Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Thursday, December 23, 2004





KERRY ECONOMIC ADVANTAGE

This letter was posted at another site in response to criticism of John Kerry. It was agreed that some of his programs were expensive. In his defense, however, Senator Kerry did state he would cut back on some programs if they were too expensive. However, the benefits of John Kerry's economic proposals were numerous.

John Kerry backed pay-as-you-go plans. He was also one of the initial co-signers of the Balanced Budget Amendment in the late 1980's. Unlike Bush, he stressed that federal programs and legislation need to be matched by spending cuts or tax increases.

Many other components of Kerry's economic plans would be better for the economy. Most of Kerry's taxation, anti-outsourcing proposals, and other policies would have increased the demand for goods and services. Most were non-"supply-side" benefits. They could be referred to as "demand-side" benefits. This would have been much more beneficial than Bush's "supply-side" emphasis.

"Demand-side" benefits are easily explained. Consensus among economists is that domestic consumer spending accounts for 2/3 of all economic activity. This accounts for most of the demand. Our economy is driven by demand. Goods and services will not be produced if there is no demand for them. (At least, not for very long). Think of the old adage: "Necessity is the mother of invention". A parallel statement is "Demand stimulates production." But it does not follow that "Production stimulates demand". Increased production of a product will not increase demand. The message here is that increasing demand is the key to stimulating our economy. Companies do not make money by producing goods and services. They make make money by selling goods and services. It doesn't matter how much product they produce. Profits are only made by product sales.

Aggregate consumer spending is limited by how much money consumers actually have to spend. Consumer spending comes mainly from consumer income/wages. (More specifically, from "take-home" wages). Consumers can increase spending above their income by borrowing or spending their savings. In order to increase aggregate demand, consumers will need to spend more money. Current consumer spending is 123% of yearly income. So it's not likely that consumers can increase spending much through more borrowing. Current savings are 0.2% of annual income, leaving little room for increased savings expenditure. Further spending increase can only come through increased wages.

US Labor Department statistics show median weekly wages, after adjustment for inflation, have fallen over the last year. Median wages have been falling since 2001. Consumer spending has been maintained largely through increased borrowing. However, aggregate consumer debt is now at record levels. Current consumer spending levels cannot be maintained indefinitely through borrowing. When consumer spending ultimately falters, so will demand for goods and services.

The ensuing drop in sale of goods will cause a drop in demand for workers to produce goods. Which will further decrease consumer income and spending. Which, again, further decreases demand for goods and hiring of workers. Companies are never going to hire more workers than they need. And they'll never need more workers if they can't sell more goods. An increase in total consumer income is the only thing that will increase consumer spending and demand. It is the only thing that will increase the hiring of workers.

Bush's tax cuts and economic policies are "supply-side" benefits. They favor increased "supply." Tax cuts for the affluent are designed to increase investment and savings. Increased investment favors increased supply. Consumer spending changes little with tax cuts for the affluent. These tax benefits favor an increase in supply of goods, even though the demand is not increasing. Does this make any sense? Will production of an increased supply of goods help the economy? Can this increased supply be sold while consumer income is decreasing?

John Kerry's tax plans and anti-outsourcing policies would have increased consumer spending by increasing consumer income. Take-home pay would have increased mainly for people who would spend the money, the lower 98% of the income tax range. Keeping jobs in the United States would have increased employment and aggregate consumer income. Both would have increased demand for goods and services. Both would have necessitated hiring of more workers. This would have further increased consumer income, causing still further increases in consumer spending and demand.

Would this increase in consumer spending help American business? Would increased demand for goods and services help American business? Wouldn't the sale of more goods and services increase profits for American business?

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