I prefer Keynesian Economics over Trickle Down Economics but

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mikecartwright
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17 May 2012, 9:28 pm

I prefer Keynesian Economics over Trickle Down Economics but can anyone explain Keynesian Economics's views of how to promote economic growth in the private sector I know Keynesian Economics supports Government Spending but Government Spending on what ? Public Works Projects ? Infrastructure Spending ? I know this is not a Keynesian forum but Keynesian Economics should work better then Trickle Down Economics in my view. Doesn't Keynesian Economics support Consumer Spending to help the Economy ? I hear Keynesians say we need Government Spending to put money in the pockets of the people who then will spend the money this they say will help promote Consumer Spending which will help create Jobs how do Keynesians plan to pocket money in people's pockets is it by giving the people Jobs rebuiliding or building Infrastructure ?

John Maynard Keynes
The General Theory of Employment, Interest and Money
Book III
The Propensity to Consume

Chapter 10. The Marginal Propensity to Consume and the Multiplier



V

We have seen above that the greater the marginal propensity to consume, the greater the multiplier, and hence the greater the disturbance to employment corresponding to a given change in investment. This might seem to lead to the paradoxical conclusion that a poor community in which saving is a very small proportion of income will be more subject to violent fluctuations than a wealthy community where saving is a larger proportion of income and the multiplier consequently smaller.
This conclusion, however, would overlook the distinction between the effects of the marginal propensity to consume and those of the average propensity to consume. For whilst a high marginal propensity to consume involves a larger proportionate effect from given percentage change in investment, the absolute effect will, nevertheless, be small if the average propensity to consume is also high. This may be illustrated as follows by a numerical example.
Let us suppose that a community’s propensity to consume is such that, so long as its real income does not exceed the output from employing 5,000,000 men on its existing capital equipment, it consumes the whole of its income; that of the output of the next 100,000 additional men employed it consumes 99 per cent., of the next 100,000 after that 98 per cent., of the third 100,000 97 per cent. and so on; and that 10,000,000 men employed represents full employment. It follows from this that, when 5,000,000 + n x 100,000 men are employed, the multiplier at the margin is 100/n, and n(n + 1)/2.(50 + n) per cent. of the national income is invested.

http://www.marxists.org/reference/su...heory/ch10.htm

Infrastructure Spending Builds American Jobs

Public Investments Help Private Businesses Create Jobs


By Kristina Costa, Adam Hersh | September 8, 2011

Jobs induced by direct and indirect hires when they make consumer purchases with their paychecks

http://www.americanprogress.org/issu...structure.html

Infrastructure Spending Stimulates the Entire Economy

Pat O'Malley, Yahoo! Contributor Network
Jun 29, 2011 "Share your voice on Yahoo! websites. Start Here."

The Keynesian economic theory is one of the few classic economic principles that is based in reality. It maintains that government should increase spending during a recession. It should buy more of the things that government normally buys.
Those things are new and repaired roads, bridges, dams, harbors, levees, tunnels, buildings, schools, parking garages, subways, railways, parks, sewers, stadiums, airports, and other public facilities. That spending creates jobs for construction companies and workers. Those projects create demand for the supplies, equipment, tools, and other materials that they need for those projects. It creates demand for the trucking companies to ship them and the warehouses to store them. That creates jobs in all of those industries. If the companies supplying the construction industry have enough work, they can spend some of their revenue to hire more employees or to upgrade their own facilities. See, more demand, more jobs.

Then all of those workers have paychecks that they can spend on groceries, clothing, furniture, cars, houses, utilities, entertainment, appliances, restaurants, vacations, and all sorts of things. That creates demand in those industries. And that creates jobs. If those companies have enough work, they can spend some of their revenue to hire more employees or to upgrade their own facilities. See, more demand, more jobs. And government gets its new stuff built and its old stuff fixed. See. Everybody wins.

http://voices.yahoo.com/infrastructu...69.html?cat=55

the end of the 80s, it had become clear that the rich were not investing their liberated tax dollars on "good" forms of investment, like jobs and productive tools and technology. Instead, the money went towards consumption, the good life, and economically meaningless investments like antiques and sport cars. The lack of investment in the national interest became so obvious that Democrats in congress actually proposed guidelines to encourage it. During the 1992 campaign, Bill Clinton proposed a massive infusion of public investment into the nation's aging infrastructure to compensate for the failure of the private sector to do so.
http://www.huppi.com/kangaroo/L-capgainsspur.htm

To get the circular flow of money started again, Keynes suggested that the central bank -- in the U.S., the Federal Reserve System -- should expand the money supply. This would put more money in people's hands, inspire consumer confidence, and compel them to start spending again.

http://www.huppi.com/kangaroo/Causes.htm#keynesianism

The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! Too simple, in fact, for the policy-makers of that time.

http://www.huppi.com/kangaroo/Keynesianism.htm

What is Trickle Down Economics?


The major problem with this economic theory is that it doesn't work as effectively as its proponents suggest. A few economists may still cling to the trickle down economics theory, but many more agree that, in fact, trickle down economics hurts the lower classes, and it hurts the government.

By reducing the tax burden for the wealthiest individual, the government cheats itself out of a very profitable wedge of tax revenue, meaning that this revenue cannot be invested directly in the citizens of the nation. Without that revenue, the government may go into debt to pay for basic services, thereby creating a serious problem for future generations.

The issue with trickle down economics is that it relies on actions by individuals which will benefit a whole, and most individuals are not that altruistic. In fact, many wealthy individuals and corporations are understandably interested in protecting their wealth, and when their taxes are cut, they may choose not to reinvest that money, meaning that no funds “trickle down” to people in lower socioeconomic classes. The tax burden on the middle class may also increase as the government struggles to keep tax revenues high enough to fund itself.

Trickle down economics tends to be promoted by conservative politicians who would like to see less government. However, moderates and conservatives have suggested that theories like trickle down economics are ultimately a disservice to the government and the citizens.

By collecting reasonable tax revenues, a government can provide the benefits which are supposedly offered by trickle down economics, as demonstrated under politicians like President Roosevelt, who invested heavily in American infrastructure with government funds in the 1930s to foster recovery from the Great Depression.

http://www.wisegeek.com/what-is-tric...-economics.htm



ruveyn
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17 May 2012, 9:43 pm

If investment is lagging simply because there is a shortage of credit, then pumping some money into the economy (a monetary strategy) might remedy that. But here is the priviso. When the economy picks up because investment is stimulated by an injection of money, some of that must be taxed back when the good times happen to prevent price inflation.

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17 May 2012, 11:15 pm

Keynesian economics doesn't say how it gets the money there, only that the money goes there through deficit financing.

So, even tax cuts can actually be a Keynesian stimulus. The key issue is that it has to be deficit financed. Now, economists believe that certain methods are better than others in terms of boosting consumption(often they see government spending as better than tax cuts due to concerns about the marginal propensity to save in consumer preferences), but the issue is that a Keynesian stimulus is valid even if it is just building unnecessary pyramids or holes in the ground.



marshall
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17 May 2012, 11:46 pm

I think the problem with Keynesian economics is political. It's not hard to pass tax cuts and deficit spending in an economic downturn. It's harder to get people to accept tax hikes and spending cuts during boom periods or periods of stable growth. Yet this should be done in order to offset the losses incurred while digging out of a depression. Practicing only one half of the formula isn't a viable long-term policy.



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18 May 2012, 6:39 am

In periods of growth the automatic stabilisers cost less (less unemployment) and tax revenues increase and this removes any necessity for any spending cuts or tax increases. Specific stimulus programmes need not be pursued if unemployment goes below a certain level so as to prevent too much competition for resources. Debt to GDP ratio would decline during such periods even if deficits are maintained. I don't see any evidence that this hasn't been pursued under Keynesianism. Debt to GDP ratios kept going down during the Keynesian Era.



TM
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18 May 2012, 10:00 am

The "challenge" with Keynes is that it stands contrary to monetarism, which says that more government spending means less private spending. No economic school of thought fits all situations, laissez-faire is a nice strategy when the market goes up, but is horrible when it falls, whereas Keynes is questionable in bull and good in bear. The "problem" with American trickle-down economics is that the "down" is in China. Ideally lower taxes on capital should result in higher job creation (and it does) however when its less risk and higher reward to invest outside of America, investors do so. Apple has something like 700.000 people working for its foreign subcontractors, so long as this goes on, American "trickle-down" doesn't work.

If American companies had to pay large tariffs, lets say if Apple were charged enough on each I-whatever to make it unprofitable to produce in China they would produce in the US.



marshall
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18 May 2012, 12:04 pm

xenon13 wrote:
In periods of growth the automatic stabilisers cost less (less unemployment) and tax revenues increase and this removes any necessity for any spending cuts or tax increases. Specific stimulus programmes need not be pursued if unemployment goes below a certain level so as to prevent too much competition for resources. Debt to GDP ratio would decline during such periods even if deficits are maintained. I don't see any evidence that this hasn't been pursued under Keynesianism. Debt to GDP ratios kept going down during the Keynesian Era.


The problem is in the US as soon as we got a surplus, Republicans immediately saw fit to squander it on tax cuts. The attitude was to hell with saving for a rainy day and shoring up social programs for the future generation, the entire surplus must immediately be returned to the pockets of the tax payers. Bush even extended entitlements to seniors with absolutely zero attempt to pay for them. The attitude was "deficits don't matter", until we fell into a depression. Now suddenly the deficit matters and we must make drastic cuts at all costs. I've thus come to the conclusion that Republicans simply do not care about the younger generation. They are simply there to please their 60 and older base and screw everyone else.



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18 May 2012, 7:31 pm

Republicans don't believe in Keynesianism unless of course it is military Keynesianism. It's hilarious to hear them turn into True Believers when it's military spending that's threatened. The tax cuts were of course the Starving the Beast strategy designed to create a society where more people can be cornered into near slavery with the very rich and powerful gaining a free lunch at their expense. They claim this is required in the name of Personal Responsibility and to show their opposition to people having a free lunch.



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19 May 2012, 7:41 am

Repugnicans are also willing to spend on $17,000 drip pans.

http://www.nytimes.com/2012/05/19/us/po ... h_20120519



ruveyn
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19 May 2012, 9:08 am

marshall wrote:
The problem is in the US as soon as we got a surplus, Republicans immediately saw fit to squander it on tax cuts..


Only money spent can be squandered. You show a typical left of center bias by thinking of a tax cut as an expenditure. It isn't.

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19 May 2012, 9:38 am

ruveyn wrote:
marshall wrote:
The problem is in the US as soon as we got a surplus, Republicans immediately saw fit to squander it on tax cuts..


Only money spent can be squandered. You show a typical left of center bias by thinking of a tax cut as an expenditure. It isn't.

ruveyn


Indeed, sir.



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19 May 2012, 10:44 am

A tax cut is an expenditure as far as the budget is concerned - never mind the philosophy and the moralising that the Right uses in such a case. You take in X and pay out Y, you choose to take in X - the tax cut, that is exactly the same as choosing to increase something to the Y that is paid out. Its effect on the budget deficit is identical. Now, it's well-known that tax cuts are far less efficient when it comes to stimulus as the multiplier effect of government spending is multiplied by the Marginal Propensity to Consume and multiplying something less than 1, as the MPC is, causes a reduction in the overall multiplier; the average MPC of those who get the tax cut determine how inefficient it will be. If the MPC is 0.8, it's 80% as good as extra government spending, if the MPC is 0.2, it's 20% as good. MPC declines with income and wealth so cutting taxes on the rich is always the least efficient.



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19 May 2012, 11:01 am

Simple economics says over time supply and demand must balance. When supply (the wealthy) continues to sop up more than its share, then demand (most of us) do not have the resources to maintain demand. Keynesianism merely says the government must step in providing investment (jobs) so that demand can increase, the follow-up is then the suppliers are taxed when the system approaches normal so that the Keynesian investments can be paid for. It is the latter half of this theory that Republicans and ,in fact, most politicians ignore for political expediency.



TM
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19 May 2012, 11:24 am

xenon13 wrote:
A tax cut is an expenditure as far as the budget is concerned - never mind the philosophy and the moralising that the Right uses in such a case. You take in X and pay out Y, you choose to take in X - the tax cut, that is exactly the same as choosing to increase something to the Y that is paid out. Its effect on the budget deficit is identical. Now, it's well-known that tax cuts are far less efficient when it comes to stimulus as the multiplier effect of government spending is multiplied by the Marginal Propensity to Consume and multiplying something less than 1, as the MPC is, causes a reduction in the overall multiplier; the average MPC of those who get the tax cut determine how inefficient it will be. If the MPC is 0.8, it's 80% as good as extra government spending, if the MPC is 0.2, it's 20% as good. MPC declines with income and wealth so cutting taxes on the rich is always the least efficient.


A tax cut is not an expenditure, its a revenue cut. I hate to get all GAAP on you, but the accounting equation is "Assets = Liabilities + equity". Tax income is not an asset until it has been collected, in essence it is purely a matter of projected potential income rather than actual income. Doing so is the equivalent of a company projecting an income of lets say 1.000.000, only getting 600.000 and then putting 400.000 on the balance sheet as a liability and depreciating it. In essence what they just did was to take income they never had and put it on the balance sheet as money going out, which is insane.

You also have keep in mind that when calculating multiplier effects, anything except "income as a result of expenditure" is counted, which neglects the cost of the capital and arguably the drop in private sector spending if you are a monetarist.

The multiplier theory relies on the fact that as income goes up, the MPC goes down. This is due to the fact that with a higher income, basic human needs are met at a lower expenditure as a percentage of income and the propensity to save increases. The problem with tax cuts at the moment is that the market is seen as excessively risky, which means more money is going into things like bonds and savings accounts as opposed to equity capital for businesses. This will continue so long as the market views the downside risk to be higher than the upside.



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19 May 2012, 12:37 pm

TM wrote:
xenon13 wrote:
A tax cut is an expenditure as far as the budget is concerned - never mind the philosophy and the moralising that the Right uses in such a case. You take in X and pay out Y, you choose to take in X - the tax cut, that is exactly the same as choosing to increase something to the Y that is paid out. Its effect on the budget deficit is identical. Now, it's well-known that tax cuts are far less efficient when it comes to stimulus as the multiplier effect of government spending is multiplied by the Marginal Propensity to Consume and multiplying something less than 1, as the MPC is, causes a reduction in the overall multiplier; the average MPC of those who get the tax cut determine how inefficient it will be. If the MPC is 0.8, it's 80% as good as extra government spending, if the MPC is 0.2, it's 20% as good. MPC declines with income and wealth so cutting taxes on the rich is always the least efficient.


A tax cut is not an expenditure, its a revenue cut. I hate to get all GAAP on you, but the accounting equation is "Assets = Liabilities + equity". Tax income is not an asset until it has been collected, in essence it is purely a matter of projected potential income rather than actual income. Doing so is the equivalent of a company projecting an income of lets say 1.000.000, only getting 600.000 and then putting 400.000 on the balance sheet as a liability and depreciating it. In essence what they just did was to take income they never had and put it on the balance sheet as money going out, which is insane.

You also have keep in mind that when calculating multiplier effects, anything except "income as a result of expenditure" is counted, which neglects the cost of the capital and arguably the drop in private sector spending if you are a monetarist.

The multiplier theory relies on the fact that as income goes up, the MPC goes down. This is due to the fact that with a higher income, basic human needs are met at a lower expenditure as a percentage of income and the propensity to save increases. The problem with tax cuts at the moment is that the market is seen as excessively risky, which means more money is going into things like bonds and savings accounts as opposed to equity capital for businesses. This will continue so long as the market views the downside risk to be higher than the upside.



For the purposes of accounting it is. It's a decision to increase the deficit/decrease the surplus... It's the same! The same! The same! Get it? Those who say it's different use it as an excuse to "Starve the Beast"; after all, it's "YOUR MONEY" that the government "STEALS"... they have no right to do that. Why just not live under feudalism? I guess that fits their moral code.



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19 May 2012, 12:51 pm

xenon13 wrote:
TM wrote:
xenon13 wrote:
A tax cut is an expenditure as far as the budget is concerned - never mind the philosophy and the moralising that the Right uses in such a case. You take in X and pay out Y, you choose to take in X - the tax cut, that is exactly the same as choosing to increase something to the Y that is paid out. Its effect on the budget deficit is identical. Now, it's well-known that tax cuts are far less efficient when it comes to stimulus as the multiplier effect of government spending is multiplied by the Marginal Propensity to Consume and multiplying something less than 1, as the MPC is, causes a reduction in the overall multiplier; the average MPC of those who get the tax cut determine how inefficient it will be. If the MPC is 0.8, it's 80% as good as extra government spending, if the MPC is 0.2, it's 20% as good. MPC declines with income and wealth so cutting taxes on the rich is always the least efficient.


A tax cut is not an expenditure, its a revenue cut. I hate to get all GAAP on you, but the accounting equation is "Assets = Liabilities + equity". Tax income is not an asset until it has been collected, in essence it is purely a matter of projected potential income rather than actual income. Doing so is the equivalent of a company projecting an income of lets say 1.000.000, only getting 600.000 and then putting 400.000 on the balance sheet as a liability and depreciating it. In essence what they just did was to take income they never had and put it on the balance sheet as money going out, which is insane.

You also have keep in mind that when calculating multiplier effects, anything except "income as a result of expenditure" is counted, which neglects the cost of the capital and arguably the drop in private sector spending if you are a monetarist.

The multiplier theory relies on the fact that as income goes up, the MPC goes down. This is due to the fact that with a higher income, basic human needs are met at a lower expenditure as a percentage of income and the propensity to save increases. The problem with tax cuts at the moment is that the market is seen as excessively risky, which means more money is going into things like bonds and savings accounts as opposed to equity capital for businesses. This will continue so long as the market views the downside risk to be higher than the upside.



For the purposes of accounting it is. It's a decision to increase the deficit/decrease the surplus... It's the same! The same! The same! Get it? Those who say it's different use it as an excuse to "Starve the Beast"; after all, it's "YOUR MONEY" that the government "STEALS"... they have no right to do that. Why just not live under feudalism? I guess that fits their moral code.


No, it is not the same. As TM said, it is a reduction in revenue.

Unless, of course, I bring up the Laffer curve. The only problem with shaping tax policy around the Laffer curve is the fact that the optimum point will always shift depending on economic conditions and variables.