Sep 09 2010

Aggregate Demand

More Economics.

The Tortoise Economy

by Robert Reich

Wednesday, September 8, 2010

After a typical recession, growth surges until the economy reemerges from whatever hole it fell into and returns to its normal growth path. Usually that surge isn’t difficult to accomplish once the upswing begins because all the assets the economy needs to get back to its old path are readily available – lots of people who have been laid off or have come into the job market and been unable to find work, unused office and retail space, factories and equipment that had been idled. After the economy returns to normal and almost all these people and physical assets are back to work, growth slows to its normal pace.

But this time it’s not happening that way. More than two and a half years after the Great Recession began, many months after we hit bottom and when in a normal “recovery” we’d expect growth to surge, the opposite is happening. Growth is slowing.

The underlying problem is structural, not cyclical. There will be no return to normal because normal got us into the hole in the first place. And the normal kind of prescriptions can’t possibly get us out. Until the economy is restructured so more Americans share in its gains, the economy won’t make many gains. We’ll be forever trying to scale a wall that can’t be, because the vast majority of Americans lack the purchasing power to move upward.

The current battle is over the extension of the Bush Tax Cuts.  Whether for the rich or just those under $250K they are by definition NOT STIMULATIVE.  It doesn’t add anything to aggregate demand because it’s money you already have.  It is not being spent to create new demand.

Likewise business tax cuts.  Businesses are already sitting on $2 Trillion that they are not spending because there is no demand for the goods and services they produce.  They are awash in cash and credit and giving them any more is like pushing a string.

That leaves Government and they have 2 choices, give money to people who will spend it (which is why giving to the poorest is the most stimulative, because they’ll definitely spend and not save it thus creating demand), OR spending it themselves.  The only “stimulative” part of Obama’s new proposal is the $50 Billion spent on Infrastructure and it’s not enough.  The rest of the money is wasted pushing string and if you claim to care about “deficits” (and the bond market says you shouldn’t even if you’re not a Modern Monetary Theorist) you’re a hypocritical liar to support that and not the spending.

IF you wish to increase aggregate demand AND not increase the deficit THEN you should be talking about explicitly redistributionist policies that take money away from those who are not spending it to create demand and giving it to those who will.

Supply side economics is “Voodoo Economics”.  It has been tried and it has failed.  Spectacularly.

The most economically productive period in American History is the 40s, 50s, and 60s when the concentration of wealth was lower, the marginal tax rates higher, and business more regulated.

It’s amazing to me that those most anxious to turn back the clock socially are the most reluctant to do so economically.

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