tag:blogger.com,1999:blog-3545486259853481740.post4549433164298901102..comments2023-08-09T05:43:38.350-07:00Comments on Competing Hypotheses: The Weekly N&C for January 12th, 2009L.Douglas Garretthttp://www.blogger.com/profile/14850812403220127553noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-3545486259853481740.post-78547921507322783152009-01-16T04:49:00.000-08:002009-01-16T04:49:00.000-08:00Personal Note: Welcome, Kulamata ("K"). It is grea...Personal Note: Welcome, Kulamata ("K"). It is great to see you here!<BR/><BR/>***<BR/>On-Topic<BR/><BR/>Speaking of the specific point of: "You stimulate demand by making sure people have money, and that it will not increase in value by being saved."<BR/><BR/>I had the pleasure of a fairly deep discussion tonight with a client that keyed on one aspect of that point: The act of government stimulus functions best when the demand created by the public-project consumption is a demand for value-added materials where the entire (or at least most of) the supply chain that produces that material is domestic industry. Furthermore, there is a trade-off to be considered when looking at *how* value-added the end material supplied to the public-work is... buying a couple more F-22A fighter jets to help the Air Force replace old interceptors (a known need that has been deferred) is likely *not* good stimulus as while the material supplied is highly value-added, the supply chain is so "narrow" that the effect of the public-work helps support the wage base of too few workers.<BR/><BR/>If, on the other hand, the public-work requires a large volume of modestly value-added activity that provides a quality wage to a larger number of workers in the supply chain, then the effect could be quite significant.L.Douglas Garretthttps://www.blogger.com/profile/14850812403220127553noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-68025710086598416832009-01-15T17:23:00.000-08:002009-01-15T17:23:00.000-08:00Re Will. "I really don't see how one could think t...Re Will. <BR/>"I really don't see how one could think that artificially increasing wages could do anything but reduce employment. Reduced employment means more people who buy almost nothing, which is going to have a strong downward pressure on demand."<BR/><BR/>I certainly did not intend to suggest artificially increasing wages; if I understand the objection here, I was instead suggesting that wages falling more slowly ("sticking") than the economy was deflating tended to be a stabilizing factor. <BR/>...<BR/>"Imagine we decide the automakers are sick because cars don't cost enough, and that we should make car prices higher, and then increase wages to allow people to buy those cars." <BR/><BR/>Why would anyone do or advocate that? Competition alone would make that futile. Certainly nothing I intended to propose. <BR/>...<BR/>"You can't stimulate demand by inflating wages and prices in much the same way you can't stop inflation by fixing prices."<BR/><BR/>You stimulate demand by making sure people have money, and that it will not increase in value by being saved. (The deflation trap.) Giving them jobs works well, and creating jobs privately is preferred. Those big infrastructure projects get built by private companies. Funded by the government, but built by the private sector. But education, park maintenance, unemployment insurance, and medical assistance will come primarily from the public sector. <BR/><BR/>It's certainly true that execution counts; some projects have a good payback, some none at all. Roads are usually good, bridges to nowhere, not. <BR/><BR/>You might look at the OPA in WWII to see what governmental control can do to limit inflation. It was broadly effective, even if there were imperfect aspects. Not anything you'd want to see in any but extreme circumstances of course. But it did work.Kulamatahttps://www.blogger.com/profile/07276270921202329642noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-28454559205443378152009-01-15T10:57:00.000-08:002009-01-15T10:57:00.000-08:00I've been meaning to put in a "read this" about th...I've been meaning to put in a "read this" about these fine fellows, and <A HREF="http://www.marginalrevolution.com/marginalrevolution/" REL="nofollow">*here it is*</A>.<BR/><BR/>Economics, and historical context, by two very competent writers.<BR/><BR/>The ongoing analysis threads on Keynes General Theory -chapter by chapter- alone makes it worth your time.L.Douglas Garretthttps://www.blogger.com/profile/14850812403220127553noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-42543623267578805412009-01-14T20:49:00.000-08:002009-01-14T20:49:00.000-08:00@AllA little more pondering by me on part of this....@All<BR/><BR/>A little more pondering by me on part of this.<BR/><BR/>If the key motivation of an intervention (like TARP) is to make capital resources whole again after a round of capital destruction in the markets, I don't see how that does bugger-all to directly improve the concurrent demand-side failure.<BR/><BR/>If the key motivation of an intervention is "stimulus", it is momentarily possible to boost the demand side by various mechanisms that functionally subsidize the wages of labor in certain industry sectors... very inefficiently, but possible. That was much of the gain made by the early New Deal cartel rules interventions. It created a class-system within labor: Protected jobs had a good wage and lived very well in the deflated price environment. The rest of common labor lined up for make-work at dirt wages just to get by.<BR/><BR/>If the key motivation of an intervention is to generally increase demand (to then get some indirect effect on wage maintenance and job security) then projects like concreting huge portions of the Japanese coastline in the name of "erosion control" (which didn't work; different topic though) were just dumb. The concrete was mostly imported and the "private" labor involved in the total cost of the projects was a relatively small part of the total project cost.<BR/><BR/>So if the goal is to be in part reached by infrastructure projects, they had best be far better targeted than many of Japan's were.<BR/><BR/>*Note: I generally do not support government wage subsidies.*L.Douglas Garretthttps://www.blogger.com/profile/14850812403220127553noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-61034490828479091692009-01-14T16:58:00.000-08:002009-01-14T16:58:00.000-08:00(damn interface)(continuing) Imagine we decide the...(damn interface)<BR/><BR/>(continuing) Imagine we decide the automakers are sick because cars don't cost enough, and that we should make car prices higher, and then increase wages to allow people to buy those cars. What result can you expect?<BR/><BR/>Will Chrysler suddenly start making money because of the higher prices? Not really. They will have to cut employment to balance the higher wages, and a lot of people will elect not to buy a car at the inflated price.<BR/><BR/>Unemployment will go up and demand will decrease. <BR/><BR/>Employees who haven't yet been laid off by Chrysler will worry they may be next, and they will stop buying a lot of things. All the companies that used to get business from Chrysler employees will find their own revenues going down too. It's an endless spiral.<BR/><BR/>You can't stimulate demand by inflating wages and prices in much the same way you can't stop inflation by fixing prices. (See Zimbabwe)Willhttps://www.blogger.com/profile/17302138253612433688noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-18717776720981227572009-01-14T16:44:00.000-08:002009-01-14T16:44:00.000-08:00I really don't see how one could think that artifi...I really don't see how one could think that artificially increasing wages could do anything but reduce employment. Reduced employment means more people who buy almost nothing, which is going to have a strong downward pressure on demand.<BR/><BR/>In addition, high unemployment will make those who *do* have jobs less confident and that will reduce spending and further reduce demand.<BR/><BR/>Frankly I am at least as concerned about the US following the Japanese lead from the late-80's property/stock bubble. Japan spent an enormous amount of money propping up failing businesses and building infrastructure. <BR/><BR/>At least one outcome from the policy was that many companies which were already sick before the bubble popped ate the lion's share of economic resources and staggered along generating little or no growth. Newer companies with expanding markets couldn't get resources to grow. Improved infrastructure doesn't generate ongoing economic benefits if there is no growth to make use of it.<BR/><BR/>If we continue to support effectively bankrupt companies like the US automakers, we'll be heading down the same path as Japan in the 90s.<BR/><BR/>Now back to the orginal topic of the post. Imagine we decide that low car prices are responsible for theWillhttps://www.blogger.com/profile/17302138253612433688noreply@blogger.comtag:blogger.com,1999:blog-3545486259853481740.post-10401888977087796562009-01-13T23:15:00.000-08:002009-01-13T23:15:00.000-08:00A little more from "K" to me, regarding the paper ...A little more from "K" to me, regarding the paper in its particulars:<BR/><BR/>"The foregoing (First Blockquote) was written before I’d read the full paper, and I feel that the summary was a bit misleading. <BR/><BR/>"As to the paper itself: <BR/>For me, the paper fails the Occam test. For one example, insider/outsider friction as the cause of the regression in the 37-39 time period as opposed to the reduction in governmental spending demonstrates coincidence, but (for me) causality is not shown, let alone proven. For a second example, saying that the boom of the forties was the result of changing cartel policy is (to me) just a blunder. The war created a shift from inadequate demand to insatiable demand. And that demand continued after the war when rationing was lifted, and there were large wartime savings just sitting there... Using those very large changes to explain very large effects seems much more reasonable. This may be (or not) why I haven't seen or heard of a body of work based on this paper, let alone broad acceptance. Sometimes the obscurity is justified."<BR/><BR/>***<BR/><BR/>Again, my thanks to "K", who has helped me greatly with this matter.<BR/><BR/>LDGL.Douglas Garretthttps://www.blogger.com/profile/14850812403220127553noreply@blogger.com