A question about Keynesian Economics ?

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I don't think the current depression is due to a self-correcting "cycle". There's no such thing as wage or employment equilibrium, only price equilibrium when you assume a competitive market for inelastic demands. Hiring is contingent on demand as well as capitol. At this point capitol is definitely not the limiting factor for job growth. Further, falling wages and prices would really exacerbate our private and public debt problem. At this point inflation, not deflation, is needed.

Supply logically precedes demand - you cannot demand goods before they have been produced. The converse makes no sense. If you crash landed on a deserted island with some people and decided to set up an economy, you couldn't start demanding stuff. You would need to organize productive resources to make goods. The production of goods would engender demand by giving the people a means to barter (demand) for other goods. Demand is not simply wanting stuff. Demand is both the desire and ability to acquire goods and it is only made possible by production. Now, in your convenience store and manufacturing firm examples, demand slows and the owners cut back on production by laying people off. An individual firm can experience a lag in sales for a lot of reasons, not all of them having to do with cyclical fluctuations in aggregate output. There could be a decline in relative demand for a good (e.g. widgets), while aggregate demand remained strong. But what happens when demand collapses for all conveniences stores in an economy, and all manufacturing firms? If there is a general collapse in demand, that means that supply has collapsed. It's never the case that people simply stop demanding things, then businesses cut back on production. It's the other way around - all recessions originate on the supply side (credit bubbles, natural disasters, supply shocks, etc). Therefore, to resuscitate the economy, impediments to supply must be removed. That means easing up on taxes and regulations. And there is no such thing as oversupply. As supply is what engenders demand in the first place, greater supply would only mean greater demand and therefore higher standards of living. More production would reduce the price of goods and people would become wealthier. I submit that your Keynesian chicken and egg scenario, where demand emerges out of thin air (if it doesn't emerge out of production) and then businesses start producing goods, is utter nonsense.



The unemployment rate among teenagers is something like 20-25%. It is in the double-digits even when the economy is in a boom phase. Teenagers would have an easier time landing an after school or summer job if there was no minimum wage. That way they could enter the workforce and develop an employment history. Then there are people seeking work whose labor is practically worthless. If your convenience store experienced a decline in sales, you might be forced to lay some of your employees off. But if you weren't forced to pay them at least $7.50 an hour, you might be able to retain them for $4.50 an hour. You could slash wages the same way you might slash prices for unsold goods. If there was no minimum wage and no unemployment benefits, wages in certain industries would adjust downwards to a new equilibrium in recessions. Hardly anyone would get laid off and the unemployment rate wouldn't budge.



Low income earners receive most of their income taxes back. The payroll tax hurts them more than income taxes. A flat tax wouldn't affect their income.



Even if that's true, so what? Foreign investment enables foreign economies to grow. If investors buy shares in Japanese companies, that's just more business for the US. No country in the world consumes all of its goods. The very wealthy shouldn't spend their income anyway.



Well, does it? FYI I'm not calling for the abolition of all business regulations. I don't think pre-pubescent children should be working at convenience stores, for example.

Wrong. Nobody create any goods unless they know somebody will buy it.


Wrong. If you make a billion 8086 cpu chips there will still be no demand.


That is the truth in most cases. People don't need a new computer every year, don't need to east at restaurants, don't need to listen to music or watch movies.

Explain the Edsel, then.

There are a lot of products produced which do not sell well.

ruveyn

^ At least the producer expects them to sell.

You suggest that, "demand is both the desire and ability acquire goods," and then you turn around and claim, "it's never the case that people simply stop demanding things." If people lose the ability to acquire goods (and services, you don't live in a manufacturing economy any more) then according to your first claim, demand necessarily falters. That imposes negative pressure on real prices, and when they fall below the cost of production, recession inevitably occurs.

The suggestion that credit creates recessions falls nicely into my argument. Credit doesn't create new supply, credit fuels demand. Credit provides consumers with the ability to acquire goods and services beyond their ability to pay for them. Credit creates artificial demand, which then perpetuates the economic cycle by enabling producers to continue to sell. When the credit bubble bursts, demand that was financed by that credit evaporates. It's not the bursting of the credit bubble that causes the recession--it's credit that delayed the inevitable recession.



Again, nonsense. When I open my convenience store, I need 336 person hours of labour. If I have to pay $7.50, I still need 336 person hours. But if I only have to pay $4.50, I still only need 336 person hours. I'm not going to go out and hire another 214 person hours worth of cheap labour just because I can. Now there is some argument that I might be able to more easily expand my business with cheaper labour. But that expansion is only justified if I can reasonably conclude that there is a market for the products or services that I am going to offer.

The price cut argument is a canard. Since my competitors are hiring in the same market that I am hiring in, the cost of labour is relatively uniform for all of us. If we take the argument across the board, then all you are talking about is deflation. But deflation serves to punish borrowers and reward savers, which--in the current state of the developed world's economies--is a death sentence.



Then that's not a flat tax. Taxpayers only receive refunds of taxes paid if they qualify for exemptions, deductions or credits all of which, if disproportionately available to low income earners, is progressive taxation by another name.



Offshore investment creates economic activity elsewhere, with no assurances that any of that benefit will return to your shores. "Just more business for the US?" What if the Japanese companies that investors are buying up buy their goods and services from China?

Spending is exactly what your economy needs. You don't lack for capital. Pension funds, mutual funds, insurance companies and public pension plans are the largest institutional investors in publicly traded equities (in that order, by the way). The middle class are already funding your capital markets.



That's a public policy debate. In my view, health and safety regulations, child labour restrictions and their ilk are all valid intrusions of the government's regulatory power into the marketplace. The price paid in costs to employers is a reasonable exchange for the public policy goals that are met. As for other regulation, the case must be made. I am not prepared to wholheartedly stand up for business regulation unless government can make its case.

To settle questions of economics with quantitative certitude you need to experiment with numerical computer models. I don't trust hand-waving arguments which is all supply-siders and Austrians ever give.

I've actually been thinking of writing my own simple program.

How do you know if the models correspond to reality?

ruveyn

They don't have to correspond to reality 100% to answer very basic questions. The problem with hand-waving arguments is they only follow a single logical trajectory while the real economy consists of a complex coupled system with many interlocking closed loops. You need to plug in some actual numbers to get beyond the chicken-egg dilemma.

Why are the statements in conflict? You snipped part of the second statement. The way you quoted the statement gives it a different meaning. The second statement says that recessions do not begin on the demand side - it's not the case that aggregate demand declines, followed by a recession. That defies common sense and is ahistorical. When and where have people just stopped buying stuff, followed by a recession?

Provide an alternative analysis of how demand originates. How do consumers gain the ability to demand goods and services? If it's not from productive activity, then what is it from?

What if $1,000,000 magically appeared in the closet of every household in America? People would suddenly have greater demand for goods, right? Wouldn't this revive the economy? If you say this would lead to massive inflation, you've indirectly conceded my point.

The thing is prices don't rise instantaneously so your scenario will lead to increased demand before inflation catches up.

That's interesting. The central problem is that any computer model will have to include a theory, and this theory is partly what is up to be questioned. Honestly, I don't think the question of "logical precedence" makes sense for supply or demand. They're scissors.

That being said: Visagrunt, you're practically denying that we have a continuous and downward sloping demand curve. That's kind of questionable. Yes, it is obvious that labor demand is relatively inelastic, but the issue is whether SOME of the hours will be cut. That latter one is pretty likely, as there are ways to economize on labor, to substitute capital for labor, and there are less valued uses of labor as the gains aren't heterogeneous(and arguably the costs aren't either because even if we say wages are the same, we still have institutional costs for having any additional employee to keep up with). Frankly, just with the situation, we're probably more justified in simply saying labor is highly inelastic, as we aren't going to assume every employer is exactly the same, otherwise we just have one employer. (Note: To be fair, the empirical debate on the elasticity of labor demand is pretty controversial, even with entirely new models presented) Also, it's pretty correct that minimum wage laws are unlikely to change a damn thing, because the case isn't just job loss, it's significant job loss, and if the job losses are insignificant, then this isn't a meaningful issue from a macroeconomic standpoint.


Here's a very basic hint: How do US investors buy stuff? US dollars. What's the use of a US dollar? US goods and services. It flows back as a matter of economic necessity. We're not talking about a gold standard where the US economy loses gold by trade.(Even if we were, the effects are difficult)


Really? The only reason why people get laid off is because of a minimum wage?? That's absurd. Don't you think that the actual reason why people get laid off is due to principle-agent problems, that is to say that employers want a loyal employee and they know that if they can only pay peanuts, that their employees will remember and jump ship to the first company that makes a slightly better offer? Don't you even think that there will be rigidity in wage expectations among employees causing those with significant wage cuts to think they're getting screwed because economic variables in times of change do not match up well to intuitive notions of fairness? These employees may get angry and uncooperative for that reason, saying "Management is screwing us over while getting massive checks!" which... wouldn't be untrue.


I actually just don't think that most of these regulations matter. At most they just make child abuse harder, but that's the only real variable to have concern about is whether the environment the child is growing up in is abusive.


Yeah, that's probably right. I mean, if the numbers were smaller, then what was described would literally be a stimulus policy.

Correct. But when inflation hits, it will catch everyone by surprise. Producers would interpret the initial upswing in demand as increased consumer confidence. Production wouldn't be able to keep pace with all of the money entering the system and prices would get out of control. Eventually you'd have runaway inflation and high unemployment. The cost of everything would go up, from final goods to the raw materials used in production. Production would stall and unemployment would skyrocket.

A single stimulus wouldn't cause runaway inflation. The dollar would devalue very abruptly but it would then stabilize at a lower value. Runaway inflation requires continuous injection of new money.

The real reason government won't just give every household $1,000,000 is a moral one. It would devalue people's savings. The policy would be effectively the same as throwing a massive tax on savings and then redistributing that money to everyone else. If that could happen nobody would bother with savings accounts anymore. They'd have to invest in some other currency or gold and it would be a major inconvenience. Banks would also stop lending in dollars if people did away with savings accounts.

People wouldn't know how high prices would go, so the velocity of money would increase rapidly. When inflation spikes, people buy goods in anticipation of higher future prices. That sets in motion an inflationary spiral until you have total currency debasement. There are 52 million households in the US. Giving each one $1,000,000 would destroy the dollar in one fell swoop.

Of course. No one produces something unless they -expect- it to sell. But expectation is not the same as a guarantee. There are no real guarantees in the market place.

ruveyn