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eeeeeeeli
09-20-2011, 03:07 PM
OK, at risk of exposing myself as an economic dunce, I've been bothered by this question for some time, and someone might be able to shed light on it for me.

Basically, what types of consumer spending are more productive than others, and how much does it matter? For instance, does it matter much whether I spend $100 on groceries, or a piece of artwork? In both cases, the money would seem to go back into the economy, creating value elsewhere. But wouldn't it matter what labor is getting paid for, in other words, what labor is getting done and what use it has for the economy?

The grocery transaction is powering myself and family, as well as supporting a business owner servicing his community, as well as the chain of businesses he is supporting. The art transaction is I suppose providing me a sort of inspiration - but for argument's sake, let's say it is overpriced and of marginal value to me. To the artist, it pays the bills, but his labor has been wasted on a relatively unproductive effort.

It ultimately seems a very difficult problem to untangle, as finding and weighing the productivity in these transactions is so complex. I'm reminded of an old device an early economist had built with the intention of creating a physical replication of an economy. It resembled a Rube Goldberg contraption.

Do economists have an opinion on this question? Does it matter? I can help but think it must, the same way that an investment can either by good or bad - there surely is a spectrum productive activity. Is luxury spending more wasteful than basic essentials?

Lastly, and you might have guessed this: what does it portend for distribution of wealth? Returning to groceries and art, while the arts are important, they do seem at some level a luxury - in the productive sense. And given that 37% consumer spending is now done by the wealthiest 5%, whether fair or not, it would seem to suggest considerable waste.

sugarkang
09-20-2011, 05:44 PM
Basically, what types of consumer spending are more productive than others, and how much does it matter? For instance, does it matter much whether I spend $100 on groceries, or a piece of artwork? In both cases, the money would seem to go back into the economy, creating value elsewhere. But wouldn't it matter what labor is getting paid for, in other words, what labor is getting done and what use it has for the economy?

It matters a lot and this is where the divide exists between different types of economists. I think the quickest way to understand this is to read the short summary on the broken windows fallacy (http://en.wikipedia.org/wiki/Parable_of_the_broken_window). This gives you an idea of what should be happening when things are normal. Keynes would say that broken windows doesn't apply because people are hoarding cash. It's better that people fix windows that don't need fixing in this weak demand scenario.


Lastly, and you might have guessed this: what does it portend for distribution of wealth? Returning to groceries and art, while the arts are important, they do seem at some level a luxury - in the productive sense. And given that 37% consumer spending is now done by the wealthiest 5%, whether fair or not, it would seem to suggest considerable waste.

Are you just using groceries and art as extreme examples? What is it that you're really concerned about specifically? While it's true that more households are considered to be living in poverty, I believe most people are still getting proper meals. So, is this more about redistribution? If so, I agree with your general intent, but i don't believe outright redistribution is politically feasible.

In light of the President's bill proposal it would behoove one to take a look at the current distribution scheme. Here are numbers from the Tax Policy Center (http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3190&topic2ID=40&topic3ID=41&DocTypeID=2).

Tax burden for:
1. bottom quintile = 1.6%
2. middle quintile = 14.1%
3. top 0.1% (billionaires) = 30.4%

http://img850.imageshack.us/img850/1719/capturepw.png (http://imageshack.us/photo/my-images/850/capturepw.png/)

Top two quintiles pay for 83% (http://sociology.ucsc.edu/whorulesamerica/power/wealth.html) of all federal taxes.

eeeeeeeli
09-21-2011, 12:30 AM
It matters a lot and this is where the divide exists between different types of economists. I think the quickest way to understand this is to read the short summary on the broken windows fallacy (http://en.wikipedia.org/wiki/Parable_of_the_broken_window). This gives you an idea of what should be happening when things are normal. Keynes would say that broken windows doesn't apply because people are hoarding cash. It's better that people fix windows that don't need fixing in this weak demand scenario.
That's interesting. (I noticed too, that this is not to be confused with broken windows theory', which I had heard of and was sometimes confused when it seemed out of context!)

It makes sense. But it stills seems difficult to quantify. For instance, the glazier spending money that would have been spent elsewhere is still going back into the economy. Is the key the actual value being created - in the form of windows having value?

And, as you say, this assumes normal times. What happens when you have large numbers of unemployed people, basically large quantities of wasted resources. The idea behind Keynes would seem to be that this labor can be put to use in adding value. This would need to be via borrowed money, but if it is a worthwhile project, like say fixing a bridge or policing the streets, etc., not only is value being created, but the money is getting recirculated back into the economy, and whatever price there is to pay in interest on that borrowed money, the investment is worth it.

There, I've completely run out my economic cord. Maybe what I just proposed made no sense.

Are you just using groceries and art as extreme examples? What is it that you're really concerned about specifically? While it's true that more households are considered to be living in poverty, I believe most people are still getting proper meals. So, is this more about redistribution?

Not really. They were I suppose just meant as opposite forms of say, family spending - from necessity to luxury.

Don Zeko
09-21-2011, 12:44 AM
That's interesting. (I noticed too, that this is not to be confused with broken windows theory', which I had heard of and was sometimes confused when it seemed out of context!)

It makes sense. But it stills seems difficult to quantify. For instance, the glazier spending money that would have been spent elsewhere is still going back into the economy. Is the key the actual value being created - in the form of windows having value?

And, as you say, this assumes normal times. What happens when you have large numbers of unemployed people, basically large quantities of wasted resources. The idea behind Keynes would seem to be that this labor can be put to use in adding value. This would need to be borrowed money, but if it is a worthwhile project, like say fixing a bridge or policing the streets, etc., not only is value being created, but the money is getting recirculated back into the economy, and whatever price there is to pay in interest on that borrowed money, the investment is worth it.

There, I've completely run out my economic cord. Maybe what I just proposed made no sense.

The crucial element of Keynes's response to the Broken Windows issue is the multiplier. The idea here is that if you put someone to work, even if that person is doing something completely pointless, he'll get paid. And then he'll take that money and buy things that he otherwise wouldn't have been able to buy, which means that all of the merchants he buys from have demand for their goods that didn't exist before. If there's enough added demand, those merchants will hire new workers and the whole virtuous cycle will repeat itself. Because of these feedback effects, a dollar spent to pay that pointless glazier might create several dollars of economic activity.

Of course, this only works if the right conditions exist. First, there have to be unemployed workers with useful skills and other productive resources sitting idle. If there aren't, then you're just shifting them around and not creating new economic activity. You also need to have capital sitting idle, otherwise the money you borrowed to pay the glazier prevents a private investor from spending it to pay for something useful. You also can't have the glazier save that money or use it to pay down debt. He has to spend it and get more money flowing through the economy. Otherwise you're moving debt around but not doing anything* to stimulate employment or economic growth

*Well, not exactly, because it could be the economy is depressed because people are paying down their debts instead of spending money. So shifting the debt to the government might encourage growth, but this is an extremely inefficient way to do it with lots of bad side effects.

sugarkang
09-21-2011, 02:27 AM
It makes sense. But it stills seems difficult to quantify. For instance, the glazier spending money that would have been spent elsewhere is still going back into the economy. Is the key the actual value being created - in the form of windows having value?

I think DZ answered this question from the Keynesian perspective. There are all kinds of problems with that Keynesian logic, but the bottom line is that most economists (across disciplines) acknowledge that a demand problem exists.


And, as you say, this assumes normal times. What happens when you have large numbers of unemployed people, basically large quantities of wasted resources. The idea behind Keynes would seem to be that this labor can be put to use in adding value. This would need to be via borrowed money, but if it is a worthwhile project, like say fixing a bridge or policing the streets, etc., not only is value being created, but the money is getting recirculated back into the economy, and whatever price there is to pay in interest on that borrowed money, the investment is worth it.

You've just touched on the heart of what's really wrong with the Keynesian theory. That is, even if I grant you that Keynesian logic is solid (and I don't), the real problem lies in the politics, the implementation, and ultimately the adherence to the original theory itself, i.e., Keynesianism is for the short term, not long term.

First, the politics. Those goddamn right wingers won't let you spend the money on that bullshit. That ends the story by itself.

Second, the implementation. You can talk about crumbling roads and bridges until you're blue in the face. Hell, I completely agree with fixing this stuff yesterday. However, the problem is that these jobs aren't "shovel ready." Obama will make you think that this isn't a problem; people are "ready to work." However, this isn't true and Ezra Klein admitted it in a recent piece. There's a disconnect between what people want to do now and what is actually feasible now. Even assuming you had the political will, which you don't, there are structural impediments to putting everyone back to work. Say there are a thousand unemployed people. The government has a thousand shovel ready jobs. Perfect, one would think! Except, it's unlikely that job hopefuls have the skills needed to fill the jobs. Even if you could train them, this would take a lot of time. And this is related to my next point.

Third, Keynesianism is a short term theory. Now, I'm all for fixing infrastructure. But let's label things accurately. A massive infrastructure project could go on for a decade. That's not Keynesianism; that's fascism (state owned and directed production). And it wouldn't doesn't address the situation right now. If the desire is to do something right frickin now, the only "shovel ready" plan -- aka quick acting stimulus -- is through lower taxes, debt forgiveness, and/or mailing checks.

I'm confused as to why your team keeps making fairness arguments that Republicans don't care about. If anything, you guys should be hammering Republicans all day and all night for blocking the payroll tax cut. It's your best, most effective argument, IMO. It's actually a real, shovel-ready Keynesian plan; it would stimulate demand now; it would let your team be in favor of low taxes for once; it would likely help Obama get re-elected.

Instead, Obama wants to add regulation to prevent employers from discriminating against people already unemployed. It makes me want to vote for Huntsman.

Ocean
09-21-2011, 08:58 AM
Of course, this only works if the right conditions exist. First, there have to be unemployed workers with useful skills and other productive resources sitting idle. If there aren't, then you're just shifting them around and not creating new economic activity. You also need to have capital sitting idle, otherwise the money you borrowed to pay the glazier prevents a private investor from spending it to pay for something useful. You also can't have the glazier save that money or use it to pay down debt. He has to spend it and get more money flowing through the economy. Otherwise you're moving debt around but not doing anything* to stimulate employment or economic growth

*Well, not exactly, because it could be the economy is depressed because people are paying down their debts instead of spending money. So shifting the debt to the government might encourage growth, but this is an extremely inefficient way to do it with lots of bad side effects.

How does that work when the money is used to buy imports (basically you would be shifting money to workers and materials produced in other countries)? Except for the fraction of the money that stays with the intermediary, the rest would flow out of the country. Also, how about investments in foreign companies/stocks?

From a very macro perspective, I would think that more flow of capital outside of the country, the more unemployment it creates here, unless there's some balance between inflow and outflow (imports-exports maintained constant, or investments by foreign capital increasing when we increase investments in other countries).

How is all that quantified and applied to our current situation of unemployment?

Florian
09-21-2011, 12:03 PM
Third, Keynesianism is a short term theory. Now, I'm all for fixing infrastructure. But let's label things accurately. A massive infrastructure project could go on for a decade. That's not Keynesianism; that's fascism (state owned and directed production).

I believe the US interstate highway system took more than a decade to build. When was it begun? Under Eisenhower? Kennedy? Who would have thought that Americans under Supreme Leader Ike were in the grip of fascism. Or perhaps the fascism only took hold under democrats?

sugarkang
09-21-2011, 08:45 PM
I believe the US interstate highway system took more than a decade to build. When was it begun? Under Eisenhower? Kennedy? Who would have thought that Americans under Supreme Leader Ike were in the grip of fascism. Or perhaps the fascism only took hold under democrats?

I was careless with my explanation. Still, I wish you'd criticize on the basis of taking all of the text into account. I said twice that I support infrastructure spending. What I meant to say was that some massive spending program would likely end up putting money into non-shovel ready Solyndras and that is fascism.

popcorn_karate
09-22-2011, 02:49 PM
I was careless with my explanation. Still, I wish you'd criticize on the basis of taking all of the text into account. I said twice that I support infrastructure spending. What I meant to say was that some massive spending program would likely end up putting money into non-shovel ready Solyndras and that is fascism.

so you support fascism. nice.

uncle ebeneezer
09-22-2011, 03:14 PM
How "likely" is a case like Solyndra?:

The Energy Departmentís loan-guarantee program, enacted in 2005 with bipartisan support, has backed nearly $38 billion in loans for 40 projects around the country. Solyndra represents just 1.3 percent of that portfolio ó and, as yet, itís the only loan that has soured.

Via (http://www.washingtonpost.com/blogs/ezra-klein/post/five-myths-about-the-solyndra-collapse/2011/09/14/gIQAfkyvRK_blog.html)

Ocean
09-23-2011, 11:37 PM
She articulates it so well. (http://www.thedailyshow.com/watch/thu-september-22-2011/exclusive---jennifer-granholm-extended-interview-pt--3)

Some may want to watch parts 1 and 2 as well.