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You can't spend your way out of a recession

You can't spend your way out of a recession


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Because the problem with a recession isn't insufficient demand. Insufficient demand isn't really a problem. The problem is that production has fallen. We should want production to rise. And I'm not talking about aggregate production, I mean production of things that people want.

Um, why produce things if there's no demand for them? If there's no demand, how does one know what people want?

Do you believe supply creates its own demand?
 
Um, why produce things if there's no demand for them? If there's no demand, how does one know what people want?

Demand is 0 during a recession? Really?

Do you believe supply creates its own demand?

That's an over-simplification of Say's Law, because not all production is equal.
 
Demand is 0 during a recession? Really?

Didn't say that. Didn't say anything close to it.

Why do you want to increase production without increasing demand? Why?
 
Didn't say that. Didn't say anything close to it.

Why do you want to increase production without increasing demand? Why?

Because if you increase consumption while ignoring production then production won't be able to keep up with it. You will get a crash.
 
Because if you increase consumption while ignoring production then production won't be able to keep up with it. You will get a crash.

Who said anything about ignoring production?
 
Who said anything about ignoring production?

If you artificially stimulate consumption then you necessary decrease production.
 
If you artificially stimulate consumption then you necessary decrease production.

No you don't.

A stimulus bill employs people. These people engage in production, as well as consumption. It's not like the government is handing out free cash for people to spend.
 
No you don't.

A stimulus bill employs people. These people engage in production, as well as consumption. It's not like the government is handing out free cash for people to spend.

The money for that has to come from somewhere. From taxes it's obvious. If it's by lending then they are diverting capital away from productive opportunities. If it's by inflation then it's the same problem as taxation.

So any government spending takes money away from those things that people want to spend money on and spends it on things that are politically favorable.
 
The money for that has to come from somewhere. From taxes it's obvious. If it's by lending then they are diverting capital away from productive opportunities. If it's by inflation then it's the same problem as taxation.

It's mostly from lending, as you know. And it's diverted from much less productive opportunities because the lenders are skittish about investing anywhere else. They want a safe investment, and the government gives them that. But the government can still take risks they can't.

So any government spending takes money away from those things that people want to spend money on and spends it on things that are politically favorable.

Bull. People aren't spending that money, they are parking it.
 
It's mostly from lending, as you know. And it's diverted from much less productive opportunities because the lenders are skittish about investing anywhere else. They want a safe investment, and the government gives them that. But the government can still take risks they can't.

But government doesn't produce the things that we want like private companies. And it's a paradox that you pointed out. Companies only want to lend to government because they're so safe, but lending to government gives them less capital to lend to private companies. So government tries to stimulate production by lending but that action itself decreases production.

Bull. People aren't spending that money, they are parking it.

Saved money is used for capital. Think of an economy without money.
 
But government doesn't produce the things that we want like private companies.

Sure it does.

It produces things like roads, for instance.

Companies only want to lend to government because they're so safe, but lending to government gives them less capital to lend to private companies.

Private companies aren't borrowing right now. There's a recession, remember?

So government tries to stimulate production by lending but that action itself decreases production.

Not if there's no production to decrease.

Saved money is used for capital. Think of an economy without money.

It can be used for capital, yes.
 
The term the republicans should be focusing on is crowding out. The fact that people are trying to negate government spending is only naive.
 
The term the republicans should be focusing on is crowding out. The fact that people are trying to negate government spending is only naive.

Crowding out is only an issue when there's competition for the capital. The problem in a recession is capital isn't being used enough.
 
Sure it does.

It produces things like roads, for instance.

Roads aren't inherently good.

Private companies aren't borrowing right now. There's a recession, remember?

Because we're trying to discourage savings and because government is taking on a lot of debt. That leaves you less capital overall and government in control of a higher proportion of it. Now figure out why private companies can't get loans.

Not if there's no production to decrease.

There's no production right now?

It can be used for capital, yes.

Then what is the function of "parked money"?
 
Roads aren't inherently good.

You've strayed into ridiculous territory. I'll give you a pass and let you take that one back.

Because we're trying to discourage savings and because government is taking on a lot of debt. That leaves you less capital overall and government in control of a higher proportion of it. Now figure out why private companies can't get loans.

Private companies can get loans.

There's no production right now?

Do I have to be that precise with my words with you?

There is a less than optimal level of production.

Then what is the function of "parked money"?

To sit there, nice and safe, until the recession is gone. Which is why the government needs to do something - private capital isn't going to take the first step. Same with consumers who won't spend because they have no job or fear future job loss, even if they have the cash. Someone who can take the risk needs to make the first move.
 
You've strayed into ridiculous territory. I'll give you a pass and let you take that one back.

I'm not taking it back. Some roads simply are a waste of money. The profit motive works just as well for private roads. Read the quote in this thread.

http://www.debatepolitics.com/econo...nvest-because-wont-see-societal-benefits.html

Private companies can get loans.

Then what are you complaining about?

Do I have to be that precise with my words with you?

There is a less than optimal level of production.

Yes you do. So then we need more capital to get production moving, right? Let's let people save more money so we'll have more capital to distribute.

To sit there, nice and safe, until the recession is gone. Which is why the government needs to do something - private capital isn't going to take the first step. Same with consumers who won't spend because they have no job or fear future job loss, even if they have the cash. Someone who can take the risk needs to make the first move.

You already admitted that saved money is used as capital though.
 
I'm not taking it back. Some roads simply are a waste of money.

Some are, most aren't. Some products made by private enterprise are a waste of money too. Your point?
 
Crowding out is only an issue when there's competition for the capital. The problem in a recession is capital isn't being used enough.

Well.... To a point. The manner in which the US obtains much of its current funding is via the offset of the current account. Due to the rather large trade imbalance, Japan, China, Germany, etc... are going to be holding quite a bit of dollars. We can only speculate whether or not they would be purchasing other forms of assets in the absence of $200 billion treasury auctions.

However, if i was cheer leading the "hands off" section, the first thing i would bring up is crowding out :shrug:
 
Some are, most aren't. Some products made by private enterprise are a waste of money too. Your point?

Those who make worthless products in private industry go bankrupt. Those who do so in government get more government money. It's a perverse incentive.
 
Those who make worthless products in private industry go bankrupt. Those who do so in government get more government money. It's a perverse incentive.

That doesn't mean the government doesn't produce things of value. The fact that you had to declare that roads have no value shows how silly this line of thought is.
 
That doesn't mean the government doesn't produce things of value. The fact that you had to declare that roads have no value shows how silly this line of thought is.

I said that roads aren't inherently good. Maybe you don't know what inherent means. What I was trying to say what that a road isn't necessarily a good thing. Sure, some roads are good, I'm not going to debate that. However, I'm not going to say that all of them are either. We need a profit and loss mechanism to decide which roads are good and which are a waste of money.
 
I said that roads aren't inherently good. Maybe you don't know what inherent means. What I was trying to say what that a road isn't necessarily a good thing. Sure, some roads are good, I'm not going to debate that. However, I'm not going to say that all of them are either. We need a profit and loss mechanism to decide which roads are good and which are a waste of money.

Nothing is inherently good. But I submit that most roads are good.

It would be nice to have a profit and loss mechanism to decide which roads are good, but unless you want to have a toll both on every corner, that's a bit impractical.
 
A review if the Keynesian theory helps explain why spending is necessary during a recession.

"When the Great Depression hit worldwide, it fell on economists to explain it and devise a cure. Most economists were convinced that something as large and intractable as the Great Depression must have complicated causes. Keynes, however, came up with an explanation of economic slumps that was surprisingly simple. In fact, when he shared his theory and proposed solution with Franklin Roosevelt, the President is said to have dismissed them with the words: "Too easy."

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this, which we'll cover in a moment.) Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.

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.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this "priming the pump" of the economy, a final government effort to reestablish the circular flow of money."

A Review of Keynesian Theory
 
A review if the Keynesian theory helps explain why spending is necessary during a recession.

"When the Great Depression hit worldwide, it fell on economists to explain it and devise a cure. Most economists were convinced that something as large and intractable as the Great Depression must have complicated causes. Keynes, however, came up with an explanation of economic slumps that was surprisingly simple. In fact, when he shared his theory and proposed solution with Franklin Roosevelt, the President is said to have dismissed them with the words: "Too easy."

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this, which we'll cover in a moment.) Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.

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.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this "priming the pump" of the economy, a final government effort to reestablish the circular flow of money."

A Review of Keynesian Theory

Thanks. That's a great explanation.

Some people disagree with this, and that's fine. But too many simply don't understand Keynes' theory in the first place, and argue out of ignorance.
 
It would be nice to have a profit and loss mechanism to decide which roads are good, but unless you want to have a toll both on every corner, that's a bit impractical.

And your argument against it is a bit deceiving. First off, we don't even know if streets would be owned or grids (like areas owned instead of strips). Secondly, with the technology we have in electronic transponders, we don't need toll booths. You can drive right by a "booth" without even having to slow down.
 
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