lesson in economics that even a simple minded right winger can understand

[Free Thinker]

Quote from Mav88:

Are you kidding me? you actually think that the economics of a perishable item is the same as the economics of information and services?

You have have absolutely no business talking about economics, go back to your favorite topic- bashing christians

perishablility changes it only slightly. a retailer has a shipment of dresses. they are not perishable but fashions change quickly.

really, you dont understand these concepts are you just joshing with me?

 

[CaptainObvious]

Quote from Free Thinker:

yea but you are way off subject here.

I know, but I'm trying to point out it's not as simple as giving the drunk more money and expecting him to now be responsible on how he spends it. Creating demand is tricky business.

 

[Epic]

Quote from Free Thinker:

It's good for the NY Times to give space to conservatives to present their views on economics to counterbalance Paul Krugman and the other liberals on its payroll. But surely they can do better than Mulligan.

Here Mulligan is misleading his readers. He would like you to believe that the economic theory that the Obama Administration relies on is based on a simple logical error, and that economic analysis tells us that there is no such thing as "stimulus" or the "multiplier". The truth, however, is that the economic theory behind the Obama Administration's stimulus proposals is completely conventional, and it is Mulligan who is making a simple logical error. To whit:

In describing the first flaw in the Obama Administration's reasoning, Mulligan says that when the government takes income from one person and gives it to another there is not necessarily a net increase in aggregate demand - the person receiving the transfer increases her spending while the person paying for the transfer reduces hers. Mulligan argues that this logic holds whether the government raises taxes or borrows to fund the transfer. But there's a huge difference. If the government borrows to finance the transfer, it is borrowing from people who desire to save rather than spend. So the person who pays for the transfer does not reduce spending, and the net effect is an increase in demand.

Let's illustrate this with a simple parable. Robert is a carrot farmer. He has a lot of carrots sitting in the ground but no one wants to buy them, so he does not hire anyone to dig them up. Sylvie normally works for Robert picking his carrots, but he has no work for her, so she has no income, so she does not wish to buy any carrots. If Robert had some income he would pay Sylvie to dig up the carrots and buy them himself, but alas no one is buying his carrots so he has no income either. Kofi is a hobo living on the edge of town with no money and therefore no ability to buy carrots. Aya is a wealthy retiree who has plenty of money but has had her fill of carrots and so does not want to buy carrots either. Instead she wants to bury her money in her back yard to be spent at some unspecified time in the future. The economy is in a depression: there are goods available to be purchased, but no one to purchase them.

Now Barack Obama appears in this community and says to Aya: let me borrow some of the money you wanted to bury in your yard. I promise I'll pay it back. Aya is indifferent between burying her money in the yard and giving it to Obama, so she says sure, what the heck. Obama takes her money and gives it to Kofi. Kofi now has income to spend on carrots, so he goes to Robert's store and asks for some carrots. Robert says sure, let me call Sylvie and get her to dig some up for you. Sylvie comes in and digs up the carrots. Kofi pays Robert the money, which he divvies up between Sylvie (in the form of wages) and himself (in the form of profits). Robert and Sylvie now have some money to spend, so they both show up to Robert's store and ask for carrots; Sylvie goes back out in the field and digs up some more, earning more income for her and Robert, which inspires them to want more carrots. At some point Sylvie's back is hurting from harvesting all those carrots, so she tells Robert she can't work any more. But people are still buying carrots, so Robert looks around and asks Kofi if he'd like a job. Kofi says sure, and starts harvesting carrots, earning income, spending it on carrots, and so on and so forth.

This is a very logical, conventional story. But of course any macroeconomist worth his salt, even if he's only taken one or two macroeconomics courses, will be able to poke holes in it. What if Aya is unwilling to lend her money to Obama unless he pays her a higher rate of interest than she can get by burying the money in the ground? What happens when Sylvie and Kofi are unwilling to dig more carrots unless they are paid higher wages? What if Robert, Sylvie, Kofi and Aya are worried about the future taxes they'll have to pay to repay the loan from Aya to Obama? All of these factors can reduce the magnitude of the increase in aggregate demand brought about by the transfers from Aya to Kofi. But a macroeconomist seeking to dismiss the effectiveness of the government's stimulus efforts needs to explain why these offsetting factors are likely to be large. (In fact, at a time when market interest rates are near zero and the unemployment rate is 8.3 percent, the offsetting effects are almost certainly very small.) But Mulligan doesn't do this. He makes an illicit assumption on square 1 (Aya transfers money to Obama that she would have spent rather than buried in her yard) and claims that the whole logical argument underlying the conventional story is therefore flawed. That's just plain bad macroeconomic thinking, beneath the standards one should expect from the New York Times.

Oh, and the second flaw in Obama's logic? I think Mulligan is saying that Robert won't provide carrots to Kofi unless he gets a profit; but in my story he does earn a profit, and I don't see any reason he wouldn't make a profit. If Mulligan wants to say that in the current economic environment businesses won't sell to eager customers because their costs are too high he's welcome to do that, but it would be nice to substantiate that claim.

http://gecon.blogspot.com/2012/08/why-does-new-york-times-allow-casey.html#!/2012/08/why-does-new-york-times-allow-casey.html

There is a significant flaw in the analogy that pretty much destroys the entire argument. The analogy is based on the premise that "savers" who do not have an immediate consumption motive effectively remove wealth/money from the system. It even goes so far as to suggest that the person might "bury it in the backyard". When a person makes an argument with such language, she is usually attempting to be pithy without recognizing that this is a pivotal statement in the argument.

This is the breakdown for the person who doesn't understand economic reality as it relates to any type of monetary exchange including consumption and taxation.

The main point is that almost nobody in this country removes money from the system. Almost no one hoards any appreciable amount of cash in a literal sense, under the mattress, in a mason jar, or even in a home safe. The portion of the money supply held outside of the system is realistically a small fraction of a percent.

So in a more realistic version of the analogy, Aya does not bury her money in the backyard, but instead either deposits it in a bank account, or in an investment account, depending on whether she has an immediate profit motive. Either way the money actually remains in the system. Once at the bank, the institution must lend it out as a condition of survival. In lending it out, they are choosing which borrowers they presume might have an acceptably efficient/profitable use for it.

Although the author argues that taxation creates demand whereas savings do not, that is fundamentally incorrect. This should be obvious to anyone who has either studied economics or has committed any decent amount of critical though to the situation. Interestingly, according to the multiplier effect resulting from fractional reserve lending, demand is much more easily created by allowing the person to save the money rather than by a tax transfer of wealth.

That is, when Aya is taxed and that money is given to Kofi, there is no demand multiplier. If we assume that Aya would've hoarded the money, then there is an increase in demand at a ratio of 1:1. Kofi cannot spend more than the amount of the tax transfer.

OTOH, even in a relatively conservative fractional reserve system which requires 20%, Aya's deposits result in a 3.5X multiplier. In our system it is actually a 9X multiplier. So if Aya is allowed to "save" the money that would've been taxed, there will now be a 9X greater increase in demand than if that money were transferred via taxation.

My personal opinion is that in the real world it is all a moot point because we've built our entire system around bank deposits. Even if Aya is taxed and that money is given to Kofi, it will soon end up back on deposit at the bank and the greater multiplier will be realized soon enough. But as it pertains to this thread, the premise of the authors argument is fundamentally flawed.

 

[Mav88]

Quote from Free Thinker:

perishablility changes it only slightly. a retailer has a shipment of dresses. they are not perishable but fashions change quickly.

really, you dont understand these concepts are you just joshing with me?

you picked another perishable item in your typical dishonest way.

Medical care is not perishable and doesn't fit the simple model, neither does financial services, or coding... the economics is different. A massage therapist can simply do something else until demand comes back for that particular service.

 

[Mav88]

Quote from Free Thinker:

lol. you obviously havent farmed. or studied economics much.


carrots are perishable they have to be sold within a few days. robert knows the customers will not suddenlt get money because the republicans just killed the food stamp program killing all demand. there is that word that keep popping up. DEMAND. without it robert has no incentive to hire or harvest.

I have worked on a farm, and if it comes down to losing the crop or at least getting it harvested for the chance you can dump it for some small price, one will always take the latter.

You didn't answer the problem that if you give Kofi money then Robert still has no income to pay for harvesting... huge gap there.

Farming, thinking, economics. Stay away from these.

 

[Free Thinker]

Quote from Mav88:

A massage therapist can simply do something else until demand comes back for that particular service.

at least you have admitted that the massage therapist has no need to hire employees with out demand. are we making progress?

 

[Brass]

Quote from Epic:

...So in a more realistic version of the analogy, Aya does not bury her money in the backyard, but instead either deposits it in a bank account, or in an investment account, depending on whether she has an immediate profit motive. Either way the money actually remains in the system. Once at the bank, the institution must lend it out as a condition of survival. In lending it out, they are choosing which borrowers they presume might have an acceptably efficient/profitable use for it...

In keeping with the scenario, what if businesses aren't borrowing because there is no demand for their wares because potential consumers don't have the money to buy product? However full the tank may be, the motor only works upon ignition. I think you missed the point of the analogy.

 

[Ricter]

Quote from Max E. Pad:

The reason people cant afford the carrots is because they cost too much, because all you guys think you can inflate the price of carrots enough to make people want to buy again.

The carrots cost too much because they've inflated (excessively), or because wages have stagnated (or worse)? What do the historical data, on inflation per productivity and growth vs. wages per productivity and growth, say?

 

[Free Thinker]

Quote from Mav88:

I have worked on a farm, and if it comes down to losing the crop or at least getting it harvested for the chance you can dump it for some small price, one will always take the latter.

really? i grew up on a farm and owned one until about 5 years ago so i more than "worked" on a farm.
harvesting is not free. it costs a lot of money to harvest,ship and store the crop. why would he invest that kind of money on the off chance that he migh be able to sell them for a "small price" that doesnt come close to the harvesting costs??

 

[Ricter]

Quote from Mav88:

I have worked on a farm, and if it comes down to losing the crop or at least getting it harvested for the chance you can dump it for some small price, one will always take the latter. .

Nope, not always. There is a cost to harvest, so you have to look at that by the acre against expected yield/acre * sale price. We're examining that very scenario right now on my farm, which crop has significant, but not total, hail loss.

Edit: FT beat me to it.