why wouldn't Target just plop stores down in every little town in the U.S.? "Build it and they will come", does not always work. No?

 
At 6/05/2012 10:20 AM, Blogger morganovich said...

ed-

you have to be joking.

lower cap gains leads to more investment as it becomes relatively more attractive to consumption.

more investment drives more jobs, more productivity, and more income and economic growth.

this drives a virtuous cycle of production begetting paychecks and productivity begetting more affordable products both of which drive demand which rewards investments which, in turn, drives more of production and productivity driven by investment.

take a look at what happened in 1997 when congress cut cap gains.

economic growth accelerated, real personal income stopped declining and began to grow, and even tax receipts as a % of gdp went up dramatically.

the exact same thing happened when cap gains were cut under reagan.

have you ever actually run or invested in a business? you question makes me think that is unlikely.

 
At 6/05/2012 10:22 AM, Blogger Jon Murphy said...

The people who invest when there is no aggregate demand (no matter the tax rate) will just lose their shirts and end up owning warehouses of inventory.

Well, yes and no. Just like any investment, it depends on what the investment is.

Both sides of this argument are making the same mistake (and I am probably the biggest perpetrator of it). We are treating all of the variable, whether it be demand or investment, as homogeneous. Just as not all demand is the same, not all investment is the same. We want investment in businesses that produce things of value, just as consumers will demand things of value. If our goal is to increase just investment, then we would be able to end recessions at will: investments like Solyndra or Kodiak will be seen as ubiquitous as investments in Apple or GE. Doesn't matter your investment is now shit, you've invested!

Same thing with demand. AD assumes all demand is the same. But it's not. People want to be consuming things of value. Consuming a vehicle is not the same as digging a hole in the ground just to fill it up. One adds value, the other detracts.

The idea behind lower taxes and interest rates in general is that people will have more money to spend on activities they see as valuable (whether it be in investments, consumption of goods, etc). The problem with some kind of directed plan is that it doesn't necessarily take value into account (or it may take into account only one person/group's value).

There is also the issue of scarcity. Every person/resource tied up in non-valuable work (like our hole-digger) is a person/resource no longer able to be used in a more valuable role.

 
At 6/05/2012 10:24 AM, Blogger morganovich said...

moe-

target is a bad example as they are retail, not production.

let's look at it slightly differently.

let's say honda decides to build a plant in your town. that takes investment. it creates jobs and products. that brings money into the town. THAT attracts target.

the point is that you need to create something to trade for demand to ever be acted upon.

perhaps a clearer example would be investing to modernize a factory. this drives worker productivity up (and their paychecks with it) and the price of goods down.

this leaves workers with more money to spend on cheaper goods and drives demand.

does that makes sense?

 
At 6/05/2012 10:28 AM, Blogger morganovich said...

"The people who invest when there is no aggregate demand (no matter the tax rate) will just lose their shirts and end up owning warehouses of inventory."

and there is no aggregate demand without investment and production.

what are you going to trade for the goods ans services you desire if you produce nothing of value?

you are confusing this notion of demand (as in "i want a ferrari") with demand that can actually be acted upon and create economic activity. if you are broke, WANTING a ferrari is meaningless. until you produce something that someone will give you an Italian sportscar for, it's just want, not demand in an economic sense.

demand in an economic sense is what you can and will pay for, not what you would like. we'd all like a mansion and a pony, but that's economically meaningless if we cannot pay for them.

 
At 6/05/2012 10:30 AM, Blogger Paul said...

"Cutting taxes will not spur more investment if there is not aggregate demand."

Well, yeah it will, depending on the taxes being cut. But that's not the whole program; you also need a pro-growth agenda in energy, regulatory, and spending for a healthy economy to grow. In other words, take everything Obama has done for the past 3.5 yrs and do the opposite.

 
At 6/05/2012 10:32 AM, Blogger Ed R said...

To Morganovich:

When the corporate sector holds huge retained earnings in cash and the banking system is holding $1.6T in excess reserves; how does reducing the capital gains tax lead to more investment (or more hiring) by those corporations or more lending (debt-financed investment) by the banks?

So there is currently a great excess of lendable/investable funds.

It is suggested that reducing the capital gains tax (a tax break for cashing out of current investments)will only add even more to the great current surplus of excess investable funds.

 
At 6/05/2012 10:33 AM, Blogger Jet Beagle said...

ED R: "Please show us the transmission mechanism for how reducing capital gains tax rates leads to higher factory utilization or additional hiring."

Lower capital gains taxes stimulates the startup and financing of new businesses. Higher capital gains taxes dries up funds for new businesses. It's pretty simple, really.

High capital gains taxes also locks in capital in existing businesses. When capital gains taxes are reduced, a large part of that locked in capital is redeployed to more efficient and more profitable uses. The reallocation of capital to more efficient businesses is a key to economic growth.

Now, I've answered your question. Please be respectful enough to answer mine. Please explain how any of the three supply side policies will, as you asserted, lead to deflation and a deeper recession.

 
At 6/05/2012 10:43 AM, Blogger Paul said...

Jet Beagle,

"Please explain how any of the three supply side policies will, as you asserted, lead to deflation and a deeper recession."

Funny thing is the Keynesian critics of the Reagan tax cuts repeatedly warned that supply-side economics would create inflationary havoc. We know how that turned out. I guess Ed R could make the case that tax cuts spur production, creating more economies of scale = lowering prices. I'm not sure how that "deflation" is such a bad thing.

 
At 6/05/2012 10:45 AM, Blogger morganovich said...

ed-

the current reason for a lack of investment is that cap gains are going up dramatically next year, there is massive regulatory uncertainty, the government has been intruding into the business sector through repeated malinvestment, and no one has a clue what is going to happen.

imagine you run a buiness. you know that obamacare and it's huge impacts on your costs is going to be ruled on by the SCOTUS this month.

why would you invest now when the future is so unclear as opposed to waiting for certainty?

if the payback is more than a year and taxes are going up, that makes it less attractive to invest even now as opposed to consume or wait out certainty on the law.

we same this asme thing the last time we had a government this interventionist in the 30s'. who would build a power plant when the TVA was being discussed?

i talk to dozens of ceo's and cfo's every week. they are all singing this same song.

retained earnings are largely CAUSED by the tax code. it's more tax efficient to hold that cash and pass it along as a higher stock price that to do the more economically productive things and hand it out as dividends that are double taxed at higher rates.

the flaw in your reasoning is that you are assuming that demand just appears.

i'm not talking about want, i'm talking about actual demand as in "how many units will you buy at this price".

where do you think that comes from if not payment for productive activity?

 
At 6/05/2012 10:50 AM, Blogger Ed R said...

From Wikipedia (and it can also be found on any number of Austria economics web-sites): "The central concept of supply-side economics is Say's Law: 'supply creates its own demand," the idea that one must sell before one can afford to buy.'

To follow Say's Law (supply-side policies) during a time of capital underutilization and high unemployment is a formula for deflation and deeper recession.

 
At 6/05/2012 10:50 AM, Blogger morganovich said...

also:

the bank funds are held up by, wait for it, regulation. most of it is in US treasuries, which, i agree, are a poor investment. it's also being exacerbated by freddy and fannie buying up 80-90% of al new residential mortgages.

that is glutting the banks with capital and forcing them to buy federal bonds. (which is likely deliberate)

they have been crowded out of their own core market by federal policy. it's not exactly nationailzation, but it's pretty damn close from a functional standpoint.

if you want to read somehting that may help you understand why you have this largely backward, read this speech my friend gave at the grants conference.

http://www.huffingtonpost.com/david-einhorn/fed-interest-rates_b_1472509.html

he lays out quite clearly why the sort of demand creation you seem to favor does not work and why we are currently mistaking the brake for the gas.

 
At 6/05/2012 10:57 AM, Blogger morganovich said...

"To follow Say's Law (supply-side policies) during a time of capital underutilization and high unemployment is a formula for deflation and deeper recession."

utter nonsense.

1. it worked in the 80's.

2. where is it you think demand is going to come from? read the jelly donuts fed piece. you have this completely backwards (and, i note, provide zero evidence, even anecdotal) for you claim.

in periods of low growth and too much debt, the LAST thing you want to do is run up more debt and keep the investment rate too low and to take from the most productive and give to the least. that can NEVER drive growth.

how is it you think you can create net demand out of thin air?

and why would you consider it moral to do so through forced redistribution even if you could?

what gives you or a government the right to take my money just because i do not wish to spend it?

why do i have to be sacrificed to your notions of the greater good?

sounds awfully like fascism to me.

 
At 6/05/2012 11:12 AM, Blogger Jon Murphy said...

"The central concept of supply-side economics is Say's Law: 'supply creates its own demand," the idea that one must sell before one can afford to buy.'

That's a perversion of Say's Law. What Say actually said was "Products are paid for with products." In other words, you need something to trade if you want something in return.

 
At 6/05/2012 12:24 PM, Blogger Pulverized Concepts said...

perhaps a clearer example would be investing to modernize a factory. this drives worker productivity up (and their paychecks with it) and the price of goods down.

Why would this be the case? As an employer, why would I increase the wages of my employees just because they're more productive? Am I sharing my increased profits, if that's what increased productivity has produced? Actually, if my profits from a given activity go up, I'm more likely to hire more employees rather than raise the pay of the ones I have.

the banking system is holding $1.6T in excess reserves

What are "excess reserves"? Do you mean that banks have more in assets than they've loaned out? Sorry, I don't believe that, that's contrary to the very notion of fractional reserve banking. In reality, banks should have on deposit exactly as much as they've loaned out. Fractional reserve banking is what's created the current financial mess, to a large extent.

 
At 6/05/2012 12:27 PM, Blogger Moe said...

Morganovich,

Thank you for your response. There is a lot of nuance to this.

In reply to your Honda analogy - I would take it back further - Why would Honda build a plant in my town in first place? Demand for their product and the sense to build it in an area with enough potential employees to man it.

Seems like the chicken and egg - which came first?

On the other hand, There was no demand whatesoever for pet rocks -until someone decided to market and sell them...

regards

 
At 6/05/2012 12:31 PM, Blogger Ed R said...

Re: Banking system holding excess reserves:

" . . . .Sorry, I don't believe that, that's contrary to the very notion of fractional reserve banking. In reality, banks should have on deposit exactly as much as they've loaned out."

Go to the FRED (Fed Res Bk of St. Louis) website and find the graph of "Excess Bank Reserves" and look it up for yourself. (Whether you want to believe it or not is not relevant).

 
At 6/05/2012 1:04 PM, Blogger PeakTrader said...

Restrictive monetary policy, along with contractionary fiscal policy, caused the recession initially.

A liquidity "crisis" worsened the recession. There's plenty of liquidity now. However, banks are much more risk adverse.

Over the past few years, fiscal policy has focused on stimulating the "wrong" parts of the economy. So, we're in depression.

I suspect, inflation has been grossly overstated in the 2000s, even with appropriate adjustments to more accurately measure the true inflation rate, which were too little and too late.

The U.S. economy was most efficient after the quick and massive creative destruction process, mostly from 2000-02, and the country reached full employment. Yet, real GDP growth was low, and certainly didn't reflect the improvements in living standards.

After 3 1/2 years of depression, enough potential output has been destroyed to accelerate inflation when demand picks-up.

 
At 6/05/2012 1:04 PM, Blogger Jon Murphy said...

What are "excess reserves"?

By law, banks are required to hold a certain percentage of their deposits in cash. Anything above and beyond that percentage is knows as "excess reserves." Banks can opt for excess reserves to provide them with extra liquidity should a crisis arise. Prior to 2009, it was very uncommon for banks to hold excess reserves. However, in an effort to boost bank liquidity, the Fed started paying an interest rate on bank reserves. That interest rate is higher than what the Fed loans to banks, so banks borrow money from the Fed and then turn around and deposit the money at the Fed for the interest. They then pocket the difference.

 
At 6/05/2012 1:11 PM, Blogger morganovich said...

moe-

there is certainly a certain amount of chicken and egg one the system is running, but at start, supply must always come first.

want is not the same as demand in an economic sense. demand is that which you will really buy and pay for, not what you wish you had. wishes are infinite. i'd like a unicorn and g5 with a stable on it, but that's not terribly economically relevant.

demand in an economic sense cannot exist until you have some way to pay, and that takes supply.

if you and i are cavemen and WANT a new spear, it does not matter. we are not even capable of demanding it in an economic sense until we have somehting to trade.

i think people confusing demand in the economic sense with want in a personal one causes a lot of thinking to get tangled here.

a want only becomes economic demand when coupled with the ability to pay, and that can only come from producing things. (past or current)

 
At 6/05/2012 1:15 PM, Blogger Jon Murphy said...

a want only becomes economic demand when coupled with the ability to pay...

Right you are. In fact, economic demand is defined as what consumers are willing and able to buy

 
At 6/05/2012 1:19 PM, Blogger morganovich said...

also:

lest someone try to flip this over and claim that credit allows demand to come before supply, i would first ask they they go to a lender and explain that they produce nothing but would like to borrow money to consume and see how the loan application goes.

 
At 6/05/2012 1:26 PM, Blogger morganovich said...

oh, and, of course, why anyone would have money to loan before things had been produced seems like the bigger question there.

lending requires savings. savings requires previous production.

 
At 6/05/2012 1:32 PM, Blogger Moe said...

You clarified it nicely -I was confusing want with demand. I appreciate it.

 
At 6/05/2012 1:42 PM, Blogger Jet Beagle said...

Ed R: "To follow Say's Law (supply-side policies) during a time of capital underutilization and high unemployment is a formula for deflation and deeper recession."

Say's Law is not the equivalent of supply side economics.

I gave you the four key points of supply side economics earlier. Here they are again:

- reducing marginal income tax rates;
- reducing capital gains tax rates;
- eliminating government interference in markets.
- do not use money supply in an attempt to "tweak" the economy.

You keep saying that supply side policies will send the economy into a deeper recession (we are not now in a recession, of course). But you refuse to explain how. I don't think you really know.

Read this explanation if you do not understand what I just wrote.

 
At 6/05/2012 1:46 PM, Blogger Steve said...

Nick Hanauer makes the case for Demand Side Economics:

http://youtu.be/bBx2Y5HhplI

 
At 6/05/2012 2:03 PM, Blogger Jet Beagle said...

Ed R,

You seem to think that supply side economics is simply Say's Law.

What is Supply Side Economics? is a brief explanation of supply side economics by Paul Craig Roberts. He was the economist who sold the concept to Ronald Reagan and who debated the concept with Keynesians in the 1970s and 1980s.

Paul Craig Roberts shows that producers do not react to Keynesian-induced demand by increasing output. Rather, they simply raise prices. Only by providing incentives for producers to increase output - lowering production costs - will they do so. Lowering marginal income tax rates and lowering capital gains taxes will reduce the cost of capital for businesses. Eliminating regulatory burdens will also reduce costs for businesses. That's what supply-side economics is.

 
At 6/05/2012 3:14 PM, Blogger Regan said...

@Moe

As Henry Hazlitt said: "But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The needs of China too are incomparably greater than the needs of America. But its power, and therefore the “new business” that it can stimulate, are incomparably smaller."

Keep in mind that that was written in the '40s I believe.

 
At 6/05/2012 4:18 PM, Blogger Jet Beagle said...

Most of the discussion about Mark's post has been about the impact of supply side policies on the supply of goods. We paid little attention to how supply side policies will increase the supply of labor.

If you tax something, you get less of it.

A high marginal income tax rate is a disincentive to work more.

If you subsidize something, you get more of it.

Extending unemployment benefits creates a strong incentive to remain unemployed.

Supply side economic policy would remove the disincentive to work more (by lowering marginal tax rates) and also remove the incentive to remain unemployed (by slashing unemployment benefits.

 
At 6/06/2012 3:34 AM, Blogger Ron H. said...

Ed R: "The central concept of supply-side economics is Say's Law: 'supply creates its own demand,"

That much is correct.

"...the idea that one must sell before one can afford to buy.'"

That part is almost correct. It suggests the use of money, which isn't necessary to an understanding of Say's Law.

What Say was 'saying' (heh) is that when you produce something to exchange, you are creating the demand for those things you wish to receive in the exchange.

If you grow apples that you wish to exchange for pears, you are creating a demand for pears. Production creates demand.

Fortunately for us, we can use money to represent the things we want, instead of direct barter, so we can wexchange our apples for any mumber of other things, including pears, and don't need to find a pear grower who wants apples.

"To follow Say's Law (supply-side policies) during a time of capital underutilization and high unemployment is a formula for deflation and deeper recession."

That's not correct. Maybe you could rephrase that in your own words, so it would make sense.

If there is to be ANY policy followed by government, it should be to encourage production by doing all the things Jet Beagle recommended, including:

- reducing marginal income tax rates;

- reducing capital gains tax rates;

- eliminating government interference in markets.

 
At 6/06/2012 3:46 AM, Blogger Ron H. said...

Jon M: "There is also the issue of scarcity. Every person/resource tied up in non-valuable work (like our hole-digger) is a person/resource no longer able to be used in a more valuable role"

Of course Keynesians will tell you there is no scarcity, as there is great "slack" in the economy, so digging holes is a perfectly fine use of labor and taxpayer money, and will stimulate AD.

 
At 6/06/2012 3:57 AM, Blogger Ron H. said...

"what are you going to trade for the goods ans services you desire if you produce nothing of value?"

Let me call my Uncle Bernanke about that. I believe he has an idea, but I can't remember exactly what it is.

If that doesn't work out, I'm sure Obama will just pull something out of his stash.

 

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