demandside

Plus Krugman on how bad it is; also Bush and the supply siders are rushing from the building, but it is the sky that is falling.

Where is the money coming from?  How can we pay it back?

A look at Aggregate Demand

Stimulus spending

Recovery spending

Things have unfortunately arrived as we predicted here at Demand Side.  Perhaps more so, though we were trying to be as dark as we could be.  We panned the first stimulus package when it was produced last spring for not including infrastructure spending, nor help to states and municipalities.  The president and Congress compromised on tax rebates for individuals and tax cuts for business.  Better to get there slowly than to be lost in transit.

Today, thanks in large part to the promotional video by Barack Obama, infrastructure spending is the greatest idea in the crackerjack box.  And it is.  this is investment, not spending.  It should be considered recovery, not stimulus.

The great concerns today are How can we afford it?  Where is the money coming from?  How can we pay it back?

Aggregate Demand is the source of all activity and the central concept of the economics of John Maynard Keynes.  Aggregate Demand is much more visible in motion, as now, when it is falling like a stone.  We’ll take advantage of this motion in our explanation in a moment.

For context, however, let’s first the man who remembers yesterday.  He is standing now in a clearing in the year 2001 looking out at the future.  I can hear his thoughts.

I want fields of McMansions, he says, preferably at the end of potholed two-lane roads.  I want a war halfway around the world where I can use my military toys and use up hundreds of thousands of American men and women to destroy the land of my father’s enemy.  I want to reward my friends and build up a political machine for the class of the worth.

Where will I get the money?  Can I afford it?  How can I pay it back?

You may wonder if these questions were really asked.  I have to admit, the man who remembers yesterday finds the thoughts very indistinct.  But whether or not the question was asked, it was answered:

I will borrow — for the war and the houses and the tax cut gifts for my in-group.  That is the source.  Can I afford it?  No.  The man who remembers yesterday admits now that five trillion dollars in federal debt and growing, plus perhaps fifteen trillion in private debt is a cost far greater than could be afforded.  And it did not lead to the land of money trees.

So How can I pay it back?

Well, you can’t.  You’re out of a job.  You will either renege on your debts or depend on somebody else.  Your high-flying buddies who made a fortune on the cheap money are now scrambling to retain shreds of those fortunes and cursing you as they do.  They now have to come to the government you and they derided for so long and beg for guarantees on all their unilateral bad lending.  The McMansions and garages full of stuff like in their fields like silos of pet rocks.

But in fact, the man who remembers yesterday is passing off to the man who must deal with tomorrow.  he correctly sees that his houses and garages are not what he needs and that what he needs is a job.  Since he is a building contractor and nobody is building ….

Ah, maybe we should leave it there.

Aggregate Demand.

I was sitting one day in meditation in the woods.  It was cold, so I had draped a blanket around me, a blanket that had been left on the line in the wind for a day and a half.  Three deer came down the trail, and it was then that I discovered that deer cannot see you unless you move.  Since the only odor-emitter from my little blanket tent was my head, it was the only thing smellable.  The lead doe did not exactly sniff my eyebrows, but there well within petting zoo range.  Eventually they decided this lump was nothing to worry about and continued on in their business.

We are like the deer.  We cannot really see Aggregate Demand unless it is moving.  And it is moving now.  People are saving now. not spending and trying not to borrow.  That moves it down.  Businesses are cutting back, laying off, not investing or expanding.  That is moving it down.  State and local governments, as their tax revenues fall, are going into austerity budgets.  Foreigners are finding our high dollar a barrier to buying our products.  More motion to the downside.

At the same time all of us are congratulating ourselves on our willingness to make the tough choices or perhaps just acknowledging the inevitable, or maybe criticizing others who are not willing to make these choices.  More about Big Auto later.  Implicit in our thinking is that we just need to get lean and defensive and in position to weather this storm.

The sad fact of Aggregate Demand is, however, that we are tearing off the roof of the house to feed the fire that keeps us warm.  The second sad fact is that the private financial markets have been crippled by their own hand and the mechanisms that helped right the ship in the past are absent.  That is, the consumer is tapped out and the mechanism of market recovery is broken.

But just to be clear gain, and our listeners probably find this dull….

Aggregate Demand is effective demand from government, business investment, consumer spending, and foreign purchases.  When Keynes came upon the scene he faced a situation similar to what we see today.  Companies had grown up in the Roaring Twenties, with plenty of customers.  The customers were hurt by the stock market crash and the banks were subsequently broken again by their own hand.

Keynes saw that it was all very well and good for one company to downsize, rationalize and get fit, but when all did it, the income available to and the demand for products declined and the need for another cycle of downsizing ensued.

And there is no bottom.  There is no smallest size, except that described by basic subsistence or the government’s guaranteed social safety net.  Even then, some are not going to subsist.  The correcting and recovery mechanism described by the Cato Institute or by Republican senators and governors does not exist.  All the more so in the absence of a functioning financial sector, the nervous system of an economy.

Maybe you will remember the family farm metaphor of a week or two ago.  When the ground is too wet to plant, it is time to  put the hands to work building barns and roads and water wells.  We’ll borrow to do this and repay it with the increased efficiency and capacity we’re building.  The government, as in the metaphor, does not depend on financial intermediaries — banks.

This stabilizes demand.  Demand Side.

The Auto Industry case from the Demand Side is a bailout of the jobs and the existing supplier networks, plant and equipment.  As a bailout of the corporation it is a Supply Side non-starter.  Just as the tremendous gifts to Wall Street have not produced a viable financial sector, absent the prospect of profitable loans, so the bailout of Big Auto will not produce a viable industry absent demand for its products.  Maybe its a little like fixing up the harvester but forgetting to plant the crop.

With banks and shadow banks, the Demand Side alternative has always been the Home Owners Loan Corporation model.  Writing down debt.  Yest there are big losses.  let the lenders and borrowers take them.  Together, in an organized way.  Government bailouts ought to be very small in terms of ratifying the prices that were paid or the innovations.  The concern ought to be to create or recreate a healthy banking function that can react to conditions on the ground, not to save current players or force credit into unstable places.

With Big Auto, there is an additional concern.  Manufacturing is a shrinking part of the American economy.  Yet we have big international trade deficits.  Those deficits must be repaid in goods and services, not debt, as at present.  The sooner we begin, the better.  it is possible the automobile industry or its successor industry and its supplier networks can provide some of these tradable goods.  Likewise, it is hoped, the anticipated development of green energy products can be traded when once again the currency becomes a medium instead of an obstacle to exchange.

A little bit off track.

How can we afford it?  We afford it by employing idle hands in useful endeavors that increase capacity — such as a longer useful life for the planet — or efficiency — such as energy, water, transportation infrastructure.  We pay these idle hands with the benefits of their labor, just as we do in normal times, except that the source of the returns from these benefits are moved from the future to the present by borrowing.  We pay back the borrowing by a universal mandatory levy on those who benefit from current efforts — taxes on the citizens of the future.

The alternative is hoping the banking system will revive after oceans of liquidity are thrown on it, that the consumer will regain his eagerness to spend as a result of another desultory $600 check.  Not going to happen.  At any pace.

The man who remembers yesterday remembers borrowing for overly large houses and consumer goods.  these have a difficult time generating repayment, because they produce some but not enough gains in capacity and efficiency.  The clear advantage of the public goods we are considering in stimulus and recovery talks, infrastructure and so on, are not passive but active, positive contributors to future well-being.

 Standard Podcasts: Play Now | Play in Popup | Download | Hits (251)