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.

Saturday, March 19, 2005






GEORGE BUSH: ECONOMIC TERRORIST

Bush economic policy is unsound. Careful review of US Labor Dept. statistics and US Commerce Dept. statistics reveal the true source of our economic problems. The biggest problem is flat or decreasing CONSUMER SPENDING. Consumer spending accounts for 2/3 of US economic activity. Consumer spending = Aggregate consumer demand [in dollars]. (The concept of aggregate consumer demand shows that limits are placed on demand when considering all consumers as a whole. This is in contrast to the less-limiting concept of individual demand.)

Without an increase in consumer spending/demand, our economy will decline. Aggregate consumer spending is largely dependent on aggregate consumer income. Median weekly wages have decreased over the last year. Department of Labor statistics show that inflation-adjusted average weekly wages have decreased 2.0% during the 12-month period from February 2004 through February 2005. This aggregate decrease in wages will ultimately reduce consumer spending. Lower consumer spending will not support job growth.

Additional tax cuts for the wealthy do little to stimulate consumer spending. The wealthy are generally consuming as much as they desire. They have little ability to increase their consumption. In fact, the rationale behind tax cuts for the wealthy is entirely different. These tax cuts are supposed to stimulate INVESTMENT (or savings). So what is the potential benefit of increased investment? It increases money available for the production of goods. In economic terms, increased investment is supposed to increase the SUPPLY of goods and services. This is a classic "supply-side" benefit. The intended result is an increased supply of goods available for purchase by consumers. What benefit will an increased supply of goods have on our economy, given decreasing consumer demand? Can consumers spend MORE money to buy this increased supply when they have LESS money to spend?

Consumer spending won't increase until there is an increase in aggregate consumer income. Tax cuts designed to increase the SUPPLY of goods and services provide NO benefit for our current economic situation. None whatsoever. Companies do not make money by producing goods and services. They make money by SELLING goods and services. Sales determine profits, not production. If they can't sell more product, they won't make more money. In addition, companies will NOT invest in the hiring of more workers to produce goods and services they can't sell. If they've already made too much product, they'll lay off workers. This further decreases aggregate consumer income, and further decrease demand for goods and services.

Tax cuts for lower and middle income taxpayers increase take home pay for CONSUMERS. It would increase consumer spending. This would also increase demand for goods and services. In turn, this would increase hiring of workers to produce those goods and services. The resulting increase in demand for workers would increase the average wage of those workers. This would further increases consumer spending. And our economy would improve. Most economists agree that lower and middle income tax cuts would have provided much more of an economic stimulus.

Bush economic policy is counterproductive for the above reasons. The Bush administration appears to ignore publicly available information from the US Bureau of Labor Statistics. Continuation of current economic policy will result in continuing deterioration of the U.S. economy. Without a complete change in course, the economy WILL worsen. And probably soon.

unlawflcombatnt

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

14 Comments:

Blogger berrnie said...

Jobs have increase in the past 15 months. Second the poor have a thing called earn income tax, which gives them more back on there their tax return than what they paid. So the poor need no tax break

I am middle class and paid more of a percentage then John Kerry did on his taxes because he has accountants that know the tricks.

And giving companies tax breaks the can make things cheaper and sell more. That is were all the new jobs come from

Saving gives banks more money to lend out to start more business so more jobs or created.

Must be working, because we have the best Job growth in the world.

4:28 AM  
Blogger unlawflcombatnt said...

Bernie,
Thanks for responding to my post.
You are correct about jobs having increased during the last 15 months. However, so has the size of the labor force. Economists estimate the labor force grows 150,000 each month due to population increase. That's an increase of 2.25 million over that 15-month period. Private jobs increased 2.18 million during those 15 months. That's a job deficit of 70,000. More importantly, we've lost a net total of 1.17 million jobs since Bush took office. For the 23 months ending November 30, 2004, the labor force has grown 3.45 million. That's a 4.62 million job deficit since Bush took office. It's the worst job record in U.S. history, and probably world history. The statistics I used are publicly available from the US Bureau of Labor Statistics at
http://data.bls.gov/cgi-bin/surveymost?ce. I suggest you go to this site and see for yourself.

Regarding the poor paying no income tax, you are incorrect. They pay a flat 6.25 % payroll tax. This is capped at $87,000. The rich pay a much smaller percent in payroll tax than the poor or middle class. That's because payroll tax is only assessed on the 1st $87,000. There is no further payroll tax paid on income over $87,000.

You may have a misunderstanding about supply and demand law. You can download a copy of the Supply and Demand chapter from Paul Krugman's Microeconomics text at http://pkarchive.org/
The price of goods sold by companies is determined by DEMAND. Consumer demand is determined by what consumers will pay for an item. If a company can't sell its supply of goods, it lowers the selling price. Eventually the price is lowered enough to sell the entire supply of goods. This is the market price. The market price is determined by what consumers will pay, not by what it costs to produce. If the production cost is greater than the market value, the producer will lose money. If his price is too high, he'll be unable to sell his entire supply. If consumers will pay $10 for an item, that's the market price. It doesn't matter whether it cost $1 to make, or $8 to make. The full supply will not be sold if the price is over $10. Tax breaks do not allow companies to sell more product. It allows them to PRODUCE more. Which has no benefit without an increase in demand. It simply increases company profits.

Did you read my post on job creation? You have a major misunderstanding here. Jobs and hiring are increased ONLY when the demand for labor increases. Employers don't hire because they can "afford" to hire. They only hire when they need more workers to produce more goods. Demand for more goods increases demand for the labor to produce goods. Corporate tax cuts and other giveaways do not increase hiring. They do not increase the demand for labor. Corporate welfare to an already profitable company has absolutely NO effect on hiring. And has no benefit to our economy.

You're partly right about savings. Increased savings increases available loan money for business startup. So it has potential there. Nationwide, however, investment capital is plentiful. The Wall Street Journal states that the markets are "glutted with capital." Capital's benefit is to increase the supply of goods. But its benefits are limited by DEMAND for goods. Profits are made by selling goods, not producing them. Supply produced in excess of demand cannot be sold. There is no benefit to increasing investment capital if the supply already meets the demand. It won't increase sale of products if the demand is already being met. If the total consumer market for goods is $10 trillion, why produce goods worth potentially $12 trillion? The extra goods can't be sold. The extra goods would have 0 market value. Further investment simply has no benefit.

Aggregate consumer demand for goods is limited by aggregate consumer income. According to the US Bureau of Labor Statistics, inflation-adjusted average weekly wages have dropped 2.3% in the last 12 months. You can find that informantion at http://stats.bls.gov/news.release/realer.t02.htm
If consumer income decreases, consumer spending will decrease. The end result will be a decrease in demand for goods and services. And a decrease in demand for labor. Hiring will decrease further as a result.

Our job outlook is not good. We do not have a good record. Our last month's job growth did not keep up with the labor force increase. Eventually consumer spending will decrease and job loss will resume. It's just a matter of time.

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

10:42 PM  
Blogger berrnie said...

I hate to say it theirs a 2.4 million job increased since august 2003, not 2.25. But unemployment rate drop from a peak of 6.3% last June to 5.4% today below the average unemployment rate of 1970s, 1980s, and 1990s. The population is increasing but they are finding work.

I check with the microeconomics at Paul Krugman web page, and did some reading, but I am weary of anyone around Al Franken. You are right companies cant decide the price the costumer does, but being able to lower prices they can compete not with just American companies but with over seas. Increasing the demand and then creating more jobs

Companies are their, to make money. Being “glutted with capital” means their not selling. The next logical thing would be make something that the consumer market wants. So they invest to make the new product.

Your right the dollar has lost a lot causing the wage to drop 2.3%. As always the dollar and market go up and down.

The government doesn’t can’t create are lose jobs companies do. All it can do is get out of the way, buy lowering cost are “taxes” and less regulation. Witch is what Bush is doing.

Berrnie

5:39 AM  
Blogger unlawflcombatnt said...

Bernie,

Thank you again for your well-thought-out response. And thank you for taking the time to check out the references I gave you.

I have to admit that I do not agree with everything Paul Krugman says. I do agree with most of it, however. I disagree only with Krugman's pro-free trade positions. Most people do consider Krugman a left-of-center or middle-of-the-road economist on the political spectrum. Certainly he is not a Bush supporter.

However, Krugman is a very intelligent and well-respected economist. He actually worked for the Reagan administration for about a year. But he is certainly not a supply-sider. Paul Krugman writes many articles that are easy for a layman to follow. In that respect he is unique among economists.

I appreciate that you understood my statement about consumers determining the price. You also made an excellent point regarding "companies glutted with capital" meaning that they are not selling. You are absolutely right. I hadn't thought of it in exactly those terms before.

You also helped make my point about supply and demand. I think you made it better when you said "Companies are 'glutted with capital' because they're not selling." You're absolutely right. They're not using that capital to create more supply. Because they can't sell any more supply. As you suggest, they need to make something that the consumer market wants. I would restate that slightly. They can't make something that consumers won't buy. And they can't make MORE product than consumers can buy. This is where we may differ.

The aggregate value of our industrial production = aggregate consumer sales. Aggregate consumer sales are limited by aggregate consumer wealth. Consumer income is the biggest part of spendable wealth. Thus, reduced income reduces consumer wealth, as well as sales. Therefore, consumer income limits the aggregate value of our industrial production. Increased production will NOT increase the aggregate value of industrial production, unless consumer wealth also increases. As you have acknowledged, real consumer income has decreased 2.3% in the last year. This reduces consumer wealth and the value of our industrial production. Further busines tax cuts won't help. In fact, they reduce value by increasing inflation.

Let me restate this in terms of the consumer market. The total consumer market is created by total consumer wealth. Again, this is largely a product of consumer income and wages. Reduced consumer income reduces total consumer market value. It reduces the size of the market in spendable dollars. It reduces the total value of our industrial production. The value of our industrial production is determined by how much of it can be sold, and how much it can be sold for.

Capital is ultimately used to increase supply. Currently, capital is not being invested because current sales don't necessitate a supply increase. Further supply increase would exceed demand. No extra value would be created because consumers couldn't purchase the increased supply. Further upper bracket tax cuts simply increase the take home pay of the affluent. They won't increase investment, since there is no increased demand for investment. Because there is no increased demand for products.

You're correct stating the government doesn't create jobs. However, the government can do a lot to help. Many economists believe middle and low-end tax cuts would have stimulated the economy more. These tax cuts would have increased consumer spending. Which would have increased demand for goods and services. Which would have increased demand for labor to produce those goods and services. Which would have further increased consumer spending, initiating a self-perpetuating cycle of economic growth. I agree with those economists. Tax cuts for middle and lower income taxpayers would have helped more. Tax cuts for the affluent have helped nothing.

Again, I appreciate you comments. Please respond again.

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

6:30 PM  
Blogger unlawflcombatnt said...

Bernie,

I didn't get a chance to address the jobs issue in my last letter. I used the job data from the BLS site on total private employment. It is at http://data.bls.gov/cgi-bin/surveymost .
It is the series CEU0500000001. My numbers are correct using that table. It comes out to 2.17 million jobs created in those 15 months. You may come out with different numbers if you use a different table, especially "total nonfarm employment." That includes government employees as well. I don't consider government job increase as real job creation. Those jobs are paid for by taxpayers, and are completely under the control of the government. I'll have to get back to you later on the unemployment deception. It's too long a story to discuss right now.

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

_________________________________________

6:55 PM  
Blogger rightsideblogger said...

Mike,
I am sure will be surprised by this, but I have to agree with Bernie. ( I say that in gest... the part of you being surprised anyway).

It is true in our economy that the supplier alone will not create the price of the product. But the cost of the product will be in the "asking" price from the supplier. If the "asking" price is too high then the consumer will offer a lower price. If the price is too low and the seller can not get a price that will at least cover the cost of production on a consistant basis, the producer will fold and go out of business. The driving force of having a business,like it or not is to make a profit. The idividule that starts the business takes many risks most of the time including their home. So why should the burden be soley on the shoulders of the business owner to "increase" the wage of the consumer? Why can't the government take a smaller portion of the income pie? This has the desired effect that you are so wanting to see. This decrease in the taxes or better yet the illimination of income taxes would have the disired effect. If you are so concerned with the "fairness" of the tax issues would you agree that the only "fair" tax would be a consumption tax? That is what most conservatives, (us right-wing wacos that voted for Bush) would like to see. Have a flat 2% (for illustration purposes only) consumption tax. That way everyone gets taxed in an equal way. If I buy more than you I pay more than you in taxes. We could also get rid of the beuracracy of the IRS, April 15th would become just another day of the week.
P.S. I was very happy to hear that you do not include government jobs in your calculations for employement.
Alberto

7:31 PM  
Blogger unlawflcombatnt said...

___________________________

Alberto,

Did you ever consider the effect of a consumption tax on consumer spending? Consumer spending has been maintained by lower interest rates, which has countered the effect of consumer income decline. "Consumption" taxes raise consumer prices, which will decrease consumer spending. Businesses will make less money in sales because of loss of consumer buying power. If consumers spend exactly the same amount of money, the dollar-value of product sales will be less because of consumption taxes. The decreased product demand will reduce labor demand. Labor & consumer income will further decrease. Not only are consumption taxes regressive, they're tremendously anti-business as well.

I haven't mentioned anything regarding "fairness" of our tax system, in spite of your suggestion that I have. Fairness is completely subjective. Opinions vary greatly as to what is fair. I might well agree with you on what's fair or unfair. However, I'm concerned with the "objective" effects of economic policy. Current Bush policies don't make sense to me. They are bad for the economy. Regardless of their subjective "fairness," they are bad for the economy. We can talk more about fairness when our economy is in better condition. For now I'm concerned with a healthy economy. Economic fairness is a completely subjective concept, nothing more. Whether the economy is doing well has some objective measure. That's what I want to discuss.

Mike

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

5:24 PM  
Blogger unlawflcombatnt said...

______________________________

Alberto,

You ask "Why should business be responsible for consumer wages?" The real question is why should they be "concerned?"

Isn't that kind of obvious? Consumer income purchases their products. Business make money from consumer sales. More consumer income favors more product sales. Business better start getting REAL concerned about consumer income. And soon. Their survival depends on it.

Mike

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

5:38 PM  
Anonymous Anonymous said...

but what about increased (by weaker dolar) demand for goods being exported? Why are you looking at US economy like on closed-circuit system?

12:18 PM  
Blogger unlawflcombatnt said...

Anonymous,

Thank you for your comment.

The effect of the falling dollar has no effect on countries that peg to the U.S. dollar, like China. It also has little effect on countries that have large amounts of US dollar cash reserves. This partially pegs their currency to the dollar as well. Also, we aren't going to be able to export any more products if the price of our goods doesn't drop far enough to compete with the cheap goods from poor countries. If their products still remain cheaper than ours, it won't make any difference. We'll just continue to import cheaper, but less cheap goods made by slave labor in those countries. Also, we won't be able to increase exports to countries that put up tariffs against our goods.

Also worth mentioning is the fact that exports account for only 1/5th of our manufactured goods sale. The solution to increasing American industry sales is to increase sale to Americans, the other 4/5th of their market.

In theory our trade deficit should improve significantly as the dollar drops. However, the dollar has been dropping in value during the entire Bush term(s). And our trade deficit has continued to worsen along with this drop.

Thus, the theory and the reality are in conflict with each other. Unfortunately, we have to deal with the reality, not the theory.

Mike

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

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