1. Hi there guest! Welcome to PoliticalJack.com. Register for free to join our community?
    Dismiss Notice

Aggregate demand...

Discussion in 'Economics, Business, and Taxes' started by Woolleybugger, Dec 17, 2013.

  1. Woolleybugger

    Woolleybugger Mayor

    Joined:
    Sep 19, 2011
    Messages:
    4,586
    Likes Received:
    477
    Some of you may have noticed that I tend to harp on aggregate demand as the key to understanding our macro economy. AD is a simple way of looking at a complex system that also has the benefit of producing a number that represents GDP or the sum total of all economic activities measured in wages and income. For the benefit of Mr. Kite, here it is yet again.

    AD=Personal Spending+Business investment+government spending+net proceeds from foreign sources(exports less imports).

    All the money in circulation within an economy can be viewed by this simple equation for the purposes of analyzing policy options. Of course this equation is not perfect, it really does not represent "all" the money and it is made up of very complicated variables which only a statistician could ever hope to verify but for the purposes of looking at an economy from 20,000 feet, this is a great tool.

    Let us say that the sum total of one years activity (AD) is equal to the GDP. Let us also say that this number is 10 trillion to make numbers easy to grasp. Personal consumption runs around 75% or 7,5 trillion. That number represents us spending all our money on things, it does not represent savings or debt retirement. Business investment may be another 5% or 500 billion. This number comes from balance sheets, VC funding sources, bank loans, bonds and so forth. Government spending is easy to grasp, around 22% of GDP or 2.2 trillion. We are now up to 7.5t + 500B + 2.2T or 10.2 Trillion. That is more than the sum of the four elements! This is where the fourth variable comes into play. We run a trade deficit every year. That means what we import is more than we export. When we run a trade deficit, this variable is a negative number. Let us make up a number that says the net proceeds is minus 200 billion. Now we have a balanced AD equation.

    If the people running our nation could only agree that this analysis was a good way to look at the economy, we would be in great shape to actually formulate policy using something objective. So let us agree that this little equation is valid, the numbers seem right and then let us play with some possible options to get 10 trillion bigger.

    Option 1: Make personal consumption bigger. How do you get people to spend more money without making something else in the equation smaller in the process? Tax cuts would give people more money but then government tax receipts will take a hit forcing them to borrow money to pay for their spending. You could do tax cuts and cut spending but if you cut taxes by 1 dollar, somehow personal spending would have to increase by more than one dollar to make AD bigger. How much bigger? Take a guess because that is what the economists do and your guess is as good as mine. You could make consumption bigger by rising wages, incomes and getting people back to work. But where does all that new money come from to pay these workers? Somebody else in this equation has to pony up the dough or money just has to appear from thin air. Where could this new money come from? Possible sources are debt, asset depletion, exports, foreign capital, business investments or increased exports. Of course you could also just allow the government to make more money as well, its called deficit spending or printing money.

    Option 1 is the battleground for economic policy debates. What if you could create a model that perfectly simulated each option considered and gave you a new AD number? You would be a friggin genius and win the Nobel for it. No one has this perfect model. So every decision made in this part of the equation is very difficult to review objectively. Since this part of the variable is so large, we cannot ignore it so all of us pick some policy using our best guesses or biases and then run with it. Depending upon your politics, you will choose different paths. No one knows which is right for tomorrow but we sure as hell know what happened in the past when we did one or the other.

    Option 2: Make business investment bigger. This seems like a no brainer but what would compel any business to make investments and use assets or credit to expand? Well, businesses need customers and customers need money to buy the stuff businesses sell so unless businesses see a market, they will not invest. What is good for one sector's growth may actually replace another sectors business leaving the total AD the same. This is what happens when incomes are flat. The same amount of money is spent but it is spent in different ways. Fine for a company but it doesn't do shit for the overall economy. So the key to getting business to invest is for them to see more money going to people, more business coming from the government or more sales internationally. Trade agreements supposedly fix the export side but all trade agreements seem to be asymmetric. They usually result in more imports to the USA than we gain in exports. So, the net proceeds are always negative in a free trade economy.

    Option 3: Make government spend more money. This is what we have been doing for decades now. By borrowing a shitload of money every year, we add money to this equation helping to make the sum stay at 10 trillion. If we stopped borrowing money and forced the government to balance the books, the 10 trillion number would drop by about 5% at least. Not good.

    Option 4: Increase exports, decrease imports and create a trade surplus. Since we are the customer to the world, if we did this we would in essence put the world economy at risk or become an isolationist economy. Our spending is someone else's income and vice versa. Very complicated stuff, very political and this is how wars start.

    So now we are stuck. We argue about how to affect AD along party lines and never seem to agree on how to look at these questions objectively. But is there another way to increase AD?

    Sure. Wealth represents the stored value of unused assets. Much like a corporate raider who sees an undervalued balance sheet, we have trillions of dollars in wealth sitting around all over the place that could be unleashed if only we could get at it. How? Perhaps a wealth tax or a massive inheritance tax or a global war on tax shelters and havens. I am not sure which is the way forward but this is definitely one way of finding more money without printing it out of thin air. The Romans used to do this when a regime changed. They did this because money was tied to gold or silver. Today, money is fiat based but it still has limits because all the central banks are worried most about inflation. So printing more money seems to be off the table at least as far as printing enough money to make AD bigger in a meaningful way. We currently make money out of thin air in small doses compared to AD. What to do?

    Hell I don't know. But I am curious to see if you folks think this type of reasoning is a valid way of looking at the problem. Remember though that economics may appear to be a science but it is not really a hard science. It is more like psychology or quantum mechanics in that the progress made by some only creates more questions than it usually answers.
     
    • Like Like x 1
  2. Woolleybugger

    Woolleybugger Mayor

    Joined:
    Sep 19, 2011
    Messages:
    4,586
    Likes Received:
    477
    BTW, Greenspan has a new book dealing with this modeling problem. It is getting panned everywhere.
     
  3. justoffal

    justoffal Senator

    Joined:
    Sep 18, 2011
    Messages:
    20,998
    Likes Received:
    4,944

    Is this verbatim from an econ 101?

    I don't have any degrees in economics but I do deal with systems of demand for a living. I have never seen the system that works with the component parts contributing less than the whole system demands....maybe someday somebody will invent the bootstrap lift for engineering designs as well as for economics but for now I believe we are stuck with a balance sheet whether hidden or obvious.

    If you think about if for a moment...money that is printed or electronically infused into the economy is not really created out of thin air......simply because it is thrust like an enema load into the circulating currency supply and so it becomes part and parcel of all the transactions, the man hours and the profit margins that are out there. In short it is theft. Or maybe it is re-theft....this is an angle I am certainly willing to consider.

    If the point of your query was/is/will be to point out that as a society we have a greater social load than we can afford then perhaps you have a point.

    Other than that...I'm not really sure what it is you are asking.

    Seems to me that this is more about altruism than economics. How to convince people that they should do with less so others can have more. It's a good value...one that I wish everybody held...but alas the pragmatic reality here is that they don't and also that there are those who will always take what they shouldn't. Not sure if you can fix that. Probably not.


    JO
     
    Last edited: Dec 18, 2013
  4. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153

    Raise wages, for no reason other than people need more money.


    These basic models which endeavor to treat an economic system like its a goddamn General Ledger are absolutely useless.

    Here's how you know. Apply it to 1950 to 1960 America. What's it tell us about anything that was good or bad from a policy standpoint?

    What demand is best? (monetary velocity)

    What taxation is best (net improvement in money staying within the higher monetary velocity points in the system )

    When did business and investment ever do compensatory moves? (not over react in one way or another)

    Where does asset value come into play?

    How about currency hoarded by individuals in countries where it's a hedge against their currency going I'm the shitter? Or being as ours is, the coin of the realm on black markets? (why give a shit if we send money out in excess of money coming in.)

    I could go on and on. But just look at what makes everything [Unwelcome language removed] peaches and cream: More money for middle class. Period. No need for productivity, since it follows on a leash. How about supply? Businesses running out of products? No! CUSTOMERS!!!

    Grow the middle class, and great shit happens all the way up the value chain. Never has it not worked. Never has something different worked.

    Fact. Look back.
     
    • Like Like x 2
    Last edited: Dec 18, 2013
  5. Woolleybugger

    Woolleybugger Mayor

    Joined:
    Sep 19, 2011
    Messages:
    4,586
    Likes Received:
    477
    Ben makes a great point which is the foundation of a book Greenspan just rolled out this week. The models are all wrong it seems. JO makes some kind of claim that because he looks at demand for a living, aggregate demand as defined by economics is stupid or silly because trade deficits somehow don't matter or something or other. Same ol JO, don't ever change big guy.

    But back to Ben since he grasped the truly scary concept in my post. Incomes must rise somehow for the people. Raising minimum wage is a start but that only affects a couple million people. There are still another 100 million or so paychecks to address.

    How can anyone really know what to do? I suggested that no one really does scientifically. Sure some can say they wrote a book or an article predicting this or that so they are now the God of forecasting. Its all just bullshit. A couple guys say they predicted 2008 and have been all over the web, TV and media selling their book about the pending apocalypse asking you to let them manage your money for a fee. Others like Steve Keen are remaking economics along with others to improve the model, its called MMT. Greenspan just came out with a very serious tome about very serious subjects written by a very serious Ayn Rand disciple that almost single handedly fucked up the world. What was his prognosis? People act irrationally and expect SS funds which fucks the entire economic world order up so instead of SS, lets save more money or retire to another country or some such total bullshit. Not a peep accepting blame for any of this debacle. Nope.

    My post was about the income statement of the nation. Its not perfect but there it is. Now on to the balance sheet.
     
  6. Woolleybugger

    Woolleybugger Mayor

    Joined:
    Sep 19, 2011
    Messages:
    4,586
    Likes Received:
    477
    It occurred to me that my top post was really talking about AD as a stand in for an income statement for the nation. In essence, that is exactly what AD represents. But what about the balance sheet? The balance sheet is very interesting and never really discussed. I would argue that our balance sheet looks something like this from a book value point of view:

    Personal Assets: cash, land, houses and assorted items on hand less liabilities, Basically the net worth of each person added up to create one ledger item representing total personal net assets.

    Business Assets: Cash here and abroad, total assets from each balance sheet less liabilities.

    Government Assets: Value of non-cash and equipment/man made assets from federal holdings and associated marketing rights to use that land and air and water plus all cash less liabilities plus all existing equipment, art, museums, libraries, etc.

    Foriegn assets held in the USA.

    This number is gigantic. I have no idea how to quantify it but here is a potential source of money that could be used for better purposes. What is a better purpose? At the macro-level it has to be about making AD bigger and having personal wealth and consumption grow for as many people as possible. Or it could be just make the AD number bigger and forget how it gets there, just make it bigger and leave it up to the markets to decide how to cut the pie. Or it could be to create a centrally planned economy that forces everyone into some model or goal (China). Whatever it is, we never seem to think along these lines because when we do, everyone starts screaming about communism and capitalism and marxism and socialism. So the balance sheet debate never, ever happens except for silly arguments about repatriation of corporate money or death taxes or redistribution schemes. Since we all fear being called a commie, no one ever really talks about this subject. But what if we actually could decide how best to utilize all these idle assets? What if we actually had a 10 year plan, a 20 year plan and everyone bought into it? Imagine.
     
  7. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    In re: back to Ben.

    Bear in mind, raising For to just $12 / hour and around 42% of our work force is directly effected, and it puts over half within $1 of the minimum. The upward pressure on wages within a few bucks above the minimum is tremendous. If new hires are getting $12 how long can an experienced and more senior worker be kept at $15?

    The wage minimum is an anchor that drags down wages above it. In fact, in human and market psychology, it's called an anchor-bias. Once a number is on our head (anchor point) we are unlikely to move from it one way or the other in value considerations.

    The impact is tremendous, if we boldly go where we did in the 50s.
     
  8. Woolleybugger

    Woolleybugger Mayor

    Joined:
    Sep 19, 2011
    Messages:
    4,586
    Likes Received:
    477
    I am for it but its not the long term solution all by itself. When I was a kid making 1.64 an hour, I could afford to drive my car and go on dates on that salary. My dad gave us a middle class life on 13 grand a year. Today, not only is the minimum wage too low but middle class is now a dream for most folks.
     
  9. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    The wage minimum is never a long term solution. It needs to be addressed anytime wages do not pace productivity. Three or four year periods at most of something not being done to determine whether it's too low or too high. Debrief, then correct.

    Waiting until it's ridiculously low, and then a bandaid solution to regain some of the loss is a path to zero, not recovery.

    Makes no sense, as Obama too has stated, to want good paying jobs, and not see the only path to it is making jobs we have (needed) good paying.

    No middle class, what's the point in free markets? You're free to enter, but nothing there to enter in service of.

    Big middle class and the opportunity for entrepreneurs is myriad and low-hanging.
     
    • Like Like x 1
  10. worldlymrb

    worldlymrb Environmental Fascism

    Joined:
    Oct 6, 2011
    Messages:
    11,833
    Likes Received:
    2,239
    Wouldn't the best way to increase demand, is to have LOWER prices so more consumers can afford to purchase?

    So how do you lower prices w/o cutting profits?

    1. STOP devaluing the currency.
    2. STOP increasing the cost of production thru cumbersome multi-level red tape and taxes
    3. Lower cost of labor
    4.increase production/efficency with newer capital investments.
     
  11. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    No. Google deflation. You'll get an idea if the nightmare worse than hyper inflation.
     
  12. fairsheet

    fairsheet Senator

    Joined:
    Sep 21, 2011
    Messages:
    23,036
    Likes Received:
    3,610
    IMHO, "demand" consists of TWO essential factors. One of course, is the market's ability to afford and thus demand. The other...goes to desire. The market needs to offer the consumer something it WANTS to buy (or thinks it needs to buy).

    If we look back over say....the last coupla hundred years, it's relatively easy to recognize these "desire drivers" during previous economic highs. In terms of our current economy though, I'm not sure what that might be?

    Former President Clinton has suggested that green products and tech would be fruitful in this regard. Yet...our current politic is actually actively resisting our indulging a green bubble.
     
  13. worldlymrb

    worldlymrb Environmental Fascism

    Joined:
    Oct 6, 2011
    Messages:
    11,833
    Likes Received:
    2,239
    Yeah right.. lower prices are a nightmare, especially for the poor.

    And higher prices will miraculously increase demand because Harvard economist say so.
     
    Last edited: Dec 20, 2013
  14. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    Yes; Harvard School of Economics, Yale School of Economics and even the Laissez faire Chicago School (the top three rated schools of economics ) would all agree that modest inflation is important in both its sign of growth in the economy and a margin of safety in avoiding the universally dreaded deflation all economists know the many downsides that result from it.

    No shit. Google it. It's so widely agreed as to border on common knowledge.
     
  15. worldlymrb

    worldlymrb Environmental Fascism

    Joined:
    Oct 6, 2011
    Messages:
    11,833
    Likes Received:
    2,239
    If there was no (or moderate) inflation, then there would no need to double minimum wage every few years would there?

    Inflation is good only for DEBTORS who can pay back loans over time with inflated (devalued) currency.

    Deflation is good for savers/poor.
     
  16. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    Just [Unwelcome language removed] google it. Is learning something which might not fit neatly within your cramped but comfortable dogma so offputting for you that you'll waste your time on this ignorant and circular nonsense?

    If so, waste your time. I'll cut my losses.
     
  17. worldlymrb

    worldlymrb Environmental Fascism

    Joined:
    Oct 6, 2011
    Messages:
    11,833
    Likes Received:
    2,239
    Will reply tonight in detail how I am not convinced deflation (lower prices) is bad for majority of Americans (bottom 85%)
     
  18. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    Cool. If it helps. What's worker productivity like when an iPhone sells for $300 and not $600 (newest / no contract )?

    What's the cost of a home that's deflating in value?

    If GDP shrinks per capita, and things sell for less, what is your kid's share of national debt?

    Where might investment go if the US economy is receding?

    What school of economics has your flat wage, prices of stuff we buy is less assumption or even anything close to it, even in a fuzzy math lala land econ model? Do you get that there is a thing folks in the economy studying game understand are relational or maybe you have heard in passing "ripples through the economy?"

    Do you wish you'd googled it before you exposed your ignorance of really basic stuff?
     
  19. worldlymrb

    worldlymrb Environmental Fascism

    Joined:
    Oct 6, 2011
    Messages:
    11,833
    Likes Received:
    2,239
    First, we must agree that moderate declining prices is a BENEFIT for workers as they are GAINING PURCHASING POWER. Whereas, moderately increasing prices has NO IMPACT ON RICH, and impacts the poor greater.

    If you cannot agree to that simple principle, then you might as well join the establishment republican party because you will fit right in with the party of the rich.

    To answer your questions...

    What's worker productivity like when an iPhone sells for $300 and not $600
    HIGHER. Because MORE people can AFFORD $300 who other wise could not afford the phone at $600, so a INCREASE IN DEMAND would result.

    SELLING IPhone@$600 benefits the rich as they will sell fewer phones requiring fewer workers, capital ect..., yet receive mega profits.

    Even moderate inflation can create bubbles if it is the result of Monetary Policy (Housing Bubble), The problem with bubbles is once they POP, results in a rapid decline in prices. This is the market's way of PUNISHING BUBBLE MAKING.
     
    Last edited: Dec 21, 2013
  20. Ben Arnold

    Ben Arnold Council Member

    Joined:
    Nov 30, 2013
    Messages:
    859
    Likes Received:
    153
    Why must I agree with that? It ignores what economists would suggest is a good thing for our economy that must expand to grow the need for more workers.

    So no. I don't agree with your unsubstantiated premise, thus nothing flowing from it has merit.
     

Share This Page