Do Low Interest Rates Really Help The Economy?

[talk2glenn]

Price inflation actually discourages consumption. Do you want to buy more of something when the price goes up?

This is wrong. Inflation rates are, by definition,a function of change in price over time, and are typically quoted at an annualized rate. If you believe prices will be 4% higher this time next year than they are today, are you more or less likely to put off discretionary demand? On the other hand, if you believe prices will be lower this time next year, how does this affect your calculus?

If we assume that price levels must either be constant, increasing, or decreasing over time, and we further assume that consumption is a desirable economic outcome (that is, nobody benefits when you produce something, but don't trade it on the market), then it follows that price inflation is preferable, because it encourages consumption and discourages saving.

It is true that, at a fixed moment in time, consumers prefer lower to higher prices. The inflation rate in a fixed period is zero or more accurately irrelevant, however.

There may be some people who got some utility out of these things. They were just an example of something that many people did not really get any utility out of. I am suggesting that this is a general trend in a high-growth economy. In that case, many people would be working harder to keep up with consumption trends and pay off the debts accrued, while other people would be enjoying net income and profits due to those consumption trends.

Who benefits is irrelevant. The question is, given scarce resources, what distribution allocation maximizes aggregate utility? A competitive market, under every model, consistently (though, depending on the model and the desired outcome, not exclusively) achieves the most efficient result. Not everyone wins in a competitive environment, however. The losers tend to complain, and demand non-competitive intervention. This benefits these individuals, to the detriment of others and/or the whole (someone loses so that somebody else can gain - in economics we call this a Pareto inefficiency).

It also needs to be understood how marketing and other factors causes people to consume with the hope of gaining happiness without actually wanting the goods and services they are buying.

No, it does not. No rational individual is convinced to buy something they don't want by marketers. Marketing is defined as convincing consumers that your product satisfies a demand they already have. Marketers don't create the demand; they match specific products to specific needs.

This is the result of associations between immaterial things like happiness, peace of mind, friendship, and love and material commodities that are supposed to bring them. In reality, the high GDP economy is what is repressing these non-material commodities by reducing people's free time and ability to devote time and energy to non-material aspects of their lives.

This is nonsensical. Compare the lifestyles of individuals in high-GDP to low-GDP economies. It is absolutely true, without exception, that "wealthy" individuals have more free time than "poor" ones. By definition, the more you make per hour (GDP per capita per hour), the fewer hours you need to be productive to meet your staple demand. This leaves you with an increased number of hours to divide between leisure time and pursuit of discretionary demand.

It is a farce to suggest that individuals in wealthier economies are "slaves to consumption". Wealth is, and always has been, a liberating mechanism. Modern market economies create wealth more efficiently, and distribute that wealth more equitably, than any social systems in human history.

This reproduces the same effect of a high GDP economy, only in a more aggressive way. The issue is how a stable economy can emerge with low or negative GDP growth where competition to increase share of GDP gives way to adaptations to achieve economic well-being with less consumption and earning. Theoretically, both private consumers and businesses should be able to adapt their operations to adjust to lower GDP, deflation, etc. and maintain non-disasterous levels of production and consumption - but how?

Of course people could adapt to a lower GDP environment. The how is not mysterious or alien. GDP is a dollar measure of purchasing power. Less GDP means less purchasing power; poor people need to work harder to afford less.

 

[brainstorm]

This is wrong. Inflation rates are, by definition,a function of change in price over time, and are typically quoted at an annualized rate. If you believe prices will be 4% higher this time next year than they are today, are you more or less likely to put off discretionary demand? On the other hand, if you believe prices will be lower this time next year, how does this affect your calculus?

I see your point, but inflation is simply not sustainable as proven by various deflationary bubble-bursts. In fact, it would only be sustainable if the economy were centrally controlled, which it isn't presuming the free market is as free as its critics like to claim.

Also, this logic of "buy now because prices are going up," would cause people with money to spend to spend frivolously on items they think they might need, but would end up either re-selling or discarding those items later on, which would result in deflation of second-hand markets and/or more economic waste. Granted, everyone loves a free-for-all but is it ultimately the best form of economy?

If we assume that price levels must either be constant, increasing, or decreasing over time, and we further assume that consumption is a desirable economic outcome (that is, nobody benefits when you produce something, but don't trade it on the market), then it follows that price inflation is preferable, because it encourages consumption and discourages saving.

You are assuming that more consumption and less saving create a better quality of life. This is simply not everyone's opinion. Some people would like to live simpler lives, consuming less, and being able to enjoy non-material things more as a result of the less intense economic demands of their work and consumption activities. Such people are willing to work to maintain a certain standard of material consumption but they have no desire to spend more time, energy, and resources than necessary on materialism and economic activities generally.

It is true that, at a fixed moment in time, consumers prefer lower to higher prices. The inflation rate in a fixed period is zero or more accurately irrelevant, however.

Slowly deflating prices encourage people to take better care of the things they have to stretch out their utility longer, thus increasing the savings of waiting longer to make a purchase. If you knew, for example, that you could buy a new car next year for 10k or wait five more years and get it for 8k, you would have an incentive to take good care of your current car, drive it less, etc. so you could spend 2k less when you did eventually buy the new car.

No, it does not. No rational individual is convinced to buy something they don't want by marketers. Marketing is defined as convincing consumers that your product satisfies a demand they already have. Marketers don't create the demand; they match specific products to specific needs.

I believe there is rational consumption and production, but there is also a great deal of irrational, mostly emotionalist, economic activity. Whether marketers do it directly or consumers themselves, brand status promotes irrational spending to acquire one name or logo over another. Likewise, most unhealthy food is consumed due to irrational short-term gratification or impatience of cooking oneself or waiting longer than necessary for healthier food. Few people organize their lives and schedules rationally, preferring instead to follow their flights of fancy. Additionally, people are often anti-critical conformists who consume according to the logic of what will make them popular or otherwise gain social approval instead of what would benefit them most either in terms of quality or price.

This is nonsensical. Compare the lifestyles of individuals in high-GDP to low-GDP economies. It is absolutely true, without exception, that "wealthy" individuals have more free time than "poor" ones. By definition, the more you make per hour (GDP per capita per hour), the fewer hours you need to be productive to meet your staple demand. This leaves you with an increased number of hours to divide between leisure time and pursuit of discretionary demand.

The reason is because wealthy individuals in higher GDP economies make more money and are able to spend and consume more by spending more money on services and other labor. If wealthier individuals (and other individuals for that matter) would spend and consume less, there would be less labor-hour demand and lower GDP. Yes, higher GDP allows more people to buy their time back through investment income, but the negative result of this is that those who don't become exempt from time-consuming labor, for whatever reason, have less free time because they have to produce more profit and more consumption opportunities for those who do.

It is a farce to suggest that individuals in wealthier economies are "slaves to consumption". Wealth is, and always has been, a liberating mechanism. Modern market economies create wealth more efficiently, and distribute that wealth more equitably, than any social systems in human history.

You don't understand consumption at the social-psychological level. Some consumption is indeed liberating. Much of it is, however, habit-forming and maintenance. People get bored, sad, grumpy, etc. and consume for comfort. When they aren't consuming, they can feel a sense of emptiness or lack of direction in their lives because they're not used to doing activities that don't involve consumption. If many people are accustomed to spending their time consuming socially, people who suggest non-consumption social activities may be eschewed as being "odd," "dull," or "cheap." Status becomes a primary goal in social life. These effects are not liberating. They enslave people to maintaining a certain lifestyle or risk losing friendship and peace of mind.

Consumption would be liberating if people did it to augment their regular activities instead of as a basis for them.

Of course people could adapt to a lower GDP environment. The how is not mysterious or alien. GDP is a dollar measure of purchasing power. Less GDP means less purchasing power; poor people need to work harder to afford less.

If poor people are working harder to afford less, that would mean they are producing more and consuming less of it. If that was the case, then wouldn't GDP be going up due to greater economic productivity? If GDP would legitimately go down, people would be working less and purchasing less. If they were getting more utility out of what they did purchase, quality of life would not decrease although people would have more free time to live life outside of work and consumption.

 

[airborne18]

I don't think there is a meaningful correlation between the GDP and CPI. There is a meaningful relationship between real wages and disposable income, which is impacted by inflation.

The issue that we are facing is that the impact of the recession on economies of scale. It is not that costs are rising, but that certain retail commodities are not being discounted. PC sales is one that comes to mind. We are at the end of the back to school PC buying season, and it is one of two buying seasons for computers, yet there are no real steals.

The dilema faced by all companies is that they have to either raise top line sales, and improve bottom line return. This past year most companies had increased profits, but not through top line growth. It is a trend that will not continue this next year. You can only cut costs to a point, and that has occured. Next they will have to control the cost of sales and adjust their model for lower sales volume.

The CPI might reflect this, but the GDP will probably not. They are both trailing indiciators of the macro economy. There many ways to debate numbers.

I just do not see the value of looking at the GDP when we have 17million unemployed.
That coupled with the fact that the middle class has not only lost wealth, but their precious credit ratings.

For most of the decade financial talking heads have been huffing and puffing about how everyone should be getting cheap home equity loans and using thie ecquity. How stupid you were if you sat with equity in your home.. Okay so people did that and spent.

Now there is not going to be equity for 5 years, at best. And a part of the middle class has been lost to TRW credit ratings. And we have a whole mass of people who are rebuilding their retirements and careers.

Those are the indicators and fundamentals that the talking head economists on TV forget.

 

[turbo]

To get back to the OP, low interest rates punish people who save and reward people who borrow and spend. That is not responsible fiscal policy, but it has been the primary goal of the Fed for longer than I want to remember. Greenspan and Bernanke are crooks of the highest order, keeping Wall Street happy while stealing income from the taxpayers who are prudent enough to save.

 

[airborne18]

To get back to the OP, low interest rates punish people who save and reward people who borrow and spend. That is not responsible fiscal policy, but it has been the primary goal of the Fed for longer than I want to remember. Greenspan and Bernanke are crooks of the highest order, keeping Wall Street happy while stealing income from the taxpayers who are prudent enough to save.

Low interest rates keep our national debt interest payments somewhat managable. It is also why they started pushing the debt to shorter maturities, to nickel and dime the interest cost.

 

[brainstorm]

The dilema faced by all companies is that they have to either raise top line sales, and improve bottom line return. This past year most companies had increased profits, but not through top line growth. It is a trend that will not continue this next year. You can only cut costs to a point, and that has occured. Next they will have to control the cost of sales and adjust their model for lower sales volume.

This logic presumes a non-competitive supply side. It is completely contrary to the dynamics of supply and demand, where price-competition among firms is supposed to ensue until a price-equilibrium is reached that eliminates the glut. Firms may adjust their production to the new price level by reducing output and shifting to produce some other product instead, but the way you're describing the process would only make sense in a monopoly-type market where firms can control price as a means of generating as much or as little revenue as they please.

I just do not see the value of looking at the GDP when we have 17million unemployed.
That coupled with the fact that the middle class has not only lost wealth, but their precious credit ratings.

Both of these really just reflect a gap between expected/desired income and what people are actually getting. Once they adjust to lower income levels, they will not miss borrowing and they will be happy to get by with more free time than less.

For most of the decade financial talking heads have been huffing and puffing about how everyone should be getting cheap home equity loans and using thie ecquity. How stupid you were if you sat with equity in your home.. Okay so people did that and spent.

Now there is not going to be equity for 5 years, at best. And a part of the middle class has been lost to TRW credit ratings. And we have a whole mass of people who are rebuilding their retirements and careers.

A lot of economic restructuring is going on, but a lot of it isn't going to lead anywhere either because it is oriented toward re-establishing a level of income that doesn't make sense anymore. If, for example, a person who makes 100k/year in income loses 80% of their income and re-stabilizes, they are going to be wondering what they ever did with that extra $80k/year. They're going to realize that all they really did was invest it and plan to retire rich, but in the meantime they've adjusted their expenditures to a level where they can live normally on much less - so they might be happy to get a little more disposable income, but if they are living stably with 20k/year, why would they need to return to make 80k?

In fact, I would even venture to say that a large proportion of people's income has to be spent in relatively immaterial ways for the economy to sustain so much spending. If people took all the money they spend on stock trading, insurance, entertainment, and other immaterial things and tried to buy more cars or food, there wouldn't be enough cars and food to go around.

 

[turbo]

Low interest rates keep our national debt interest payments somewhat managable. It is also why they started pushing the debt to shorter maturities, to nickel and dime the interest cost.

You need to realize that for people to spend, they need to have a reasonable expectation of earnings. If people who save their income cannot rely on their money being available in the long term, they will not spend. If people are comfortable with the stability of the economy, they will spend more, improving the outlook of the economy. If people with savings are distrustful and refuse to spend, that is is destructive to the economy.

The Fed kowtows to Wall Street and screws citizens in the process by keeping prime interest rates so low that banks can borrow OUR money for free to speculate with. This has to be stopped.

 

[CRGreathouse]

To get back to the OP, low interest rates punish people who save and reward people who borrow and spend.

They hurt people who hold money, but not automatically those who save.

 

[turbo]

They hurt people who hold money, but not automatically those who save.

Would you like to elaborate? I'd be happy to see how you think low interest rates do not penalize people who have saved for their retirement, only to drop into this (~0) percent interest pit.

 

[brainstorm]

I wouldn't say low interest rates reward people who borrow and spend. It's more like they seduce people who want to spend into borrowing so that they'll be a source of interest income for others when interest rates go up. I wouldn't call it a reward to spend your life paying someone else's interest income.

 

[turbo]

Instead of having the Fed jerking us smaller savers/investors around to keep Wall Street happy, they should adjust the prime rate to keep us little fish earning a modest return on our nest eggs, and letting Wall Street fend for themselves. If the big banks and investment firms can't survive without corporate welfare, they deserve to die or be broken up.

 

[airborne18]

This logic presumes a non-competitive supply side. It is completely contrary to the dynamics of supply and demand, where price-competition among firms is supposed to ensue until a price-equilibrium is reached that eliminates the glut. Firms may adjust their production to the new price level by reducing output and shifting to produce some other product instead, but the way you're describing the process would only make sense in a monopoly-type market where firms can control price as a means of generating as much or as little revenue as they please.
.

Market contraction = lower demand = cost over less units = higher price.

Both of these really just reflect a gap between expected/desired income and what people are actually getting. Once they adjust to lower income levels, they will not miss borrowing and they will be happy to get by with more free time than less.
.

What? Huh? The GDP? Huh?

A lot of economic restructuring is going on, but a lot of it isn't going to lead anywhere either because it is oriented toward re-establishing a level of income that doesn't make sense anymore. If, for example, a person who makes 100k/year in income loses 80% of their income and re-stabilizes, they are going to be wondering what they ever did with that extra $80k/year. They're going to realize that all they really did was invest it and plan to retire rich, but in the meantime they've adjusted their expenditures to a level where they can live normally on much less - so they might be happy to get a little more disposable income, but if they are living stably with 20k/year, why would they need to return to make 80k?

In fact, I would even venture to say that a large proportion of people's income has to be spent in relatively immaterial ways for the economy to sustain so much spending. If people took all the money they spend on stock trading, insurance, entertainment, and other immaterial things and tried to buy more cars or food, there wouldn't be enough cars and food to go around.

Your second paragraph is on point, and that has been the goal of the green movement, and this has been the stated goal of the administration. That is why the first thing that occurred was a freeze on any defense spending. I call them the 2% crowd. The ones that always state that any problem could be solved if we just spend 2% of what we spend on defense.

That is why the stimulus was wasted. Stimulus from the bottom up does not work. Supply-side does work, and the last 2 years and next 2 will prove that fact, and painfully so.

 

[talk2glenn]

The Fed kowtows to Wall Street and screws citizens in the process by keeping prime interest rates so low that banks can borrow OUR money for free to speculate with. This has to be stopped.

This is not true. The Fed does not set the prime interest rate; the market does. It responds to several forces, including the Reserve Board and the US Treasury, but the player of largest import is the consumer debt markets - consumers and producers set clearing prices as a function of their competing interests subject to supply and demand.

Further, the prime rate is loosely defined (though it is a non-standard, non-technical term) as the base rate charged on new corporate loans. As in, money borrowed by consumers, from corporations. It is THEIR money borrowed by YOU so YOU can speculate.

Instead of having the Fed jerking us smaller savers/investors around to keep Wall Street happy, they should adjust the prime rate to keep us little fish earning a modest return on our nest eggs, and letting Wall Street fend for themselves. If the big banks and investment firms can't survive without corporate welfare, they deserve to die or be broken up.

Again, the Fed does not set the prime rate, and it has nothing to do with the rate of return on savings and investments.

Would you like to elaborate? I'd be happy to see how you think low interest rates do not penalize people who have saved for their retirement, only to drop into this (~0) percent interest pit.

Clearly, he is referencing investments, which are not the same thing as savings (but they are often used interchangably). Lower interest rates penalize cash holdings (saving), but rewards investments (which are a form of consumption).

It is important to differentiate between savings as defined technically in economics (money not spent), and savings as defined in personal finance (low risk investments). Direct investment is a form of consumption (you are effectively buying a tiny fraction of some factory in Malaysia, if you will), and is not harmful to an economy.

In general, a positive economic objective is maximal cash flow - the longer individuals are holding cash, the longer the economy is going without utilizing that individuals excess productive capacity towards creating growth. Higher interest rates tend to encourage holding cash both directly, in the way you guys are thinking, by discouraging lending and encouraging leaving your money in a savings account, and indirectly, by increasing the market value of currency and reducing the rate of inflation, which has a cyclical effect of further depressing consumption and encouraging savings - starving the economy of both investment capital (and conversely making that capital more expensive, increasing production costs) and consumer demand, leading necessarily to recessionary conditions.

That is about as simplified an explanation of "why savings are bad" as I can give. They make sense for individuals when those individuals lack confidence in their financial futures, but they never make sense macro-economically, and are to be avoided. This is why the US central bank uses monetary policy principally to preserve consumer confidence in the stability of the financial system, with inflation control as a secondary goal (Europe takes the opposite approach).

 

[mheslep]

This is not true. The Fed does not set the prime interest rate; the market does. It responds to several forces, including the Reserve Board and the US Treasury, but the player of largest import is the consumer debt markets - consumers and producers set clearing prices as a function of their competing interests subject to supply and demand.

No, practically speaking that's incorrect. The Prime Rate is indeed set by the market but it is always, always about 3 percentage points above the Federal Funds Rate which is set by the Federal Reserve and jumps almost immediately following changes to the Fed rate. The rates given in the consumer debt market do fluctuate more based on supply and demand. Occasionally even below prime rates are made available in the consumer market, but generally consumers do not have access to Prime rate lending.

http://www.wsjprimerate.us/

 

[brainstorm]

Market contraction = lower demand = cost over less units = higher price.

This is why you read a few years ago about growing production and supply-chain flexibility, on-demand production, etc.

Your second paragraph is on point, and that has been the goal of the green movement, and this has been the stated goal of the administration. That is why the first thing that occurred was a freeze on any defense spending. I call them the 2% crowd. The ones that always state that any problem could be solved if we just spend 2% of what we spend on defense.

That is why the stimulus was wasted. Stimulus from the bottom up does not work. Supply-side does work, and the last 2 years and next 2 will prove that fact, and painfully so.

The only reason I see defense spending as fiscally conservative is that people who are participating in military activities usually don't get such an opportunity to consume their wages. The result is that people come home with large nest eggs, which they want to manage well so that they won't deplete what they worked so hard to save up. Military service is an exercise in fiscal discipline as well as other kinds of discipline in this sense.

Yes, I've figured out that the game is to first drive up spending and then lower taxes. That way they can get fiscal stimulus from both ends of the cash cow, so to speak. It's ironic because first people complain they don't want the stimulus. Then once it's circulating around the economy, they want to be the ones it gets spent on and they don't want to pay it back to the government where it came from in the first place.

 

[Kimchijjigae]

Your returning to cling to this dogmatic and uncritical faith in GDP growth as the only possible means of improving a free market economy is indicative of the reason why the economy has gotten as bad as it has. More money makes things better in some cases but worsens things in others. Economics needs to grow up and start recognizing that economic health is more complex than "more money flow = better." Your perspective is like having a doctor whose solution to every health issue is to increase calorie intake.

Raising GDP does improve the living standard as goods and service are either sold locally or abroad, which increases the purchasing power of the local currency, but a policy implemented to raise GDP may actually decrease the GDP in the future. Stop talking about economics if you don't know how it works.

 

[brainstorm]

Raising GDP does improve the living standard as goods and service are either sold locally or abroad, which increases the purchasing power of the local currency, but a policy implemented to raise GDP may actually decrease the GDP in the future. Stop talking about economics if you don't know how it works.

I think economics tends to assume a simple relationship between money and happiness and fails to look at economic values that don't get reflected in transactions. There is an informal economy and many other aspects to the way people live that don't show up in the accounting books. I think economists should be able to look at human activity directly, not just in terms of which activities are reflected in transactions involving money.

 

[talk2glenn]

No, practically speaking that's incorrect. The Prime Rate is indeed set by the market but it is always, always about 3 percentage points above the Federal Funds Rate which is set by the Federal Reserve and jumps almost immediately following changes to the Fed rate. The rates given in the consumer debt market do fluctuate more based on supply and demand. Occasionally even below prime rates are made available in the consumer market, but generally consumers do not have access to Prime rate lending.

http://www.wsjprimerate.us/

It is generally true that the prime rate index is approximately 300 basis points higher than the Federal Funds rate, which is itself a function of market forces (the Fed sets a target rate - currently 0 to 0.25 percent - but cannot wholly force the market to realize those rates), but there is wide variance in actual consumer lending rates, depending on broader market forces and independent of monetary policy.

For perspective, the Federal Funds rate may change by 100% overnight, but the effect on your average credit card rate may be closer to 8%.

There is broad public misconception that the Federal Reserve "controls" interest rates in the economy. This is not the case; the United States has free flow of currency and a floating exchange rate (the "freest" economically possible currency market). The Reserve Board cannot directly set rates and ratios. It has a basket of tools (admittedly powerful tools) it uses to influence rates, but that's it.

 

[talk2glenn]

I think economics tends to assume a simple relationship between money and happiness and fails to look at economic values that don't get reflected in transactions. There is an informal economy and many other aspects to the way people live that don't show up in the accounting books. I think economists should be able to look at human activity directly, not just in terms of which activities are reflected in transactions involving money.

Economists do indeed look at human activity directly. You assume some differentiation between "money" and "activity". There is none. Money is irrelevant to economics, and is used by markets only as an abstract tool for streamlining trade.

Currency is a store of value - specifically, a store of value created when individuals engage in productive activity.

Economists differentiate between work (productive activity) and leisure (unproductive activity). The more productive you are at work, the less time you need to spend working to afford staple goods (food and shelter), and the more time you have to spend "discretionally" (either doing more work to purchase discretionary goods or taking vacation).

It is necessarily true that more productive economies (more GDP per capita per hour) make people happier because they have the option of working less - spending more time on leisure activities - but still surviving. In less wealthy economies, people must work longer to afford the necessities - they have fewer options, and will never be able to have as much leisure time or luxury goods as wealthier people. This makes them unhappy.

This is not opinion; it is fact. If you want to engage in reality-based economic discussion, you must acknowledge reality. Economics is not the same thing as accounting - it is the study of human choices and behavior, absolutely, not the study of cash flow (accounting).

 

[brainstorm]

Economists do indeed look at human activity directly. You assume some differentiation between "money" and "activity". There is none. Money is irrelevant to economics, and is used by markets only as an abstract tool for streamlining trade.

Currency is a store of value - specifically, a store of value created when individuals engage in productive activity.

Economists differentiate between work (productive activity) and leisure (unproductive activity). The more productive you are at work, the less time you need to spend working to afford staple goods (food and shelter), and the more time you have to spend "discretionally" (either doing more work to purchase discretionary goods or taking vacation).

It is necessarily true that more productive economies (more GDP per capita per hour) make people happier because they have the option of working less - spending more time on leisure activities - but still surviving. In less wealthy economies, people must work longer to afford the necessities - they have fewer options, and will never be able to have as much leisure time or luxury goods as wealthier people. This makes them unhappy.

This is not opinion; it is fact. If you want to engage in reality-based economic discussion, you must acknowledge reality. Economics is not the same thing as accounting - it is the study of human choices and behavior, absolutely, not the study of cash flow (accounting).

Then economists should be able to see when finance and exchange are impeding other human activities. They can't, though, because they always assume that humans are so rational that if their business behavior was interfering with other parts of their lives, they would simply change it to optimize their outcomes. The fact is that people get caught up in rat races and they lose sight of the forests for the trees. Economists always assume that the rat race itself is just the conditions of economic activity and fail to acknowledge that economic behavior causes (or at least allows) people to behave like that in first place.

Also, it is not true that working more efficiently necessarily leads to more leisure time. Economies evolve in the direction of greater productivity and efficiency, but instead of developing increasing ability to have more leisure time, they have expanded service industries that cause people to work more in service of other people's leisure. So economic modernization has indeed made economies more efficient and productive, but at the cost of increasing service-dependency and servant labor demand.

 

[CRGreathouse]

Then economists should be able to see when finance and exchange are impeding other human activities. They can't, though, because they always assume that humans are so rational that if their business behavior was interfering with other parts of their lives, they would simply change it to optimize their outcomes. The fact is that people get caught up in rat races and they lose sight of the forests for the trees. Economists always assume that the rat race itself is just the conditions of economic activity and fail to acknowledge that economic behavior causes (or at least allows) people to behave like that in first place.

I can see you haven't studied economics.

Also, it is not true that working more efficiently necessarily leads to more leisure time.

True! Increased efficiency allows for the possibility of greater leisure time, but if labor is compensated highly enough you can even see a shift away from leisure. I believe this is currently the case vs. the 1950s, say, in the US: more productivity, much higher real earnings per capita, but less leisure time.

 

[brainstorm]

I can see you haven't studied economics.

Unnecessary statement that avoids addressing what I said.

True! Increased efficiency allows for the possibility of greater leisure time, but if labor is compensated highly enough you can even see a shift away from leisure. I believe this is currently the case vs. the 1950s, say, in the US: more productivity, much higher real earnings per capita, but less leisure time.

How could I have possibly seen that without studying economics?

 

[turbo]

Please read what Robert Reich says about what will happen if the Fed makes money cheaper to borrow. He has some very good points. Individuals are generally not in a position to borrow, and small businesses are not in a position to borrow because there's no reason to expand in a shrinking economy. Wall Street would love to have even cheaper access to our money, but they are not going to create jobs with it.

http://www.huffingtonpost.com/robert-reich/why-cheaper-money-wont-me_b_698485.html

 

[mheslep]

For perspective, it is helpful to remember that raising the Federal lending rates in a sluggish or idle economy was the most proximate cause of the Great Depression. Cutting off lending to the banks shrinks the money supply, forcing deflation. Deflation, while good for creditors, means that the amount a borrower has to repay continues to grow over time in real terms, making repayment difficult or impossible.

http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
Four Fed contributing actions:
1. 1928: Fed raised interest rates with economy coming out of recession, started cutting the money supply.
2. 1931: Fed raised interest rates to stem a run on the dollar by speculators.
3. 1932: With deflation seriously under way, making borrowing very expensive, Fed cuts rates for awhile, but not nearly enough given the deflation. Later the Fed reversed even these cuts.
4. 1930-33. Fed refused to lend cash to banks (normal Fed window lending), following a "the weak ones need to fail" philosophy, though the reality was the Fed had largely caused the weakness in 1-3 by reducing the money supply. The banks closed/failed by the thousands.

 

[mheslep]

Please read what Robert Reich says about what will happen if the Fed makes money cheaper to borrow. He has some very good points. Individuals are generally not in a position to borrow, and small businesses are not in a position to borrow because there's no reason to expand in a shrinking economy. Wall Street would love to have even cheaper access to our money, but they are not going to create jobs with it...

Original article:
http://robertreich.org/post/1033774961/warning-why-cheaper-money-wont-mean-more-jobs

Not that I pay much heed to Reich, but note that nowhere does he say in that article that interest rates should be increased.

 

[turbo]

It's worth mentioning that Fed lending to institutions is practically interest-free already, and there is no wiggle room to lower interest rates further. What is the Fed going to do? Pay banks and investment firms to borrow our money? We are perilously close to that situation already. Cheap money for Wall Street has been the mantra of Greenspan and Bernanke all along. What has corporate welfare gotten us?

 

[turbo]

Original article:
http://robertreich.org/post/1033774961/warning-why-cheaper-money-wont-mean-more-jobs

Not that I pay much heed to Reich, but note that nowhere does he say in that article that interest rates should be increased.

He says that cheaper money won't help our economy. It will likely spur a surge of mergers and acquisitions, resulting in job-losses. Not a helpful result.

 

[brainstorm]

Cheap money for Wall Street has been the mantra of Greenspan and Bernanke all along. What has corporate welfare gotten us?

Lot's of corporate pork-barrel spending.

 

[airborne18]

Unnecessary statement that avoids addressing what I said.


How could I have possibly seen that without studying economics?

Well the fact that you conclude that defense spending is money for soldiers paychecks really makes one wonder. Social economics, yeah, but economic theory, not a chance.

 

[brainstorm]

Well the fact that you conclude that defense spending is money for soldiers paychecks really makes one wonder. Social economics, yeah, but economic theory, not a chance.

It comes down to this: when a politician believe the economy is overheated, they have to look for ways to slow/cool down flows of money. Since money always gets reinvested when saved, especially if real estate is growing rapidly, you need to get creative in figuring out ways to slow down transactions. I was just suggesting that paying soldiers to be away on a tour of duty would be one way to re-direct money in a way that it doesn't get spent so quickly. Call it social economics or whatever you want, but the main issue I'm looking at is how fast money is changing hands, which translates to GDP growth, and what this does to prices, i.e. stock prices but also real estate prices.

 

[mheslep]

Well the fact that you conclude that defense spending is money for soldiers paychecks really makes one wonder. Social economics, yeah, but economic theory, not a chance.

I was just suggesting that paying soldiers to be away on a tour of duty would be one way to re-direct money in a way that it doesn't get spent so quickly. Call it social economics or whatever you want, but the main issue I'm looking at is how fast money is changing hands, which translates to GDP growth, and what this does to prices, i.e. stock prices but also real estate prices.

Military spending increases was indeed one of vehicles considered for economic stimulus by reputable economists in 2008 (M. Feldstein in particular) and not because it is slow; just the opposite, the argument is that it can be done almost immediately, notably through increasing troop recruitment which directly reduces the number looking for work, adds training, and puts spending money in pockets. Speed, that is sluggishness of government spending, is a major problem with general demand stimulation via the government. So solely as an economic theory for demand side stimulus, if you buy that argument (I don't), military spending is likely a very effective choice; the problem is that as a long term social policy it is likely undesirable, at least versus building bridges and other long lasting infrastructure.
https://www.physicsforums.com/showpost.php?p=2809270&postcount=60

 

[airborne18]

It comes down to this: when a politician believe the economy is overheated, they have to look for ways to slow/cool down flows of money. Since money always gets reinvested when saved, especially if real estate is growing rapidly, you need to get creative in figuring out ways to slow down transactions. I was just suggesting that paying soldiers to be away on a tour of duty would be one way to re-direct money in a way that it doesn't get spent so quickly. Call it social economics or whatever you want, but the main issue I'm looking at is how fast money is changing hands, which translates to GDP growth, and what this does to prices, i.e. stock prices but also real estate prices.

The problem is that you are debating the issues. If you really what input on your hypothesis then start a thread and ask for opinions. Your assertions concerning income are not accurate. I guess the homeless person with all the free time to enjoy life is better off, okay maybe you are right.

The United Nations has a ton of research on social economics, and they document their failed attempts at proving these theories. It takes time to figure out their website and finding this stuff, but it is there.

My all time favorite was their theory that if you hire the theives and corrupt people, that they are the most motivated to distribute aid. Since they are most motivated in whatever country they are trying to help. And eventually if you pour in enough aid, you will satisify the the demand of the corruption and aid will eventually arrive at the targeted people. ( you can't make this **** up, really ). There are a ton of these type of theories, and worst, is that they actually used them to help starving and dying people.

 

[airborne18]

Military spending increases was indeed one of vehicles considered for economic stimulus by reputable economists in 2008 (M. Feldstein in particular) and not because it is slow; just the opposite, the argument is that it can be done almost immediately, notably through increasing troop recruitment which directly reduces the number looking for work, adds training, and puts spending money in pockets. Speed, that is sluggishness of government spending, is a major problem with general demand stimulation via the government. So solely as an economic theory for demand side stimulus, if you buy that argument (I don't), military spending is likely a very effective choice; the problem is that as a long term social policy it is likely undesirable, at least versus building bridges and other long lasting infrastructure.
https://www.physicsforums.com/showpost.php?p=2809270&postcount=60

Military spending is not a stimulus because you hire more troops. It is because it funds the military industrial complex, which spreads the stimulus broadly across all sectors of the economy. And the dividend is technology and research.

That is the role of defense spending as a very effective stimulus.

 

[mheslep]

Military spending is not a stimulus because you hire more troops.

The idea behind a stimulus is to create jobs. Economically that's exactly what adding troops does, and fast, most notably in WWII. Please see the Feldstein article.

It is because it funds the military industrial complex, which spreads the stimulus broadly across all sectors of the economy. And the dividend is technology and research.

That is the role of defense spending as a very effective stimulus.

You're conflating the two: economic stimulus and R&D dividends. R&D is more beneficial in my view, and R&D can also be a stimulus and create jobs, but it's hard to do quickly.

 

[turbo]

Military spending is not a stimulus because you hire more troops. It is because it funds the military industrial complex, which spreads the stimulus broadly across all sectors of the economy. And the dividend is technology and research.

That is the role of defense spending as a very effective stimulus.

Unfortunately, that is not true. Military spending is targeted to very narrow economic zones with narrow geographical impact. Want to build a couple of new frigates? The contract will go to Bath, ME or to Ingalls in MS. Neither area is as heavily impacted by our poor economy as the national average.

Of the large sawmills in ME, all have closed down but one. Stimulating the housing industry would bring back some of those jobs, including wood-cutters, log-yard owners, brokers, etc. That would be a widely-distributed benefit. Building a new ship is not.