Of Trickle Down - and Demand Side.

[KevinWestern]

Giving bonuses puts the money in the economy, in a Keynesian sense.

Generally, extra capital means more capital projects are done. Capital projects mean jobs. True, they don't do anything for union pensions.

Uncensored, I agree that extra capital will mean that more projects will be done (and more jobs). But I don’t think a business is going to embark on a project if they don’t think it will sell.

Also, giving bonuses I suppose does put money into the economy, but only for a few people. I’d rather have 1,000 people with $10 more dollars to spend each than 1 person with $100 more dollars to spend. Why? Think of products like Pepsi. A rich guy might have $100 but he’s probably only going to buy the same amount of Pepsi as anyone else; therefore, companies like Pepsi benefit from a large subset of consumers who have spending power vs just one.

 

[DSGE]

Nobody disagrees that supply is important. Ask any economist, even any Keynesian economist, they'll tell you that long run growth is all supply-side. "Demand-side" refers to a theory of the business cycle, not growth.

There are many on the left who think it's all about demand and nothing but demand.

Well there are idiots left and right. You've got equally crazy people on the right who think it's all about supply and nothing but supply.

 

[DSGE]

supply is everything. people are lazy, demand for farm equipment, for example, was 1000's of years old. Nothing happened in all of human history until someone figured out how to supply it. Thats 100% of how we got from the stone age to here

Again you can’t recognize the power of supply without recognizing the power of demand. In business, the customer is #1. If they’re not happy then they’re not buying, and you’re going out of business. If a population has more money to spend, the economy will grow. If a population has less money to spend, it will contract.

That's incorrect. In the long run Say's law applies. Wages and prices adjust so that we're rich enough to buy whatever we produce. Aggregate supply is vertical, and changes in demand only result in changes in the price level.

Demand is only relevant when there are frictions preventing Say's law from holding, such as sticky nominal wages. This can create short run deviations from trend (or 'business cycles') due to "insufficient aggregate demand". Demand is irrelevant to long run economic growth, but it plays a crucial role in business cycles.

 

[Uncensored2008]

There are many on the left who think it's all about demand and nothing but demand.

Those who do don't have a grasp of the Keynesian theory they purportedly support.

 

[Uncensored2008]

Uncensored, I agree that extra capital will mean that more projects will be done (and more jobs). But I don’t think a business is going to embark on a project if they don’t think it will sell.

Even if lower taxes merely result in painting the building, jobs are created for the painters.

Also, giving bonuses I suppose does put money into the economy, but only for a few people. I’d rather have 1,000 people with $10 more dollars to spend each than 1 person with $100 more dollars to spend.

Your math is a little shaky there.

Why? Think of products like Pepsi. A rich guy might have $100 but he’s probably only going to buy the same amount of Pepsi as anyone else; therefore, companies like Pepsi benefit from a large subset of consumers who have spending power vs just one.

$100 makes him rich?

In a linear equivalence, if the one person had $10,000 (1000 X $10) then he may have his house remodeled, creating more economic activity than 1,000 people buying a Pepsi.

But this is all speculation. The 1,000 people might put it toward credit card debt, creating zero economic activity. The 1 person may invest in a start up, generating hundreds of new jobs.

Stimulus is wild speculation.

 

[Hum Dinger]

In several threads around the board, debates rage regarding the superiority of "Trickle Down" or "Demand Side" economics on a macro scale. What becomes rapidly clear is that most people arguing these positions don't know what the terms mean. What is "Trickle Down Economics?" What is "Demand Side Economics."

Let's start with "Demand Side." The first thing to understand is that it doesn't exist. There is no "demand side" school of thought, there never has been one. Most of those who claim to support "demand side" do so based on complete ignorance. A thought process of "supply side is Reagan, we hate Reagan and want the opposite, which is demand side." They couple this with a fuzzy misunderstanding of the theories of Lord John Maynard Keynes. Keynes was NOT an idiot, Keynes did NOT claim that demand drives markets. Whether one agree or disagrees with Keynes, the foundation of Keynesian theory is sound. Keynes did not promote the idiocy that most of those using his name as justification claim that he did.

Then there is "Trickle Down." As with demand side, there is no such thing a trickle down. It is a name that demagogues coined to deride the theories of Arthur Laffer. Laffer created a fusion of Austrian and Classical economics coupled with a spin on Keynes where tax cuts, even with rising deficits, were used to stimulate business cycles. The theory being that cuts in corporate taxes would create more jobs and that the benefits would trickle down to all levels of society.

So most of the "debate" we see is based on myth and ignorance. Should public policy be based on myth and ignorance?

This thread is created in hopes that debate on the real economic schools of thought, Classical, Austrian, Keynesian and Chicago will be discussed in a more accurate manner. So that those who speak so loudly may glean some semblance of knowledge regarding the subject they pontificate upon.

Standard Disclaimer: My bias is Rothbard, for those who know who he was.

The problem is that all theory is a bunch of bunk. The world economics is way too complex, way too granular and way too dynamic for one 'theory' or even a dozen 'theories ' to be a successful guidline for policy.

What works here today probably won't work there tomorrow.

So the theorist become ideological drones - ultimately they are always wrong soon.

What would work is a dynamic system of regulation and taxation - let the economy run basically on it's own and have the government set regulation and tax policy for what is right for the times - and be prepared to change it as needed.

The true key to economics to to have a balanced and fair economy - and no one theory or ideology will ever provide that for all time.

 

[DSGE]

In several threads around the board, debates rage regarding the superiority of "Trickle Down" or "Demand Side" economics on a macro scale. What becomes rapidly clear is that most people arguing these positions don't know what the terms mean. What is "Trickle Down Economics?" What is "Demand Side Economics."

Let's start with "Demand Side." The first thing to understand is that it doesn't exist. There is no "demand side" school of thought, there never has been one. Most of those who claim to support "demand side" do so based on complete ignorance. A thought process of "supply side is Reagan, we hate Reagan and want the opposite, which is demand side." They couple this with a fuzzy misunderstanding of the theories of Lord John Maynard Keynes. Keynes was NOT an idiot, Keynes did NOT claim that demand drives markets. Whether one agree or disagrees with Keynes, the foundation of Keynesian theory is sound. Keynes did not promote the idiocy that most of those using his name as justification claim that he did.

Then there is "Trickle Down." As with demand side, there is no such thing a trickle down. It is a name that demagogues coined to deride the theories of Arthur Laffer. Laffer created a fusion of Austrian and Classical economics coupled with a spin on Keynes where tax cuts, even with rising deficits, were used to stimulate business cycles. The theory being that cuts in corporate taxes would create more jobs and that the benefits would trickle down to all levels of society.

So most of the "debate" we see is based on myth and ignorance. Should public policy be based on myth and ignorance?

This thread is created in hopes that debate on the real economic schools of thought, Classical, Austrian, Keynesian and Chicago will be discussed in a more accurate manner. So that those who speak so loudly may glean some semblance of knowledge regarding the subject they pontificate upon.

Standard Disclaimer: My bias is Rothbard, for those who know who he was.

The problem is that all theory is a bunch of bunk. The world economics is way too complex, way too granular and way too dynamic for one 'theory' or even a dozen 'theories ' to be a successful guidline for policy.

What works here today probably won't work there tomorrow.

So the theorist become ideological drones - ultimately they are always wrong soon.

What would work is a dynamic system of regulation and taxation - let the economy run basically on it's own and have the government set regulation and tax policy for what is right for the times - and be prepared to change it as needed.

The true key to economics to to have a balanced and fair economy - and no one theory or ideology will ever provide that for all time.

That's such bullshit. "The world economy is way to complex", oh and the behaviour of fucking sub-atomic particles interacting with each other isn't? Quantum mechanics is child's play, right? A system of unimaginably small objects which changes if it's observed and has crazy unintuitive properties; pfft, we can deal with that in our sleep. "It's too complex" is just an excuse lazy people use because they don't want to fucking learn anything.

 

[DSGE]

There are many on the left who think it's all about demand and nothing but demand.

Those who do don't have a grasp of the Keynesian theory they purportedly support.

See you keep saying nobody understands it properly, and I'm inclined to agree with you, but you also don't like it being called "demand-side". So... I'm gonna ask for clarification on what you think Keynesian theory is?

 

[KevinWestern]

That's incorrect. In the long run Say's law applies. Wages and prices adjust so that we're rich enough to buy whatever we produce. Aggregate supply is vertical, and changes in demand only result in changes in the price level.

Demand is only relevant when there are frictions preventing Say's law from holding, such as sticky nominal wages. This can create short run deviations from trend (or 'business cycles') due to "insufficient aggregate demand". Demand is irrelevant to long run economic growth, but it plays a crucial role in business cycles.

You may end up being correct in the theoretical long run, but when it comes to situations such as fixing the problems of today (such as our recession) I think it's most important to talk about policy that will affect the foreseeable short term (1 year, 10 years, ect.... not 50+ years).

 

[KevinWestern]

But this is all speculation. The 1,000 people might put it toward credit card debt, creating zero economic activity. The 1 person may invest in a start up, generating hundreds of new jobs.

Stimulus is wild speculation.

Agree - it's speculation. But that argument goes both ways; you can just as easily say that trying to predict what businesses are going to do with the extra money is all speculation, too.

But I must admit (which I think puts me in agreement with you), I think it's easier for the gov't to carry out effective supply-side policy (because it is easier to predict, in my opinion) vs effective demand-side policy. However, at the same time I think it's dangerous business to say that there's no value in considering a "demand stimulus" (something some far right people hold to), which creates this sort of polarizing view that there's only one way to approach fixing the economy - from the top down. I don't subscribe to that.

 

[DSGE]

That's incorrect. In the long run Say's law applies. Wages and prices adjust so that we're rich enough to buy whatever we produce. Aggregate supply is vertical, and changes in demand only result in changes in the price level.

Demand is only relevant when there are frictions preventing Say's law from holding, such as sticky nominal wages. This can create short run deviations from trend (or 'business cycles') due to "insufficient aggregate demand". Demand is irrelevant to long run economic growth, but it plays a crucial role in business cycles.

You may end up being correct in the theoretical long run, but when it comes to situations such as fixing the problems of today (such as our recession) I think it's most important to talk about policy that will affect the foreseeable short term (1 year, 10 years, ect.... not 50+ years).

Like I said, demand plays a crucial role in business cycles.

 

[DSGE]

But this is all speculation. The 1,000 people might put it toward credit card debt, creating zero economic activity. The 1 person may invest in a start up, generating hundreds of new jobs.

Stimulus is wild speculation.

Agree - it's speculation. But that argument goes both ways; you can just as easily say that trying to predict what businesses are going to do with the extra money is all speculation, too.

But I must admit (which I think puts me in agreement with you), I think it's easier for the gov't to carry out effective supply-side policy (because it is easier to predict, in my opinion) vs effective demand-side policy. However, at the same time I think it's dangerous business to say that there's no value in considering a "demand stimulus" (something some far right people hold to), which creates this sort of polarizing view that there's only one way to approach fixing the economy - from the top down. I don't subscribe to that.

Ah, don't think so. Supply-side policy is hard. It involves microeconomic reform. Demand-side policy is the easiest thing to do, since the central bank can control aggregate demand through monetary policy.

 

[Uncensored2008]

The problem is that all theory is a bunch of bunk. The world economics is way too complex, way too granular and way too dynamic for one 'theory' or even a dozen 'theories ' to be a successful guidline for policy.

What works here today probably won't work there tomorrow.

So the theorist become ideological drones - ultimately they are always wrong soon.

What would work is a dynamic system of regulation and taxation - let the economy run basically on it's own and have the government set regulation and tax policy for what is right for the times - and be prepared to change it as needed.

The true key to economics to to have a balanced and fair economy - and no one theory or ideology will ever provide that for all time.

Good post.

I mostly agree with you. Where I differ is that because the economy is far too complex, using regulation and taxation to manipulate the market is destined to failure and to causing more harm. Regulate to stop coercion and fraud, tax to fund the necessary functions of government, but recognize that tax and regulation as a means of control is destructive.

 

[KevinWestern]

Good post.

I mostly agree with you. Where I differ is that because the economy is far too complex, using regulation and taxation to manipulate the market is destined to failure and to causing more harm. Regulate to stop coercion and fraud, tax to fund the necessary functions of government, but recognize that tax and regulation as a means of control is destructive.

I mostly agree with you, but isn't there something to be said about at least trying to design good government regulation that can protect the US? The economy is complex, but it's not impossible to do a few simple things that will protect American manufacturers, and make Chinese manufacturing look more expensive and less desirable for businesses.

China's a powerhouse that's set to have an economy double the size of the US in 2050ish; workers demand only $1/hr, work 15 hour days and live on site - how the heck do you compete with that kind of cheap labor? If our government does nothing, what's to keep American companies in the US?

I think our government needs to at least do something to protect American interests and keep manufacturing here instead of moving overseas, like a tariff on certain types of imports, or a subsidy to help out a manufacturing sector. Agree that subsidies/tariffs are often politicized and become meaningless and even harmful (as you state), but we need to keep trying.

 

[Uncensored2008]

See you keep saying nobody understands it properly, and I'm inclined to agree with you, but you also don't like it being called "demand-side". So... I'm gonna ask for clarification on what you think Keynesian theory is?

I thought I answered that earlier.

But for clarification sake.

Keynesian economics is a set of theories based on the work of Lord John M. Kyenes. I know that sounds trite, but it's shocking the number, particularly on the left, that don't grasp that this school of thought surrounds a particular individual.

Keynes rose to prominence during the depression, particularly in Europe, due to his thesis that the business cycle could be mitigated during slumps by the introduction of capital derived from deficit spending by the government into the economy, particularly in the form of public works which would directly employ people, providing them a paycheck and increasing aggregate demand. Keynes postulated that as aggregate demand rose, production would rise to meet said demand and the engine of the economy would start to turn, pushing the economy out of recession.

Keynes described this stimulus as priming the pump, which is dependent on the theory of reverberation and the multiplier effect. In essence, as the government worker is paid to fill pot holes or dig and fill ditches, the wages they are paid would be spent in the market buying goods and services. As they bought a loaf of bread from the baker, the baker would use that money to buy flour and yeast from the miller, who would buy gasoline and mechanical parts to keep his mills operating, and on down the line. Keynes postulated that at every step, greater economic activity is created than the sum of the capital infused. Rothbard proved that this is not in fact true, but that is the theory Keynes operated under. Essentially Keynes believed that each dollar introduced would generate 1.33 dollars in activity (gross oversimplification for the sake of clarity and brevity) at each of 5 economic turns, and that the activity compounded at each of the turns. So $1 becomes $1.33 which becomes $1.76 which $2.35 and on down the line.

So why is this NOT "demand side?" I mean, I used the term "aggregate demand," right? What you must understand is that Keynes never advocated this as the economic norm. His theory is that stimulation of aggregate demand could lift an economy out of recession. Once the economy resumes normal activity, then the use of deficits and stimulus ceases.

Is that more clear?

Standard Disclaimer: There is a lot more to Keynes than this, but this is the subject at hand.

 

[Uncensored2008]

Agree - it's speculation. But that argument goes both ways; you can just as easily say that trying to predict what businesses are going to do with the extra money is all speculation, too.

I can and do say that, agreed. We don't know what companies will do with capital. However, lower taxes simply allow people and business to keep more of what is theirs to begin with. Stimulus is based on taking from others.

There is uncertainty in both, but uncertainty over what others do with their money is acceptable, uncertainty over what government will do with other peoples money is not.

But I must admit (which I think puts me in agreement with you), I think it's easier for the gov't to carry out effective supply-side policy (because it is easier to predict, in my opinion) vs effective demand-side policy.

Just to clarify, I am not an advocate of supply side economics. I respect Laffer, but still lean toward Rothbard and Austrian school theory.

One of the areas I take umbrage with Keynes over is that Keynes was a mathematician. His education was in higher mathematics. There was NOTHING Keynes loved more than a complex theorem that covered 20 pages. Keynes complicates even the most simple of ideas, because of his love of equations.

Rothbard is the polar opposite, state ideas as clearly and simply as possible. Austrian school economics in general follows this model. Von Mises wrote in a direct and clear manner. Austrian economics is pragmatic and logical.

However, at the same time I think it's dangerous business to say that there's no value in considering a "demand stimulus" (something some far right people hold to), which creates this sort of polarizing view that there's only one way to approach fixing the economy - from the top down. I don't subscribe to that.

Except the small issue that it simply doesn't work. I have a hard time assigning value to ideas that demonstrably don't work.

 

[DSGE]

See you keep saying nobody understands it properly, and I'm inclined to agree with you, but you also don't like it being called "demand-side". So... I'm gonna ask for clarification on what you think Keynesian theory is?

I thought I answered that earlier.

But for clarification sake.

Keynesian economics is a set of theories based on the work of Lord John M. Kyenes. I know that sounds trite, but it's shocking the number, particularly on the left, that don't grasp that this school of thought surrounds a particular individual.

Keynes rose to prominence during the depression, particularly in Europe, due to his thesis that the business cycle could be mitigated during slumps by the introduction of capital derived from deficit spending by the government into the economy, particularly in the form of public works which would directly employ people, providing them a paycheck and increasing aggregate demand. Keynes postulated that as aggregate demand rose, production would rise to meet said demand and the engine of the economy would start to turn, pushing the economy out of recession.

Keynes described this stimulus as priming the pump, which is dependent on the theory of reverberation and the multiplier effect. In essence, as the government worker is paid to fill pot holes or dig and fill ditches, the wages they are paid would be spent in the market buying goods and services. As they bought a loaf of bread from the baker, the baker would use that money to buy flour and yeast from the miller, who would buy gasoline and mechanical parts to keep his mills operating, and on down the line. Keynes postulated that at every step, greater economic activity is created than the sum of the capital infused. Rothbard proved that this is not in fact true, but that is the theory Keynes operated under. Essentially Keynes believed that each dollar introduced would generate 1.33 dollars in activity (gross oversimplification for the sake of clarity and brevity) at each of 5 economic turns, and that the activity compounded at each of the turns. So $1 becomes $1.33 which becomes $1.76 which $2.35 and on down the line.

So why is this NOT "demand side?" I mean, I used the term "aggregate demand," right? What you must understand is that Keynes never advocated this as the economic norm. His theory is that stimulation of aggregate demand could lift an economy out of recession. Once the economy resumes normal activity, then the use of deficits and stimulus ceases.

Is that more clear?

Standard Disclaimer: There is a lot more to Keynes than this, but this is the subject at hand.

You left out the kind of important point that the cause of some recessions is "insufficient aggregate demand". That's why "demand stimulus" would work. If a recession were due to supply shocks, demand stimulus would do nothing but cause inflation, with no effects on real output.

I think what's actually happening is that you're maybe misunderstanding the term "demand-side". You've suggested that people who are "demand side" just want demand stimulus all the time. That's absurd, and hopefully people like that don't exist. If they do, and you deal with them more than people who actually know any amount of economics, don't let their idea of "demand side" supersede the real one. "Demand side" just means that business cycles can be caused by aggregate demand. As such, it's synonymous with "Keynesian" to an extent. He did write the book on it, after all. But it doesn't mean that everybody why is "demand side" wants fiscal stimulus. And it especially doesn't mean you should keep doing demand stimulus when not in a recession.

 

[EdwardBaiamonte]

That's why "demand stimulus" would work.

of course it never can work because liberal tax/print/borrow and spend merely causes a mal-investment bubble that bursts and deepens the recession. A little Econ 101, class one, day one for you.

 

[EdwardBaiamonte]

. Stimulus is based on taking from others.

yes not only is it stealing at the point of a liberal gun, but it then assumes people won't have rational expectations about the temporary and artificial churning the liberal stimulus causes. People know its a liberal fraud so don't stupidly think the economy is booming merely because the liberals printed and spent some money.

They want to see real Republican growth to know the economy is healing from the disruptive liberal shocks.

 

[EdwardBaiamonte]

I think our government needs to at least do something to protect American interests and keep manufacturing here instead of moving overseas, like a tariff on certain types of imports, .

of course another Hawley-Smoot tariff might cause another Great Depression. Is that what the liberal wants?? Why do you think even liberals like BO and Clinton, and a vast majority of economists now support free trade?