Bush's deficits and the coming crunch.

[Dinner]

Cutting government spending does lower growth but if the economy is healthy it should survive it and in the long run it isn't good to continually have large debts to repay. You don't want to balance everything in a recession but once the economy is growing then balancing it is just good economics.

[chequita guevara]

Originally posted by Oerdin
That's good for America's finances but let's see how much additional debt Bush can lard on with his reindeer games in Iraq and Afghanistan.

$80 billion.

[Drogue]

Originally posted by Lawrence of Arabia
they will if interest rates are low enough.

Not quite. See Japan. Generally economic theory states that there is a level when interest rates get so low that they can't affect demand. It's rare, but possible, and has happened in Japan.

[Dinner]

If Japan really wanted to get people spending again then all they have to do is pump up the money supply to start some inflation. Right now they have periodically been experiencing deflation or near zero inflation. Why should a person by a car today if it will be cheaper in 3 months? Start a bit of inflation and give people a reason to buy now.

[Lawrence of Arabia]

Not quite. See Japan. Generally economic theory states that there is a level when interest rates get so low that they can't affect demand. It's rare, but possible, and has happened in Japan.

i know, my previous posts had stated that, so that post was still operating under the same assumptiion.

[Drogue]

Originally posted by Oerdin
If Japan really wanted to get people spending again then all they have to do is pump up the money supply to start some inflation. Right now they have periodically been experiencing deflation or near zero inflation. Why should a person by a car today if it will be cheaper in 3 months? Start a bit of inflation and give people a reason to buy now.

Bingo, though very risky. A slight change in the money supply above what is needed can lead to too much inflation. It is the solution, but it needs to be implimented carefully.

[Urban Ranger]

Originally posted by Drogue
Generally economic theory states that there is a level when interest rates get so low that they can't affect demand. It's rare, but possible, and has happened in Japan.

IIRC, that's according to John Maynard Keynes. Monetarists hold it that reducing interest rates increases supply, thus stimulating an economic recovery. Keynes contended that's not true due to the "liquidity trap," and maintained that increasing demand by increasing government spending is the way to go.

[Ned]

Originally posted by Oerdin
Cutting government spending does lower growth but if the economy is healthy it should survive it and in the long run it isn't good to continually have large debts to repay. You don't want to balance everything in a recession but once the economy is growing then balancing it is just good economics.

I remember Kennedy saying that one really wanted about about 3% inflation. Why? To keep demand up and strong and to prevent deflation, which is a killer. Deficits directly add to the money supply and to inflation to the extent that the growth in money supply exceeds the growth in the economy. But this is good to the extent that inflation stays in the 3% range. It keeps demand up and the business engine running.

The problem is that people always want a balanced budget. So we get tax increases through bracket creep or direct tax hikes that slowly bring the budget back into balance (or the economy simply grows faster than the budget). This sucks a lot of demand out of the economy. This has always led to a recession and in some cases to a depression.

[Drogue]

Originally posted by Urban Ranger
IIRC, that's according to John Maynard Keynes. Monetarists hold it that reducing interest rates increases supply, thus stimulating an economic recovery. Keynes contended that's not true due to the "liquidity trap," and maintained that increasing demand by increasing government spending is the way to go.

Most monetarists I've read about admit the liquidity trap exists in that form. However even if they didn't, you're forgetting that most economists are neither strict monetarists nor strict Keynesians. That theory is accepted and taught in most macro courses, and is supported by empirical evidence, such as the lack of effect falling interest rates had at the bottom end in Japan. So no, it's not according to Keynes, even if some monetarists disagree with it. It's according to a wealth of research and the opinion of most economic courses taught.

[Lawrence of Arabia]

i dont think that anyone can deny that once real interest rates approach zero and where demand doesnt pick up, you need to move away from monetary policy. Either increase G, or you change the structure of the economy.

[Mr. Harley]

When speaking about Japan, you are also talking about Consumer Confidence. When people are suddenly nervous about their jobs, savings, etc. and they stop spending, a consumer driven economy can tank no matter what the other stimuli. This has been a field of some debate in economics, and in fact was the subject for one of the two winners of the Nobel Prize in Economics in 2002 given to Daniel Kahneman - from the Nobel website.

"for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty"

This was shown in the recent holiday spending, or lack thereof, in the United States. Even though the economy is recovering, consumer spending is not up an equivalent amount. When people are concerned about outsourcing and layoffs, then they will not spend to the same degree as when they perceive they have security. Note that Japan's recession may have been prolonged by this effect, as well as various other factors.

Under the Bush adminstration job growth has been largely balanced by layoffs. This has led to people having a fair degree of uncertainty about their jobs, and thus consumer spending is not recovering like other indicators say it should. Until the Neocons stop their worship of a misapplied Laffer curve, and look at some of these other factors, the US economic growth is going to be negatively affected as these factors are not addressed.

[Kidlicious]

Economists usually blame poor consumer spending on worrying. I think it's got more to do with more people not having as much income, and all of it going to the rich and upper middle class who save more.

[Kidlicious]

Originally posted by Lawrence of Arabia
not that type of lending - it also allows for consumer products to have lower interst rates, so people pay lower rates and are more likely to buy, leading to increase in C and increase in GDP.

The problem with the depression was that prices were so low that producers stopped bringing their products to market. Lowering costs only lowers prices more. You can google some images as see produce sitting in the fields.

The problem was producers were already lent lots of money and saw negative results. The expectations of the suppliers was worse than the expectations of the buyers.

the government doesnt profit from increased spending. if they did, then you would see marginal tax revenues = marginal govt spending. furthermore, the govt could simply print more money, or change the discount rate, or decrease the reserve requirement.

None of that will work because it all depends on the market and the market is broken. You need to take direct action.

[Mr. Harley]

Kidicious, it depends on the economists. Many also blame wage stagnation with the increase in certain necessary sectors that reduces spending on other things, i.e. housing, medical, and college costs are all on the rise much faster than average (mean) salaries. Add in that middle class workers could be outsourced or layed off at any time, and they do funny things like delay purchasing a new car, or puchase used or smaller, they don't have that first or second child, they purchase a smaller house, etc. It both items - confidence and erosion of real purchasing power of necessities - that produce these affects.

[Urban Ranger]

Originally posted by Drogue
So no, it's not according to Keynes, even if some monetarists disagree with it.

When I said "according to Keynes," I meant it's originally his idea.