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, May 07, 2005




NEOCON ECONOMY




Bush supply-side pseudo-economic policies are destroying our economy. His policies are actively worsening life for the lower 98% at present. And they will make 100% of us poorer in the future.

Tax cuts for the affluent, and other "supply-side" giveaways make no economic sense. Many people aren't aware of this, because it does take a little time to explain. But not very much. So I'm going to try here.

Our country became the world's most powerful economy under administrations that practiced "Demand-Side" economic policies. In general, demand-side economics centers on consumer spending and demand. Profits are made when goods are sold, not when produced. Industrial production is driven by DEMAND for goods made from that production. Consumer spending creates the demand for that production. Without demand, there is no production. That's because there's no benefit to that production. No profits can be made from unsold production.
Consumer demand is the ONLY factor that increases job and wage growth. Demand for goods also creates demand for labor to produce goods. Increased demand for anything increases the price. Thus, increased demand for labor increases the price of that labor. In other words, it increases wages. It also increases hiring. Demand increases the number of people working, as well as the wages of those people working.

If more workers are working and average wages are higher, it increases the aggregate (or total) demand for goods in our country. Aggregate Demand, when measured in dollars, is the ultimate limiting factor of industrial production. Aggregate Demand in dollars is total spendable dollars available to consumers. (Republicans hate the concept of Aggregate Demand. It conflicts with their "alternate reality" economic theories.)

Again, aggregate demand for goods is the engine that drives our economy. It drives production, hiring, and wage increases. The demand cycle has a self-perpetuating effect. As labor/consumer income increases, so does the demand for goods. That's because consumers have more money to spend. This increased demand further increases labor demand. Which further increases wages and hiring.

Supply-side concepts have never been accepted by a large number of economists. What I mean here is that they are not even accepted as a valid economic theory. Many economists refuse to call supply-side policies a theory. Some refer to them as "voodoo economics." Supply-side policies are essentially economic mythology. They are a completely illogical set of ideas that were concocted to justify tax cuts for the rich. The major proponents were not even economists. Most were actually journalists, such as Robert Bartley, the late editor of the Wall Street Journal.
Let me try to show the error of some supply-side propaganda. A major point is about tax cuts for the rich. This is supposed to stimulate investment. That investment is supposed to go into building production facilities and increasing production (supply). There is an obvious problem here. What if consumer spending doesn't necessitate increased production? If consumer spending doesn't keep up with supply, that investment money is completely wasted. Profits are made by SELLING products, not producing them. Un-sold goods do not "grow" our economy. (Neither do increased CEO salaries.)

Another less important, but even more illogical assumption, is that if you tax people less, they will produce more. It may be true that high-end taxpayers would have more money to invest. However, that's where the truth ends, and the fantasy begins. Even acknowledging that smidgeon of truth, the benefit of that money is questionable. The extra investment money is supposed to lead to increased goods production(supply). Again, there is no benefit to producing more goods than consumers can pay for. This increased investment money is useless unless demand necessitates increased production.

There is also a definite negative to these supply-side fantasies. Increasing the deficit to fund these cuts increases inflation, as well as devaluing the dollar. That means consumer dollars are worth less. So consumers will buy less. And provide less demand for goods, causing less demand for labor. Which starts us on another self-perpetuating downward spiral.

The big picture is this. In order for production to increase, demand for production must increase. Consumers need to have enough spendable wealth to purchase increased production. Increasing production without increasing consumer spending is putting the cart ahead of the horse. The cart isn't going to "push" the horse forward. And manufacturers aren't going to "push" consumer spending forward. Only consumers can drive our economy. They provide the demand that "pulls" production forward. Remember the old adage: "Necessity is the mother of invention." So it is that "Demand is the mother of production." Demand for goods leads to increased production of those goods. However, supply of goods does not increase demand. Unsold goods are worth absolutely $0.

Demand-Side Economics were almost universally accepted until the mid-1970's. However, sometime in the 70's, supply-side mythology was born. (Under a rock, in a dark cave.)
Today we're seeing the fruits of supply-side mythology. Consumer income has decreased during Bush's "economic reign-of-terror." Tax cuts for the top 2% favor investment, not consumer spending. Though consumer income was obviously declining, Bush decided his rich friends needed more money to "grow" the economy. According to Bush, they would produce more goods and increase production capacity. Also, as Bush dishonestly claimed, they would hire more workers.

Does this make any sense? Will a company hire more workers just because they have more money? Do they hire more just because they can afford to? No, absolutely not. They only hire workers when they NEED them. No amount of corporate giveaways will increase hiring, unless demand for production increases, which increases demand for labor to provide that production.

Let me give an example. Let's say I'm a doctor who sees 6 patients per day. I need one nurse. What if my new friend, George Bush, gives me $1 million because he likes me. (for some unknown reason.) Will I hire more nurses? Of course not. I don't NEED more nurses. They won't increase my profits any, and they will cost me money. So I'm not going to hire them.
Let me change the example. Let's say I'm the same doctor, and my ex-friend, George Bush, takes back the $1 million. He then gives it to the potential patients who live around my office. Now more people can afford medical care. Now I have 30 patients per day. Am I going to hire more nurses? Yes, indeed. Because now I NEED more nurses. The DEMAND for nurses has increased. Hiring more nurses will increase my profits.

In the above example I hired more nurses only when I NEEDED them. I hired none when I didn't need them, even though I could afford them. Being able to afford hiring of nurses had no effect on hiring. Demand for their services did. This increased demand was due to increased consumer income. Increased consumer income ALWAYS increases aggregate demand. (It may effect demand for individual products differently. But is still increases the sum total of demand for goods and services produced.)

In the above example, nurses spendable income increased because of demand increase. In turn, their income increased aggregate consumer income. This increases demand for the goods they buy, and the labor that produces those goods. It helped the entire economy as a result.
Again, increased consumer income increases demand for production. But how does consumer spending increase, if consumer income decreases? It increases through credit and borrowing. Current consumer spending has been maintained through increased borrowing and credit card spending. To phrase this differently, it has been maintained by consumer "deficit" spending. And this is becoming an increasingly larger portion of consumer spending. A lot of this deficit spending has been financed by the artificially increased value of homes, and the resulting increase in home equity loans. Interest rates have almost a direct effect on the market value of homes. The higher the fraction of buyer's cost going to financing, the less the market value of the home. This is because the seller receives a smaller fraction of the total payment. If interest rates are low, the seller receives a higher fraction of the buyer's payment.

Let me give a brief illustration. Let's say I want to buy a home. Let's say I am a perfect example of all potential buyers in my area. I'm willing to pay $300,000 total for a home. This includes all finance charges, as well as principal payment. Let's say the total financing costs $150, 000. That means the seller will get the other $150,000. That means the market value of his home is $150,000, because that's what he actually gets.

Let's change the finance charges. I'm still only willing to pay $300,000 total for the home, including all finance charges. But the finance charges are only $50,000 now, because of a lower interest rate. The seller now gets $250,000, instead of $150,000. The market value of his home is now $250,000. The market value of his home has increased $100,000 because of a reduced interest rate. The reduced interest rate accounts for 100% of the increase in market value. This increases the equity, and increases the amount he can borrow off this equity.

Lowered interest rates have greatly increased home equity values. They have also greatly increased the amount of money that can be borrowed off this equity. This money has made a significant contribution to consumer spending during the last 4 years. Current estimates are that it contributes $200-300 billion per year to our $12 trillion GDP. This is 1.5 to 2.5% of our GDP. Borrowed money has prevented consumer spending from sinking. As interest rates rise, home equity values will decrease. Money borrowed from this reduced home equity will also decrease. The contribution to consumer spending from this money will also decrease.

From this, it becomes obvious that consumer demand cannot be maintained by this consumer deficit spending. We are nearing the limit now. We are going to reach this limit in the near future. The home-refinancing loan bubble, and its contribution to consumer spending, is about to burst. When it does, consumer spending and demand will drop. And they will continue to drop, because this is also a self-perpetuating cycle. As consumer demand for production decreases, so will the demand for labor to provide that production. As a result, hiring will decrease and layoffs will increase. This will further decrease consumer income, and the spending that comes from that income. We need to change our economic course. We can't let Republicans distract us from major issues. We can't let them waste our time with discussion right-wing planted distractions. Subjects such as steroids in baseball, the Robert Blake trial, Michael Jackson, and Terry Shiavo provide cover for what the Republicans are really up to. Corporatization of social security and extension of tax cuts for the rich affect all of us. Job loss to the cheap slave labor of foreign countries affects all of us. Let's not help provide cover for the Bush/Snow/Greenspan "economic axis-of-evil."

Clinton was right. It is "the economy stupid." Let's not let the Republicans convince us otherwise.

21 Comments:

Blogger FarceOfNature said...

loved your post on DU, looking forward to more. We need more people like you who actually put the effort into learning and discussing these issues. The fallout from neoliberalism and rampant western hegemony for the US may not come for 30 years but when it does, it will be swift and messy.

11:17 AM  
Anonymous clarence siwnney said...

A wonderful forum. I have never been exposed to such clarity in explaining economic theory with examples.

You will keep me busy copying.
clarence swinney

11:23 AM  
Anonymous clarence swinney said...

Bob Novak said on Crossfire-The Bush Debt is lowest as percent of GDP in history.

62.9% is not lower than 33.3%

Fact Check
1980--33.3%
1992--64.1%
92% increase

1992--64.1%
2000--57.8%
Decrease of 9.8%

2000--57.8%
2004--62.9%
Increase of 8.9%

clarence swinney

11:28 AM  
Anonymous clarence swinney said...

Promote Reagan as a success.This is a better success.Comparing Democrat’s hero-CLINTON—versus Republican’s hero--REAGAN
-----------------------------------------------------------------------------------------------------------
1.JOBS—grew by 43% more under Clinton.
2.GDP---grew by 57% more under Clinton.
3.DOW—grew by 700% more under Clinton..
4.NASDAQ-grew by 18 times as much under Clinton.
4.SPENDING--grew by 28% under Clinton---80% under Reagan.
5.DEBT—grew by 43% under Clinton—187% under Reagan.
6. DEFICITS—Clinton got a large surplus--grew by 112% under Reagan.
7.NATIONAL INCOME—grew by100% more under Clinton.
8.PERSONAL INCOME—Grew by 110% more under Clinton.
SOURCES—Bureau of Labor Statistics (www.BLS.Gov)--Economic Policy Institute (EPI.org)—Global & World Almanacs from 1980 to 2003 (annual issues)
www.the-hamster.com (chart taken from NY Times)
National Archives History on Presidents. www.nara.gov

Please submit comments to cwswinney@netzero.net or P.O. Box 3411-Burlington NC-27215

11:31 AM  
Blogger unlawflcombatnt said...

Clarence,

Thank you for your post and your compliment. It looks like you use most of the same sources of statistics that I do. BLS stats seem to have some basis in reality. In contrast, the US Department of "Commericals" seems to selectively edit their statistics, if not simply make them up. "Chained 2000 dollars" is one example of their reality creation. This "alternate reality" concept allows them to constantly understate inflation. If they've ever posted an explanation of "chained 2000 dollars," I've completely missed it.

Mike (unlawflcombatnt)

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