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.

Friday, March 25, 2005

ECONOMIC COMMENTARY: BASIC THEORIES






ECONOMIC COMMENTARY: BASIC THEORIES

My economic beliefs are based on 4 simple concepts. The 1st is supply and demand theory. The 2nd is that profits are made by selling goods, not simply producing them The 3rd is that consumer spending is 2/3 of economic activity. The 4th is that aggregate demand has significant differences compared to individual demand. My deductions follow from these concepts. Most deductions are consistent with Keynesian economic theory, especially that of aggregate demand . Aggregate, or total demand is critical for understanding the American economy. It is rarely mentioned mentioned by financial news analysts, despite its importance. For that reason, I will stress "aggregate demand" in my postings.

The first deduction is that consumer spending creates demand for goods and services. It follows that aggregate (total) consumer spending creates aggregate consumer demand. Consumer demand drives our economy. Aggregate consumer spending is limited by total consumer wealth. Income is the most important component of consumer wealth. Spendable dollars from consumer income can be supplemented through borrowing and savings expenditure. However, spendable consumer dollars have a definite limit. This limit is the sum total of income, borrowing, and savings expenditure. Everything else being equal, decreased consumer income decreases spendable consumer dollars. Overall, consumer income is the major limiting factor for consumer spending.

Another important Keynesian concept is the Marginal Propensity to Consume. This refers to the change in consumption spending relative to change in income. As individual income increases, the percentage spent on consumer goods decreases. Let me give an example. If an individual making $10,000 per year is given an extra $1,000, it will go mostly towards consumer spending. If an individual making $10 million per year is given an extra $1,000, it will go mostly towards investment and savings. Economic policy implications can be seen from this. Increasing money to the non- affluent favors consumer spending. Increasing money to the more affluent favors investment and savings. Along the same lines, tax cuts for the affluent increase investment. Tax cuts for the non-affluent increase consumer spending.

An interesting point should be made here. I initially arrived at the Keynesian "Aggregate Demand" and "Marginal Propensity to Consume" concepts without knowledge of Keynesian principles or formal economics background. This implies these principles are products of logic and common sense. Formal economics training is not necessary to understand them. But common sense is.

It's my opinion that many current economic theories are derived to prove a particular economist's desired conclusion, not to explain reality. Many complicated economic theories attempt to justify policy that favors a special interest. Some appear to be derived in reverse - by starting with a conclusion and then concocting a "theory" to explain it. To put this another way, some economists start with a belief in an illogical theory, that has no real world evidence to support it. Then they assemble a mass of selected data with complicated equations to prove themselves right. This contrasts sharply with the methods we use in natural science. We try to gather all the facts and evidence we can, then we connect the dots to find truth and reality. Scientists don't try to "prove" reality, they try to discover it. Some economists seem to start by "creating reality," then gather selected data and invent formulas to prove this new, illogical "alternate reality." The convoluted nature of such theories often makes them difficult to understand, much less refute. However, they often defy logic when taken as a whole. (Tax cuts for the wealthy are a perfect example of theory developed to justify illogical policy. More on this later.) Many times the validity of the theory is based solely on the so-called " expert's " background. (Because few people actually understand the theory.) It may indeed take a Ph.D in economics to prove an illogical theory. But common sense is often enough to explain logical ones. I'll stick to logical ones in this blog.

Furthermore, one should remember the adage "don't miss the forest for the trees." It appears some economic "experts" actually do miss the forest. Sometimes the trees do blind them to the forest. And sometimes one who can't see the "trees" well gets a better view of the "forest." The value of my statements come from this. I see the forest better, because I'm not blinded by the trees. I may not be able to explain some complex theories, but I can fully explain aggregate demand. That's because it's a big part of the forest, not an isolated tree.

unlawflcombatnt

HOME: http://www.unlawflcombatnt.blogspot.com/

49 Comments:

Anonymous Anonymous said...

Just a question....
how do you link other bloggers to your blog?

1:56 AM  
Blogger unlawflcombatnt said...

That's a good question. I don't know. I've been trying to figure that out for weeks. I'm having a lot of trouble using the "links" function. The only way I can put links on my blog is to show them as posts. If you find out how to link, could you let me know.

Mike

2:42 AM  
Blogger unlawflcombatnt said...

__________________________
I think I might be able to answer the question about linking bloggers to my blog. You can post links IN the "template" section. First you go to the big screen that opens and is full of bizarre gibberish (that's what it looks like to me, at least) It's the part where you see all of the funny symbols, like > and =. I can't send mail with a copy of the exact line. Blogspot won't let me. Blogspot is afraid I'll give away their trade secrets. Their assaninity is why it took me 3 weeks before I knew how to post a link. It's top secret! Sshhhhh. Don't tell anyone else, okay. You might be arrested and tortured for being an "unlawful combatant." Go down to where you see:

"http://EDITME!"

in the middle of a line. It should be under the line that says google news.

Again, blogspot won't let me send you the whole line. I guess their guarding against "intellectual property theft." "Assaninity theft" is more like it. Just imagine the <..... href= is followed immediately by "http://EDITME!" on the same line.

The next step is optional. Once you find this line, you should make extra copies of it. You don't want to use up all of your Edit-Me lines. You're going to substitute your links for the Edit-Me line. And you can have as many Edit-Me lines as you want. So highlight the above line. Copy and paste the line directly under the previous Edit-Me line. It should look exactly the same as the one above it.

Now, again, you're going to substitute the link name for the Edit-Me line. You're going to substitute the URL (website address) for the EDITME! part of the line.

Now, to post a link:

#1.Don't panic (like I did)

#2.You substitute the link(the url) for EDITME!

#3.Substitute the site description for Edit-Me.

#4.Go down to the bottom of the screen and hit "preview."

#5.You should see the site description on the front page. It should have replaced one of the "Edit-Me"s

#6.If it looks right, hit save or save edits.

#7.Republish your blog.


I hope this helps.

Mike

http://www.unlawflcombatnt.blogspot.com/

____________________________________

3:47 PM  
Blogger rightsideblogger said...

First of all for the blogging other bloggers: real easy goto blogrolling.com. It is free and you can list as many links as you wish. They also give you step by step instructions on what todo along with the script needed.

Now as far as your Keynesian economics discussion:
The Keynesian theories are great for class room and blog discussions but have very little "real world" value. Yes it helps us to understand how things start to work, but there is one problem with the theories, it is the part where it says, "ALL THINGS BE EQUAL." The problem is in the real world all things never are equal.

Your example of the tax cuts for the rich (which by the way Keynesians believe in big government) does make sence in the real world for the very reason that the person who makes "$10 million" will most likely invest that money which helps businesses to fund reaserch and development that causes more wiggits to be made. Both wiggits to produce profit by the businesses as well as wiggits to produce more wiggits (also known as technology). While if you give a tax cut to the person making "$10,000" they will most likely spend the money on bread and water, there by not "creating" any product to spure economic growth. They are buying the end product. That is why a tax cut to business owners or the so called wealthy makes sence in real world terms. Also if memory serves me correctly from my econ 101 class most Keynesian formulas don't take into account for tax burdens on the income of individules... truthfully I could be wrong on that point.

7:21 PM  
Blogger unlawflcombatnt said...

Alberto,
Thank you for your response to my blog. I appreciate the time you spent writing.

First, I want to address your statement about Keynesian theories having very little real world value. I must assume you are referring to either the "aggregate demand" concept or the "marginal propensity to consume" concept. Maybe both. You may be assuming that I am advocating more than these 2 concepts. But here, these are the only 2 I'm referring to. Needless to say, I completely disagree about their lack of value.

The aggregate (total) demand concept is very applicable to the real world. I think the fact that many economists virtually ignore it is THE major problem with our economy today. Aggregate demand implies that total society demand has a definite limit. Maybe I should alter my definition slightly. When I say aggregate demand, I mean the sum total of demand for all goods and services of any kind. I should probably also amend this slightly by defining it as "dollar-value" of aggregate demand for all goods and services. To put it differently, I'm referring to the total spendable wealth of consumers, or aggregate demand measured in dollars. Not only does this have "real world value," it's one of the most important concepts in understanding both the US economy, and the world economy.

The total value of goods and services is determined by their total market value. Market value is determined by what consumers will pay. The total, or aggregate amount of money consumers are willing to pay for all goods and services is the aggregate market value. The latter has a limit. That limit is total spendable consumer wealth. This limit is the sum of income, credit, and asset liquidation possible by consumers. Asset liquidation is difficult to pin down. If everyone tried to sell their home at the same time, home values would drop tremendously. So using the total market value of all of society's homes as a direct addition to their wealth is not correct. So the actual AGGREGATE value of asset liquidation is much, MUCH less than microeconomic individual demand would suggest. It's like the stock market. Each share has a current value. But those shares would have practically no value if everyone tried to sell at the same time.

So in a practical sense, spendable consumer wealth is the sum of income, borrowing, and savings expenditure. This is what I'm referring to as aggregate demand in dollars. Market value limits the dollar value of all goods and services produced. Profits are made only when goods are SOLD, not when they're produced. For example, a square wheel may cost a lot to make, but it has 0 market value. It has no value because it cannot be sold. Supply does NOT create demand in terms of dollars. Aggregate supply increase does not increase aggregate demand in dollars. Producing more goods and services does NOT increase wealth, unless the goods can be sold. However, demand does increase supply. An aggregate increase in spendable dollars increases the dollar-value of the aggregate supply. The total value of aggregate supply is determined by total spendable consumer wealth, not by cost or quantity of supply. (Selling more of a product with CONSTANT aggregate consumer spending simply redistributes profit from one business to another. It does not increase total business profits or GDP.)

Consumer wealth limits the value of our GDP. The aggregate demand equation looks exactly the same as the equation for GDP.

Aggregate Demand = Consumer Spending + Investment + Government Spending + Net Exports.
GDP = Consumer Spending + Investment + Government Spending + Net Exports.

Consumer spending is the largest value in the above equation. Economists state that consumer spending is 2/3 of economic activity. Wages, or consumer income, are the largest contribution to consumer spending. If consumer income decreases, "ALL THINGS BEING EQUAL," consumer demand and consumer spending will decrease. However, if consumer spending is maintained when income decreases, all things are not equal (as you suggested.) That means consumer spending is being maintained by borrowing or by savings expenditure. Since our savings rate is almost zero, consumer spending is being maintained by borrowing (or credit.) According to the BLS, real weekly earnings for private industry workers have decreased 2.3% over the last year. (You can verify this at http://stats.bls.gov/news.release/realer.t02.htm ) Current consumer spending cannot be maintained indefinitely by credit alone. Consumer income needs to rise.

Take-home consumer income can only rise by increased wages or decreased taxes on consumers. Consumer spending creates aggregate demand. The dollar-value of aggregate demand is determined by consumer spending. The aggregate market value of all goods and services is determined by total spendable consumer wealth. Aggregate market value of all goods and services has nothing to do with costs or quantity produced. It has everything to do with spendable consumer dollars. Businesses don't make ANY money by simply producing products. They must be SOLD to make money. Reducing production costs will not raise aggregate market value of goods. Increasing consumer income will. By itself, reducing non-labor business costs will not increase GDP any. Reducing labor costs will reduce GDP, because it will reduce consumer income. It will reduce the SALE of products. Reduced consumer income reduces aggregate demand. Since aggregate demand = GDP, it will also be reduced. This has has tremendous "real world value." Our government's failure to acknowledge this may lead to an economic Armageddon.

I will write more about the "marginal propensity to consume" in my next letter, in addition to the tax-cut issue. Thanks again for writing. It's nice to find someone else who is interested in talking about economics.

Mike

4:09 PM  
Blogger rightsideblogger said...

Mike,
I was right there with you until you took the turn to increasing wages. While you are correct in the fact that there are only two ways to increase the workers "take home" pay, ( increase wages or decrease taxes), we come to dividing point here.

Because a business most create proffits inorder to survive and thereby employee laboring people increasing the tax burden on them does not make economic sence. Also increaseing wages ( and I am assuming that you would suggest that this be done by raising minimum wage), truely in the end only hurts the very consumer you are trying to help. Let me illistrate:
1. Increasing taxes on businesses:
it costs x dollars for a company to produce a wiggit. The company can make enough profit to sustain that cost. Now there is tax imposed on the company. It now costs the company x(t) to produce the same wigit. The profit margin of the company decreases by a factor of t. It now inorder to recoupe the costs of tax most layoff employees. Now not only these employees not getting any dispossable income for consumption, the government losses income tax revenue, the "aggregate consumer demand" drops, inventories increase, and GDP is lower.

2. Increase Minimum Wage: In this example we again put the burden on the business to pay an employee no less than y dollars per hour. NO MATTER how much that employee produces per hour, they are gauranteed to get paid y dollars. So for every employee that is underproducing the cost of product goes up by a fraction of y, increasing each hour. As stated in your argument, the company wont make any money until the wigit is sold, but if the market price of the wigit does not recoupe the lost cost of the underproducing worker the company doesn't make anything anyway! So the company has two options, (a) fire the worker, or (b) fire the worker. So the fire the worker, and again the worker is no longer gainfully employed and we have the same problem as above.
Now there is one more problem with increasing minimum wage. As I stated before, the company can pay no less the y dollars per hour. So where does that added cost go... well also as illuded to above it added into the market price of the wigit. Now we have the whole economy doing this. What happnds? Inflation, the cost of living increases and the standard of living takes a small dip in some cases, not all, but some. Also just for the sake of argument, that employee that was making y dollars per hour is now replaced by a machine that can do three times the work per hour for 1/100 of the cost (after depreciation). Now that one time disposable income position is no longer helping aggregate demand of consumption.

Don't get me wrong Keynesian economics has an important use to understanding parts of how our economy works. But our economy is much closer to that of Adam Smith and the free markets, at least until the government starts imposeing regulations. Albeit there are surtain industries such as banking where it has been a good thing. But for the most part, the more the government gets involved the less effiecent things get and the more problems everyone faces.

6:58 PM  
Blogger unlawflcombatnt said...

_______________________

Alberto,
Thanks again for you response.

Regarding increased wages, I was not suggesting increasing minimum wage. I was suggesting increasing wages by ultimately increasing the demand for labor. The demand for labor increases when the demand for production by that labor increase. Low and middle income tax cuts would increase take-home pay for consumers. This would increase consumer spending. This would increase demand for products and demand for labor to produce those products. Increased sales would increase business profit. This increased profit would ALLOW business to hire more workers to meet an increased demand for products. Increased labor demand would necessitate the hiring of more workers and increase wages. The increased income from increased hiring and/or increased wages would increase aggregate consumer income, causing increased consumer spending. The increased consumer spending would further increase consumer spending. This cycle would repeat itself for some length of time, continuously increasing aggregate consumer spending and continuously increasing demand for labor. Hopefully it could be sustained long enough to get our economy out of trouble. As consumer wealth increased, consumers would begin saving or investing a higher aggregate fraction of their income. Investment capital would increase as aggregate consumer income increased. In my opinion, this cycle could be started by returning our tax rates to the more progressive rates we had under Clinton.

I'm not advocating an increase in minimum wage. I don't think that would increase consumer income enough to justify the negative side effects that you suggested. Some businesses are operating on a thin profit margin. Those businesses would indeed have to lay off workers if they could only afford to pay them the minimum.

However, most business layoffs are NOT because they can't pay their current work force and still make a profit. Most businesses laying off workers do it because they don't NEED the workers, not because they can't afford them. Demand for their labor is the problem, not inability to pay them. These layoffs occur because the business can make enough product to meet current demand with less workers. If demand is reduced, less workers are needed to fill the demand. Hiring unnecessary workers DOES cut in to profits. Many, if not most major layoffs are because of a DEMAND-deficiency, not from cost limitations. Demand for their products reduces demand for labor to produce them. Many companies are greatly increasing their profits and laying off workers at the same time. The overwhelming number of layoffs are coming from extremely profitable companies, many of whose profits are actually increasing. The layoffs have nothing to do with inability to make a profit, or inability to pay the workers. They are due to decreased need for labor. Giving these companies handouts by reducing their taxes will not increase hiring ANY.

Let me give an example. Let's pretend I own a restaurant. Let's call it "Mike's Super Burgers." I have 3 waitresses working for me. I have just enough business to keep 3 waitresses busy. Let's say my new found friend, George "stay-the-course" Bush, gives me a million dollars just because he likes me (or maybe just the burgers.) Will I hire another waitress? Of course not. Why not? Because I don't NEED another waitress. I can't sell any more burgers with 4 waitresses than I can with 3. So I'm going to take that million dollars and put it in the bank. I'm not going to hire another waitress. She'll cost me money and will not increase my profit any. Now, let's say my former friend, George "stay-the-course" Bush, takes that million dollars back. (He hates the burgers.) Then he redistributes that million dollars to the people that live next to my restaurant. Amazingly, business in my restaurant picks up a lot. Now I NEED to hire more waitresses. More waitresses are going to allow me to make more money. Now I do hire those waitresses. Hiring them now increases my profits. I don't hire them because I can afford them. I hire them because I need them. I can sell more burgers if I have more waitresses. Businesses don't hire workers because they can afford them. They hire workers because they need them. They need them to maximize their profit. Increasing consumer demand increases that hiring need. Giving businesses tax cuts does not.

I need to respond to the latter part of your business tax comment in another letter. I don't think I completely addressed it here. But I will get to it. Thanks again for writing.

Mike

http://www.unlawflcombatnt.blogspot.com/

8:47 PM  
Blogger rightsideblogger said...

Mike,
I am glad that you are not suggesting the increase in minimum wage. In the fourth paragraph of your last comment posting you talked about the business' need for labor. But you did not go into why the business' can produce more product with less labor. Please allow me to expand on this area.

The major reason for why the busisses of our economy can produce more product with less labor is due to the fact that there have been major technological advances in the production process. These advances are almost always created during a time of high demand for labor, where as you stated the wages for workers is at peak.
Given the state of technological advancement and the length of time that these companies have been using the technology the demand for "human capital" in the production side of a business is decreasing. So it appears the only way to increase demand for human capital would be to go back to the labor environment of the begining of the industial age ( this is an exageration for example purposes). By doing this though we would be giving up one of the most sacred things to economies and economists... efficiency.

Now I would hope you and I both agree that this is not the way to go. But I think I have figured out what we disagree on most. You view the loss of jobs as a bad thing for our economy, and I view the loss of jobs as an opportunity for our economy. Let me explain.

As peoples jobs are repalced by technology, there becomes a demand for the maintainence of that technology. This requires an understanding of such technology which usually envolves schooling of sorts. If a worker who once did a job being paid a wage of w, is replaced by technology, they now have the opportunity to go get credencials to maintaince the technoloy which the former employer will need from time to time, they can now earn a wage of w+(market value of knowledge). There by increasing their total disposable income. Not only that but they don't have to be tied to the one company. They can offer their knowledge and services to other companies in the same industry.

Now that same worker gets replaced by the same peice of technology, but this time rather than getting the knowledge of how to maintainence the technology, they go to aquire knowledge that allows them to do more of a management type of position, again allowing them to increase their wage of w+(market value of knowledge).

And there are many other scenarios that could come from this. Most of the positive scenarios require increased education or training. The one negative scenario is that the worker is replaced by the technology and does nothing. But that is up to the worker.
Alberto

7:15 AM  
Blogger unlawflcombatnt said...

______________________

Alberto,

I understand your point about increased productivity.

This may be a little off the subject, but I would first like to discuss productivity gains in terms of tax cuts. If productivity increases, businesses make more money per dollar of labor cost. If businesses are increasing their income this way, why should business taxes and high-end income taxes be cut? The increased profits should increase their available capital. If the reason for tax cuts is to stimulate the economy, how does it help to increase an already excessive amount of capital. Especially when labor/consumer income is decreasing as a result increased productivity. Why should we be trying to increase available capital when it is already increasing? Wouldn't it make more sense to cut taxes on labor and consumers, since their income is DECREASING? Wouldn't it be better to increase consumer spending money if consumer incomes are decreasing. Logically, capital investment can only increase profits up to a certain point, unless product sales increase. What are you going to invest the increased capital in if product sales don't increase? Are you just going to continue to build production facilities and increase inventories? Does it really make sense to increase investment capital when there is already more than can be currently used?

Secondly, tax cuts to low and middle income groups would also increase consumer savings some. It would probably cause some credit spending to be replaced with cash spending. Won't both of these augment investment capital by increasing money available for business loans? It seems to me that you could facilitate both your concerns and my concerns by directing tax cuts at the less affluent. You'd get your increase in availability of business loan money for investment. I would get my increase in availability of consumer spending money. The subsequent product sale increase would further increase capital for investment. We'd both like that.

I think there is an optimal balance between capital and consumer income. Do you agree with this? Do you think that increasing capital is beneficial regardless of consumer income? I think this is an important point in our discussion. I'm not really sure where you stand on this. This was the point I was trying to explain in my letter "Capitalism and Uneven Wealth Distribution." If you don't agree with my point about this balance, I would definitely like to hear your reasons. It's always possible you might change MY thinking. I have changed my thinking on strongly felt positions before. You see, I'm not a Republican. So I CAN change my course if necessary.

I'll write more on the productivy issue in my next letter. I need to go to the bank with my paycheck. I need to divide my check into investment capital and consumer spending allotment. I hope I get the right balance. Thanks again for writing. I hope you will continue.

Mike
hppt://www.unlawflcombatnt.blogspot.com/

1:49 PM  
Blogger unlawflcombatnt said...

__________________________

Alberto,

I think we agree that increased productivity has reduced the demand for labor. We agree that this, by itself, will tend to decrease aggregate consumer income. I think you acknowledge that decreased consumer spending will decrease demand for labor. If not, let me know. I also acknowledge the fact that increased productivity decreases the demand for labor. So both decreased consumer income and increased productivity will tend to reduce consumer spending. I'm assuming that you accept the idea that consumer spending has at least some positive effect on the economy. We may differ on how much difference. We certainly appear to differ on how to preserve consumer spending.

I'll state my suggestions first, since they are easier for me to explain. My 1st suggestion is to shift the tax burden towards the affluent and away from the less affluent. This would increase aggregate money put into the "demand" side of the economy and reduce the total put in to the "supply" side of the economy. It would favor spending over investment.

The next suggestion is to reduce job OUTSOURCING to foreign countries. (Alberto, I know you'll have a lot more to say on that.) Outsourcing jobs also outsources consumer income. The dollar loss in consumer income is much greater than the dollar savings in consumer prices. If it wasn't, the jobs wouldn't be outsourced in the first place. I encourage the use of little simple logic here. If an outsourcing manufacturer was passing along 100% of his labor savings to consumers, there wouldn't be ANY benefit to outsourcing. Obviously, that is not what is happening. So there is a net loss in labor/consumer income that is not compensated for by reduced prices. Free trade advocates site the "creative destruction" fantasy. They'll claim new jobs will be created that are better than the old ones. We have ample statistics that refute this claim. New jobs that pay more are NOT being created. Jobs that pay less are being created. Wages are declining. Job growth has been MUCH less than predicted. People with the high tech skills needed to fill the "new" jobs created are now being laid off. The pro-outsourcing con artists said that the new high tech jobs created would be safe. They said the new, high-skill jobs during the initial outsourcing period would be protected. They were not. The theoretical benefit of outsourcing has NOT materialized. Were the pro-outsourcing advocates wrong? Absolutely. Were they mistaken, or were they lying? I'll defer my comment on that for now. But we certainly CAN get some of those jobs back, if the government is ever willing to take any action against these "Benedict Arnold" corporations. The current administration probably won't. But that doesn't mean we "can't" get them back. It just means we probably won't during the next 4 years.

The next suggestion is to reduce imports. By a lot. To as close to zero as possible. Yes, I am an adamant, unapologetic PROTECTIONIST. Reducing imports will increase demand for American labor to replace products no longer imported. It will increase consumer income. It will increase both wages and number of people receiving increased wages. Reducing imports will not have an immediate benefit, however. At least temporarily, prices will increase. They might never return to their current level. But that is not a certainty. Consumer demand is biggest factor affecting prices. Some products may not be able to be produced profitably in the United States. However, this too is not a certainty. The effect of increased consumer income may change previously unprofitable items into profitable ones. The long-term, GUARANTEED rise in consumer income may do this. Increased consumer income may allow a manufacturer to sell an item at a higher price than he can at present. Again, an increase in consumer the income is an absolute CERTAINTY if imports are reduced. 100% GUARANTEED.

My last suggestion is to reduce immigration. Any immigration reduction will increase labor demand. It will reduce the labor force, which would increase demand for workers. This increase in labor demand would increase wages mainly. It would not increase the number of people employed, however. It may slightly reduce the absolute number of people employed. Demand for labor is most closely associated with consumer demand for products. The increase in wages from the increased bargaining position of American workers would have a much bigger effect on aggregate consumer income, than the slight loss in number employed. The number of unemployed would definitely be reduced. Thus, government spending on unemployment alone would be reduced.

I am being deliberately vague about immigration reduction for a reason. Reducing the size of the labor force is the main benefit. This can be accomplished by reducing illegal immigration as well as legal immigration. Illegal immigration seems more justifiable, but reducing legal immigration would probably be easier to do. High tech jobs are being lost to legal immigrants and H1-B visas.
Higher income doctors, engineers, scientists, and others are having their wages driven down from competition from legal immigrants. Lower wage earners are having their wages driven down by competition with illegal immigrants. Both are reducing consumer income wage suppression. Reduction in either will increase aggregate consumer income. Reducing immigration of higher wage legal immigrants is as simple as reducing the number allowed each year. Technically, that would take all of 5 minutes to change the quota. Reducing illegal immigrants is more complicated. In my opinion, the only effective way to reduce illegal immigrants is to prosecute employers who hire illegal immigrants. And to prosecute them AGGRESSIVELY. Make it mandatory that they verify the social security number with the social security administration. This can be done by banks in less than 60 seconds. So this is a completely reasonable request. Make it mandatory that employers report a false social security number to social security. Make jail time a possibility for employers who continue to hire people with unverified social security numbers. Make prosecution of such employers VERY public to get maximum deterrent effect.

I stress prosecution of employers for a simple reason. Immigrants come to this country for employment, not to use social services. The "demand" for illegal immigrants is created by employers who hire them, not by county welfare offices. That demand will only be reduced by reducing the illegally created demand by employers. Blocking use of social services will do little. Reducing the employer-created demand will also reduce social service expenditure. And it will reduce it far more. Because it will reduce the real demand that brought the illegal immigrants into the country in the first place. Furthermore, an employer is MUCH easier to prosecute. We can easily prosecute employers. But how do you prosecute an illegal immigrant? Deport them? Is that really much of a deterrent? How well is that working at present?

Mike

http://www.unlawflcombatnt.blogspot.com/

4:44 PM  
Blogger unlawflcombatnt said...

______________________________

Alberto,

I wanted to comment further on your last post here. You stated as jobs are replaced by technology, it increases demand for workers to perform maintenance of that technology. I completely agree. In no way am I advocating a slowdown in technological advancement. Even the most liberal economist would never advocate that. In theory, you're making an excellent point. However, you've also allowed me to make a different point.

Much of this newly created maintenance work has been sent overseas to countries that provide cheaper labor. If Amercian laborers are replaced by machines that are serviced overseas, this doesn't create American jobs. American industry's payroll is reduced. And what's left of that payroll goes to a foreign economy. The best example of this is the loss of high tech computer jobs in the Silicon Valley (up around your neighborhood, I think.) Any high tech computer maintenance jobs that don't require on site repair can be outsourced to a foreign country.

These new technologies also increase the need for non-maintenance type service work. Much of this is also sent overseas. American labor and consumers lose all of this outsourced income. A small fraction of that income is made up for by price reduction. ONLY a small fraction. National income, in the form of corporate profits, may actually increase. But this income goes to the affluent. And the affluent spend a smaller fraction of their income on consumption than the middle class does. That income does add into our GDP. But it adds little to actual sale of our GDP. Little goes to consumer spending. It actually reduces the fraction of GDP sold. This pseudo-increase in GDP may look good on paper, but it overstates the health of the economy. Previous GDP models have never had to deal with increasing national income from profits alone, with decreasing private wage income. The false assurances given by Greenspan and others are based on these deceptive "paper" gains. In addition, according to Barron's business review textbook, "Economics," by Walter J. Wessel, the practice in national income accounting adds further distortion. This practice allows for inclusion of UNSOLD output as part of sales. In other words, they're adding the value of surplus to actual sales to increase the total sales figure. The United States Department of Commercials uses this formula. (yes, I did mean "Commercials." Stating reality isn't their function. "Creating" reality is.)

Your statement that more jobs are being created through increased demand for maintenance labor is true. However, the implication that more American jobs are being created than those being lost is not true. Just talk to your friends in the Silicon Valley.

It's convenient for corporate America to blaim American job loss on technology. It's also untrue. Most American manufacturing jobs aren't being lost to "technology". They're being lost to cheap foreign labor. American workers aren't being replaced by machines. They're being replaced by foreign workers. World demand for manufacturing workers has not decreased. Only American demand for workers. Manufacturing jobs ARE being created. But only those paying less than $1.00/hour.

Our alleged increase in productivity is deceptive. Production by poorly paid foreign workers increases productivity, if measured in dollars. More specifically, if it is measured in dollars of output per dollars of input. The dollar-measured productivity ratio is higher for foreign labor. A foreign worker paid $1.00/hour to produce 50 widgets/hour is more "productive" than an American worker paid $10.00/hour who produces 200 widgets/hour. The labor cost in widgets/$ is much higher for the American worker, even though the American worker is producing 4 times as many widgets/hour. However, he costs 10 times as much per hour. So he is considered less productive then his slower-moving foreign counterpart. American workers are not lacking in production skills. But they are lacking the "skills" to survive on $1.00/hour.

I must admit I get angry every time I hear a Neocon say that America is losing jobs due to lack of skills and training. That's complete nonsense. America's only skill-deficiency is the skill needed to survive on $1.00/hour. Maybe more education will help develop this "skill." Maybe it's because our inept teachers don't teach it in school. Teachers are too busy teaching useless subjects like Math and Reading. We need to hold them more accountable for this shortcoming. We'll have to work on that. Maybe increased funding for education will help.

Jobs are not being lost due to more skilled foreign competition. They're not being lost because American corporations can't make a profit using American workers. They're being lost because corporations can make a BIGGER profit by using overseas labor. They're being lost because of corporate greed. Because many greedy corporations, already making exorbitant profits, want to increase profits even further. Because their poor, undercompensated CEOs are only making 400 times the average worker's salary. Surely 800 times the average worker's salary is not too much to ask, is it?

What they don't realize is that those huge salaries will not last. Nor will the profits. Those short-term profits are mainly the result of labor cost reductions. Reductions resulting from substitution of cheap foreign labor for American labor. But these labor cost reductions also reduce American consumer income. The same American income used to buy their products. The same income that provides for those corporate profits and CEO salaries. The same consumer income which is now being supplemented by record levels of borrowing. The current consumer borrowing bubble will burst eventually. It will take consumer spending along with it. Where are those corporate profits going to come from then? What happens when consumers can't even buy cheap foreign goods. We may find out soon.

Mike

http://www.unlawflcombatnt.blogspot.com/

6:05 PM  
Blogger rightsideblogger said...

Mike,
You have certainly covered many subjects. I had to take notes that is the reason why I have not answered you promptly. Of the notes I have taken I would like to address the major issues that you presented in the last three comments.

1. You said, "I was suggesting increasing wages by ultimately increasing the demand for labor. The demand for labor increases when the demand for production by that labor increase. Low and middle income tax cuts would increase take-home pay for consumers. This would increase consumer spending. This would increase demand for products and demand for labor to produce those products. Increased sales would increase business profit. This increased profit would ALLOW business to hire more workers to meet an increased demand for products." We can achieve the same the outcome without putting the entire burden on one side of the labor economy ( also know as workers and employers), by instating a consumption tax versus an income tax.
This will have your desired effects of increased income to the less affluent by not taxing their paychecks. It would also allow what I want, and that is for business to not be taxed into shutting their doors and causing even more job loss.

2. You said, "As consumer wealth increased, consumers would begin saving or investing a higher aggregate fraction of their income." I thought this was bad for the economy in your original argument.

3. You said in the next sentence, "In my opinion, this cycle could be started by returning our tax rates to the more progressive rates we had under Clinton." Are talking about the same taxes that helped put stress onto businesses that helped (not completely cause) the recesion that started in March of 2000 (under President Clinton's administration as President Bush did not come into office until January of 2001)? I concede to the fact that a few coporate CEO's greed also had an impact on the conseptions that caused the stock market crash (not to be confused for the resesion by those viewing at home).
4. Next point you made was: "If productivity increases, businesses make more money per dollar of labor cost." My reply is simply: This what businesses strive for, it equates efficency. As an economist that is the point, efficency. Businesses are not their to increase jobs, or consumer income. They are in the "business" of making more money for less money. This is how you rate production effiency. It is the cold hard truth. The company I work for (notice I do not say the company that I deserve a job from) is in the banking industry. The sole purpose of the business is to increase the amount of loans it has on it's books. The more loans there are the more money it is making. While it is true that by federal regulation the bank most have a certain ratio of dollars on deposite ( the liability side of their business) to dollars in loans (the asset side of their business). But if the delicate ballance of income coming into the business and money leaving (ie loans being closed out refinanced by other banks and the like) guess who is out of job.... that right yours truely. Will this hurt me financial, sure for the short term. But I have to pick myself up and look to work else where. I don't look for a handout.

5. you asked, "What are you going to invest the increased capital in if product sales don't increase?" Well there is reasearch and development of new products to meet the true demand of the consumer. The idol business is a dead business. The business can also invest money in the human capital that it does keep (ie training). Thereby making the employee more valuable.
you then asked,"Does it really make sense to increase investment capital when there is already more than can be currently used?" Sure it does. And if the company can't find anywhere else to reinvest the capital, it do the thing that every corporation is supposed to... pay dividends to those that took a chance on the company to do well with their own money! That increases their disposable income (if they don't take that money and reinvest it into the same or different company).

6. You and I both agree with this statement: "It seems to me that you could facilitate both your concerns and my concerns by directing tax cuts at the less affluent." We differ on how. I already mentioned what I think should done.

7. You asked,"I think there is an optimal balance between capital and consumer income. Do you agree with this?" And as an economist I do agree with the statement. I just don't agree that way you get to this optimal balance is the optimal way.

8. You made this statement next:" You see, I'm not a Republican. So I CAN change my course if necessary."
I have to admit I found this statement very funny. Sophomoric but funny. Of course a Republican change their mind as you say you can too. My point here is not change anyone's mind. I just want to make sure that those "layman economist" get both sides of the story. Yes I am a Republican. Yes I am a conservative. I do not deny the acqusation that you make of me being a Republican. Now that we have cleared that matter can we move on to the discusion at hand.

9. "The next suggestion is to reduce imports. By a lot. To as close to zero as possible." This is, as you later addmit to is a protectionist possition. Have you noticed that in the last two years especially, that our trade defficiate has decreased by a large amount, even compared to the Clinton administration? Have noticed what this has done to the value of the dollar? Granted that most of the decline in the value of the dollar has been the influx of money supply by the Fed. But the closing of the Trade defficit has also had a strong impact.
One thing I can tell from your statement here is that you are against the theory of a global economy. You also missed the day in Econ 101 when the professor talked about the pros and cons of trade.

10. Next paragraph: "Reducing imports will increase demand for American labor to replace products no longer imported. It will increase consumer income. It will increase both wages and number of people receiving increased wages. Reducing imports will not have an immediate benefit, however. At least temporarily, prices will increase. They might never return to their current level." This is a miopic statement. The long term effect on the standard of living by this type economy will take us backwards. My point is made by looking at third world countries that depend on their own goods versus the homeless of our country. The homeless of our country (while it sad that in a country of our wealth has homeless, but I will address this later) have a much higher standard of living than those.

I will leave you with that for now. I have a few more points to make but will have to get to those at a later date.

Alberto

9:22 PM  
Blogger rightsideblogger said...

PS I apreciate the link to my blog.
Al

9:23 PM  
Blogger unlawflcombatnt said...

____________________

Alberto,

Thanks for your letter. And thanks for spending the effort and time to take notes before you get back to me. I appreciate a well-thought out answer, even if I frequently disagree. At least I can see exactly what we disagree on.

I'm going to have to get back to you for an answer as well. I, too, am going to have to take notes from your response.

I do have one question about your last response. It's about when the recession began. You've mentioned before that it began during Clinton's last term. I wanted to find out exactly where you got that information. I might even be willing to concede you that point, if you can show me the statistics.

I began reviewing statitstics from the Dept. of Labor and the Dept. of Commercials early last year. At that time, it appeared we had done much better under the Clinton adminsitration as far as national income, business profits, and GDP. However, it did appear that there was some slowing in 2000. Not really a downturn, but a slight reduction in the rapid growth rate that had taken place before 2000. So you might be right that something was beginning to happen in 2000.

Also, in Paul Krugman's book, "Return to Depression Economics," he describes the sharp decline in 8 foreign economies as of early 1999. These declines had occurred over the previous 2-3 years. So I think there might even be some definite causes for a slowdown beginning around that time. Krugman also suggested the possibility of a similar downturn occuring here. (Which, of course, did occur.)

So if you've got a good source for actual statistics, please share it. You may also be able to prove yourself right from GDP and national income statistics from the Dept. of Commercials. I'll check there myself. I've seen those stats before. It seems something WAS starting to change in 2000. (Please don't quote me statistics from Fox News. You can probably guess what my opinion is of Fox News.)

Also, if you could tell me how to put a "Previous Posts" list in my sidebar I'd appreciate it.

Also, Alberto, if you could put a line at the top of your post I would greatly appreciate it. If you just start your post with __________,
and type under it, it would make it easier to separate your post from my post. You and I both know which post is which, but I don't think others can tell. Sometimes I even have trouble myself.

Thanks again for your response.

Mike

http://www.unlawflcombatnt.blogspot.com/

11:18 AM  
Blogger rightsideblogger said...

_______________________________________________________________________________

Mike,
I believe (and I am trying to remember so I will verify this soone) that the numbers came from both the WSJ and the Federal Reserve Board Baige Book. I will go there later to check there archieves so I can direct you to the exact places. It was also stated by Allen Greenspan in his address to the congress in March of 2003, again I am not completly sure of the date but I am sure that it came from his mouth. I will also be finishing up my comments to conclued my last post. Thanks again for the great disscusion. Oh and I will get back to you on the linking deal to.
Alberto

12:14 PM  
Blogger unlawflcombatnt said...

Alberto,

Regarding my suggestions on how to increase consumer income by reducing taxes on the middle and lower income taxpayers, you stated,
"We can achieve the same outcome without putting the entire burden on one side of the labor economy (also known as workers and employers), by instating a consumption tax versus an income tax."

What side of the "labor economy" are you talking about? Bush's recent tax cuts have shifted the tax burden away from employers and on to workers. The affluent are paying a smaller fraction of the total federal tax burden. The non-affluent are paying a bigger share. The fact that taxes have been shifted to the less affluent is the consensus of the CBO and most economists. A consumption tax would even further shift the burden on to the worker and off of the employer. It would make a one-sided tax even more one-sided. (I think we still have a major disagreement about one concept: What determines hiring? Is it necessity or is it affordability? I'll get back to this later.)


CONSUMPTION TAX EFFECT

The effect of a consumption tax will make the price of all taxed goods higher. It will directly reduce consumer spending. For example, a 10% consumption tax would make a consumer pay $100 to buy $91 worth of goods. It inflates the price of every item by 10%. It's an incredibly regressive tax. It is even more regressive than a flat income tax. It forces the less affluent to pay almost exactly the same amount of tax in dollars that the rich do. Not percentage of tax, but nearly the same in actual dollars. A taxpayer making $40,000 per year would pay almost the same amount of tax as a millionaire. This tax is a malicious, greed-induced attempt by the ultra-rich to reduce their taxes to nearly nothing. It will fall much more on the poor and middle income earners. It would eliminate 99% of all taxes paid by the top income earners. How much MORE money do the affluent need to be happy? Maybe we should just eliminate taxes completely for the top 2%.

From an economic standpoint, a consumption tax will directly reduce consumer spending. Every percentage increase will reduce spending by exactly the same amount. Considering the fragile state of consumer spending at present, this would wreck our economy. As you have acknowledged, consumer spending is being maintained by increased borrowing. With decreasing consumer income, a consumption tax would further reduce consumer buying power. Reduced consumer buying power further reduces consumer spending. That means reduced sale of goods, reduced demand for goods, and reduced demand for labor to produce goods. (It would further reduce the currently minuscule need for more investment capital.) The sole effect would be to reduce the tax burden even further for the affluent, while increasing taxes on the non-affluent. A shift to a consumption tax is a flagrant attempt by the affluent to shift most of the tax burden to the poor. It makes no sense to anyone except politicians catering to the affluent. It's another example of destructive economic policy for the benefit of the few.

I'll have to address your other points in another letter, including the "sophomoric" one.

Mike

http://www.unlawflcombatnt.blogspot.com/

12:28 AM  
Blogger unlawflcombatnt said...

Alberto,

Regarding "2."

Yes, I did say, "As consumer wealth increased, consumers would begin saving or investing a higher aggregate fraction of their income." I'm not sure what point is here, unless it's that I'm committing the ultimate Republican fantasy crime, a John Kerry flip-flop.

Yes, it is bad if consumers started saving more money and spending less while incomes are declining. Less spending and more saving without an increase in aggregate consumer income IS bad for our economy. I'll go one step further. If consumer income continues to DECREASE and consumer savings increased, our economy would collapse! I see no conflict in what I said. If take-home consumer income increases, savings will increase at least some. That's a simple statement of fact, not my opinion about whether it's good or bad. If 100 people have income increases from $50,000/year to $200,000/year, more total money will be put in savings by those 100 people combined.
_____


Regarding "3."

You state that increasing taxes on business puts stress on business. Obviously it would reduce take-home income for business and corporations. However, paying down debt by taxing business more has positive benefits as well. The issue is whether the benefit of decreased debt outweighs the negative effect of increased high end taxes. Increasing tax on the top 2% would DEFINITELY be beneficial at present. There is very limited need for more investment capital at present, which is the potential benefit of reducing taxes on the affluent. Industries are already over-invested as a whole. In contrast, increased consumer spending power caused by decreased inflation would benefit our economy greatly. There is still another possible benefit. Higher taxes on the top 2% would help reduce the over-investment and overvaluation of the stock market. A shift of income to consumer spending away from investment would increase product sales (and earnings) and reduce over-investment and overvaluation of stocks. The same overvaluation that was the MAJOR cause of the recession that started in March 2001 (not 2000, as you incorrectly stated). You might want to read some of the history leading up to the stock market bubble's bursting. You might want to check your facts as well. I've gone over the publicly available government statistics for many hours. The statistics are quite clear about our economic well-being during the Clinton administration. We did very well. I was very surprised myself. You may be drawing your conclusions from bad information.

I learned most of the information about events surrounding the crash recently. But much of the stock market bubble I experienced personally. My personal experience began in 1999. My father died in March of 1999, leaving me a significant amount of money in mutual funds. Stock values continued to rise from that time until early 2001. Then the market starting declining. Rapidly. I know this for a fact, because I lost quite a bit of money in early 2001. Much of the previous stock value had come from value increases during Clinton's presidency. I suggest you look at Bureau of Economic Analysis-US Dept of Commercials data from this period. National income and GDP continued to grow during the entire Clinton presidency. You might also want to read some of the books written about the stock market crash, like "Origins of the Crash," by Roger Lowenstein. Your suggestion that increased business taxes contributed to the recession is nonsense. If anything, tax increases might have delayed it. But they had certainly had no causal, or even contributory effect whatsoever. Your information source is suspect. Maybe you've confused Fox's "alternate reality" reporting with actual news.

You would be correct in stating some of the causal factors of the recession increased during the Clinton administration. Overvaluation of the stock market certainly increased under Clinton. I would further suggest that some of the apparent "growth" was more on paper that in reality. Eight major world economies experienced recessions during the late 1990's. Demand failure was a factor in all 8 of those. It's true that trouble was brewing before Bush took office. A small number of investors did predict the bubble would burst eventually. I was personally warned by a stockbroker in 1999 that stock prices could not increase indefinitely. But many ignored the overvaluation and made claims such as "the old rules don't apply" and that the Dow Jones might reach 40,000! This is the thinking that caused the bubble to expand and then burst, along with the ensuing recession. Tax increases on the top 2% had nothing to do with it. That's illogical and not true. Many of the affluent were blindly dumping money in to the stock market, regardless of overvaluation. Increasing their taxes could have only saved them from themselves. They were doing nothing but devaluing stocks by inflating their value. They had plenty of money and nothing worthwhile to invest in. But that didn't stop them. Many invested in completely irrational endeavors, simply because stocks prices were rising. Never mind that earnings were not keeping up. Many were rationalizing that the "new economy" could rapidly expand indefinitely, because "the old rules didn't apply." They began thinking earnings had no relation to real stock value. Some claimed the only limits to stock values were "the limits of one's imagination." Investment insanity was the rule of the day. Bush's promise of tax cuts further exacerbated stock market insanity and overvaluation. Many investors, fantasizing about their impending tax cuts, invested even more in an already overvalued stock market. And then the bubble burst. Bush may not have caused the bubble to occur, but he certainly accelerated the bursting. We lost 700,000 jobs from March 2001 through August 2001. Job losses that had nothing to do with 9/11. Neither did the job loss trend that continued. Job loss was only minimally affected by 9/11. But it was maximally worsened by Bush's tax policies. And further worsened by his trade policies. Bush did everything wrong he could possibly do. No one could have possibly done worse. Bush began his legacy of "no bad policy left behind." We would have been better off if Bush had gone on vacation in January 2001 and stayed on vacation until 2008.

__________


I'll have to get back to you on point "4." I'm not sure what you're saying there.

__________


Regarding "5"

Are you putting me on here? You're going around in a circle. It seems you're saying that excess investor capital will be given back as dividends to the investors. So if a company can't sell any more product, it's still beneficial to invest even more. Because investors that put excess capital into a company simply get the unused capital back as dividends. What dividends? Is the increased investment somehow increasing earnings? Without increasing product sales? Are companies paying dividends that cannot sell their products? Where are they getting the dividends from? How do investors get more money if the company isn't selling more? Why put the money there in the first place? I thought earnings increased when profits increased. Throwing more capital into a company that can't sell its current supply won't increase profits or earnings any. But it will take money out of a small investor's pocket. And it will make more "capital" available to pay CEO salaries and Enron-type accountants. It will provide more "capital" so CEOs can put money aside for the day they go bankrupt. The day after it is discovered their only "profits" came from overstatement of earnings causing over-investment by stockholders.

In addition, I think you're implying that dividend increase will increase consumer spending. There would be very little increase, at best. Take-home income increases only for those that receive dividends. It's mostly the high-end taxpayers who receive large dividends. They are not going to spend much of that on consumer goods. The dividend receivers are simply going to reinvest their money. Which might help initiate a cycle of perpetual reinvestment. A pointless cycle of reinvestment. A vicious cycle. A cycle of putting more money into producing goods when companies can't even sell current supplies of goods. You must think someone will buy that supply eventually, won't they? Maybe money will just fall out of the sky and land in consumers' pockets. That's what Say thought.

Maybe business could use the extra investment capital for research and development. Maybe they could invent a new, improved product that consumers can't afford. Surely if the product is good enough, consumers will find a way to buy it. Even if they don't have any money. Surely money will materialize from somewhere if the product is good enough. That's what they thought in 1999-2001. Those investments sure worked out well, didn't they.

I'll have to get back to you on points 7-10. You're certainly giving me plenty to respond to. Thanks again for writing.

Mike

http://www.unlawflcombatnt.blogspot.com/

1:15 AM  
Blogger unlawflcombatnt said...

Alberto,

Regarding "7"

I'm glad you agree that an optimal balance is needed between the "means of production" and the "means of consumption." In other words, a balance between capital and consumer spending. You state that we disagree on how to get there. I can't recall your method of achieving this balance. However, I think we have a bigger disagreement on where the balance point is. And a still bigger disagreement on how to determine the balance point.

My method for determining the balance point involves 2 general concepts. First, determining what fraction of national income goes to after-tax corporate profits and what fraction goes to after-tax private wages. Then determine what ratio between these 2 gives the best GDP sales growth. Obviously this is much more complicated than it sounds here. In addition, it probably can't be measured and adjusted accordingly in a short enough time frame to be useful. But it gives a theoretical basis for estimating such a ratio. It also provides a foundation for defining this concept.

You'll notice that I specifically said private "wage" income, not private income. The bonuses that are included in the Commercial Department's private income go mainly to the affluent. So this money is more likely to go toward investment, not consumption.

The optimal balance can be altered by shifting the tax burden off of wage earners on to business profit, or vice versa. (Yes, I do think it is possible to overtax business. I just don't think that's happening right now.)

I think a lot of Republicans (which I used to be), believe all tax reductions on the affluent are beneficial. I used to believe that as well. I voted for Ronald Reagan both times he won the presidency. Because I believed high-end tax cuts were always good at that time. However, tax reductions for high income taxpayers shift the burden to lower income payers.

My beliefs were similar to yours up until about a year ago. Then I began looking at actual government statistics and graphs. I also started to think about economics, and started applying reason to my understanding of supply and demand.

This reasoning changed my preconceived beliefs. Capitalism absolutely requires consumer spending. And there IS a limit to total societal spending. That's when I came up with my own concept of "aggregate demand." Later I realized Keynes had already defined this concept. I had defined it exactly the same way. I also arrived at a concept identical to "marginal propensity to consume," though I had no name for it. Again, Keynes had already described this concept. Both of these Keynesian concepts seemed very logical. My point here is that no one planted these ideas in my head. I wasn't "taught" any of this by politicians or economists. I figured them out myself. Simply by using reason.

It also seemed likely that aggregate consumer INCOME would limit aggregate demand. I assumed this was true, without known supporting literature. Again, I was able to prove myself right by reading Economics textbooks.

Again, the point here is that I wasn't taught anything by "liberal" or "conservative" economists. I was essentially self-taught. I've read extensively on economics, but I don't accept ANY ideas unless they make sense. At the same time, I don't dismiss ideas just because an "expert" economist believes them.

I have since found that Demand-Side economics of the Keynesian variety was widely accepted by most economists until 1973. I've also found that there were extensive, well-funded attempts to disprove ALL of his theories, not just his advocacy of government intervention. Though Keynes was overtly attacked for his government intervention advocacy, the real reason was altogether different. His attackers wanted to eliminate the belief that demand was important. They wanted to remove demand from the equation, if at all possible. The ascent of Supply-Side economic thinking was a product of these attempts.

Many economists, paid by corporate and investment interests, were highly motivated to reduce the importance of Demand. They weren't trying to discover any truth. They were trying to disprove it. They sought justification for tax reduction on the affluent. If demand is not an issue, tax cuts on the affluent seem more reasonable. Ignoring the effect of demand helps justify high-end tax cuts.

Initially, supply-side economics seemed like complete nonsense to me. That was my own, independent conclusion. Then I began to read the history of the supply-siders. The theory was mainly the creation of journalists, not economists. The main architect of supply-side theory was Robert Bartley, the editor of the Wall Street Journal. He was a JOURNALIST, not an economist. However, his views were accepted by many non-economists as legitimate economic theory. In contrast, few economists accepted these theories. Arthur Laffer was one of the few. However, few conservative economists even believed in supply-side economics. It was considered nonsense. Republican economists supported Reagan, but they assumed no one could be misguided enough to implement supply-side policies. They were wrong. However, Reagan was not against changing a policy that wasn't working. And he did change some of them. Following one's convictions does not mean following them off a cliff. Reagan didn't follow them off a cliff. He adjusted. (This makes him entirely different than Bush.)

The point of this long story is to explain how my own economic thinking changed. It changed because I gave it some thought. A lot of thought. And I looked at the facts. It changed because I disproved my own previous economic ideas. No one else changed my ideas. I changed it myself. Simply by thinking.

Are you capable of this, Alberto? Are you capable of listening long enough to consider that previous beliefs may not be right?

You've stated that some of your comments are falling on deaf ears. Alberto, I've heard EVERYTHING you've written in the past. Have you heard everything I've said? Have you heard it all in the past? I doubt it based on your comments. Some of what you say I agree with. Some of it I don't. None of it has fallen on deaf ears. But I've heard all of it before.

For example, when you state your case for "free trade," you make statements I've already heard numerous times. Have you ever heard what I've said in the past? I doubt it. Because I've never heard it before. However, I think I'm completely correct on this issue. I've heard all of the arguments for free trade. None of them make sense to me. Some economic "theories" are being deliberately misapplied to free trade. One of them is the theory of "comparative advantage."

"Comparative Advantage" may have been a great theory at one time. I DO understand it. But it has NO application at present. The only current "comparative advantage" to outsourcing is use of cheap foreign labor. Period. Which directly reduces aggregate American consumer income. Loss of this income is NOT made up for by consumer price reductions. The outdated "comparative advantage" fantasy is used to cover current reality. The reality is that outsourcing causes uncompensated wage loss. Economists are completely aware of this, but refuse to acknowledge it. Their paychecks depend on not acknowledging it. They're paid to promote this outdated theory, not to determine current reality. Outsourcing is beneficial to the short-term profits of business. But it's a long-term disaster for ALL Americans, including business. Consumer demand is not unlimited. And the limit is reduced with every outsourced job.

I got a little long-winded here. Alberto, I strongly urge you to reconsider the importance of demand. It's absolutely essential. And it's getting more tenuous by the day. Again, I'll restate the old adage, "necessity is the mother of invention." And so it is that "demand is the mother of production." Production won't grow unless demand necessitates it.

Thanks again for your letter.

Mike

http://www.unlawflcombatnt.blogspot.com/

7:38 PM  
Blogger rightsideblogger said...

Mike,
I too came to my economic beliefs by thinking for myself, and yes I have HEARD all that you have said. And no this is not the first place that I have heard the arguments that you have laid down. I heard them often in the class room while I obtained my Bachelors in Economics.

Let me make one point clear. I do agree with you as I had stated before that Say's Law does not work, Supply side economics alone will do nothing good for our economy, but Demand side economics will do the same. There is a carefull balance that needs to be found between the two. Now I did go to some extremes in my arguments to try to prove that point. Again I state that we do agree on several points, but the paths that we take from those points to the end all, be all economic stability are different. Again I have had a great time in this conversation. You have very fluid and powerfull statements. I look forward to more discusions.
Al

5:55 PM  
Blogger unlawflcombatnt said...

Alberto,

Thanks again for your letter. I'm glad we agree that balance is necessary. I'm also glad we agree that demand is important. Those were the major points I've been trying to make. I'm glad you don't accept Say's law.

I think we agree on something else as well. You may not be aware of this. The goal of my ideas is maximum wealth production. I think yours is the same. My emphasis on demand-favoring factors is to increase total wealth production, not to provide economic justice. I don't think it's fair that some taxpayers pay 1,000 times as much tax as others. But that's just my opinion. Again, "fairness" is not my emphasis. My emphasis is what works best for the economy. My goal is to increase the SIZE of the pie, not simply redistribute the pie. I just think some redistribution will increase the size. I consider my ideas pro-business. However, they don't result in immediate, short-term benefits for corporations. But I think they are best for corporate America in the long run. I think our goals are the same - increasing the size of the pie.

I think we disagree on which direction the balance needs to be shifted. I believe it needs to be shifted more towards demand. You believe it needs to be shifted more towards supply. Certainly many agree with you.

From this difference in direction, however, I'm still wondering how you think consumer spending will be maintained. Maybe you have some information that I don't have. It seems to me that aggregate consumer spending and demand are in a precarious position at present. Borrowing is currently increasing. Median wages are decreasing. Home values have been maintained up until now. So far, 30-yr fixed mortgage rates have actually DECREASED in California since June, despite increases in the Fed rate. However, mortgage rates will eventually rise if the Fed rate continues to increase. Home values will likely go down when that happens. If this happens, it will reduce spending financed by home equity loans. So I think the "borrowing" contribution to consumer spending will decrease. It will also reduce spendable income for those with adustable rate mortgages. Both of us already agree that consumer savings is nearly 0. Is there another factor that will maintain consumer spending?

I suspect you'll state job growth would increase aggregate consumer income. I completely agree that job growth would do this. But will job growth increase without demand growth? Will production increase, without a demand increase? We both agree that productivity growth will reduce labor income. Will productivity continue to grow if demand for production decreases? Won't continued wage-reductions also decrease consumer spending? Won't this reduce demand for production? Is there another factor here that I'm not aware of?

In addition to the above, I have another question. Do you consider "demand-failure" a possibility?

Thanks again for writing.

Mike

http://www.unlawflcombatnt.blogspot.com/

8:16 PM  
Blogger rightsideblogger said...

_____
To address the statement that my sources may be bad, consider this one,
"Still, in an economy that already has lost some momentum..." this was stated on the 5th of December in 2000. Here is the link to the speech: http://www.federalreserve.gov/boarddocs/speeches/2000/20001205.htm

and this was said, "Indeed, last October, I said a transition to slower growth was likely already under way," on the 6th of June in 2001. From the same speech further down, "The economy slowed in part, as I have noted, because monetary policy was committed to such an outcome. By mid-2000, it appeared that the economy, in response to the cumulative tightening over the previous year, was slowing toward trend." Here is the link to that speech: http://www.federalreserve.gov/boarddocs/speeches/2001/20010606/default.htm

The second speech is a truly facinating one, please take time to read it in it's entirety. But the point of me pointing these out to you is to show you that the slow down that led to the recession indeed started in late 1999 to early-mid 2000, before President Bush was put into office January 2001. But these two "guys" are just Federal Board members, what do they know, right?
Al

9:20 PM  
Blogger unlawflcombatnt said...

Alberto,

Thanks for the response and the great references. I'll have to respond further when I finish reading them. From the parts I've read so far, which are the parts you quoted, the "slowdown was likely already under way" in October of 2000. Less than 1 month before the November election. That's lot different than late 1999, though I haven't read either article entirely yet. So far, I don't see anything even vaguely suggesting that Clinton's policies contributed to the downturn. I'm also aware that there were economic crises in 8 major world economies during, and immediately prior to, 1998. Those did have an effect on our economy. And we apparently recovered. Those had little to do with Clinton's policies. So my preliminary review suggests Clinton had even less to do with the recession than I previously thought. I'm more convinced of this than previously, based on the October 2000 date referred to. Certainly a pre-election shock would have been expected. Especially since Clinton clearly was not going to be the next president. We certainly had a pre-election shock before the 2004 election. But I'm going to reserve final judgement here until I finish reading both articles. Thanks again for sending me the links.

Mike

http://www.unlawflcombatnt.blogspot.com/

12:10 AM  
Anonymous Anonymous said...

________________________________________________________

Mike,
I just want to make sure that we are talking about the same thing here. This "post election shock" you are referring to, is that in the stockmarket, or the economy? I just want to make sure that we are keeping those seperate as they are two completly different indices. While you are correct in the matter that there were worldwide economic downturns in 1998, and I will concede that President Clintons administration can not be held accountable for everything ( and will resist the inside baseball jab that goes along with that) that caused the downturn. You do have to admitt that because President Bush was not in office at the time of October 2000, niether can his administration be held responsible for the down turn in 2001. If we look at the lag time that is addherent to ANY administration policy we usually don't see the major ramifications for at MINIMUM two years. That is why economic numbers being reported today don't tell the whole picture. What we see is just the beging. Wether these numbers mean an up turn or down turn will be seen more realasticly in a couple of months from now. But regardless these numbers are the result of what was started two years ago. Now two years ago President Bush was in office. And the numbers that we are seeing are two fold. We are seeing the effects that both his fiscal policy and the Fed's monatary policy had in "softening" the recession. Which by the way was one of the shortest recessions in the history or our economy.
Al

5:46 PM  
Blogger unlawflcombatnt said...

Alberto,

I haven't completely finished reading the 2nd article. I should also point out at this point that I voted against Clinton both times. So I don't have any special interest in defending him. I had been unaware of how good the numbers looked under Clinton until about a year ago.

My comments are changing as I read through the second article. So far it looks as though the Greenspan deliberately tried to slowdown an "overheating" economy, and overshot his target. It doesn't look like either Clinton or Bush "caused" it. It's VERY obvious at this point that overoptimism about growth was a big factor. It looks fairly obvious that investment and supply production far outstripped demand. It looks like even in 1998, much of the demand and consumer spending were furnished by borrowed money from overvalued homes and stocks. It also appears that credit was too easy, and demand was maintained well in excess of consumer income. So far, the situation looks similar to the present, except consumer debt, national debt, home overvaluation, and trade deficits are much worse now. This is my preliminary report at least. I'll certainly be amending it when I finish.

I'll certainly have more to say on this. And LOTS to say on the social security/corporate welfare scam referred to as "privatization." It should be called "corporatization," or maybe even "bankruptization."

Mike

http://www.unlawflcombatnt.blogspot.com/

6:40 PM  
Blogger unlawflcombatnt said...

Alberto,

I just re-read your previous comment about the recession starting in March of 2000. I don't see where you got that information. There was a temporary slowdown in 1998. Then there was a resumption of strong economic growth. According to the articles you sent me, the beginning of any kind of slowdown came in October of 2000. Attempts by Greenspan were made to slow the economy down before that time. But NOTHING I've read even vaguely suggests a recession starting in March of 2000. Are you sure you didn't mean March 2001?

Mike

http://www.unlawflcombatnt.blogspot.com/

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