brainstorm said: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.
Kimchijjigae said: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.
mheslep said: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 said: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 said: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 said: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.
brainstorm said:Also, it is not true that working more efficiently necessarily leads to more leisure time.
Unnecessary statement that avoids addressing what I said.CRGreathouse said:I can see you haven't studied economics.
How could I have possibly seen that without studying economics?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.
turbo-1 said: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...
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.mheslep said: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-1 said:Cheap money for Wall Street has been the mantra of Greenspan and Bernanke all along. What has corporate welfare gotten us?
brainstorm said:Unnecessary statement that avoids addressing what I said.
How could I have possibly seen that without studying economics?
airborne18 said: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.
airborne18 said: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 said: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.
brainstorm said: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 said: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
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.airborne18 said:Military spending is not a stimulus because you hire more troops.
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.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.airborne18 said: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 said: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.
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-1 said: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.
John Creighto said:1) It is a form of market control. Market controls result in a misalocation of resources (invisible hand theory)
2) Low interest rates create a disincentive to save.
3) Low interest rates cause market cycles by first causing a credit expansion.
4) The American public has no capacity left to borrow.
5) The cheap money will be used by corporations to invest abroad rather then at home.
John Creighto said:There are a few reasons some consider low interest rates detrimental
1) It is a form of market control. Market controls result in a misalocation of resources (invisible hand theory)
I'd say #1 is an argument against any kind of extreme interest rate control, not just low rates.CRGreathouse said:#1 is a very strong argument against artificially-low interest rates.
John Creighto said:1) It is a form of market control. Market controls result in a misalocation of resources (invisible hand theory)
2) Low interest rates create a disincentive to save.
3) Low interest rates cause market cycles by first causing a credit expansion.
4) The American public has no capacity left to borrow.
5) The cheap money will be used by corporations to invest abroad rather then at home.
talk2glenn said:This is mostly wrong. Corporations have an incentive to invest wherever capital is cheap. Low domestic interest rates relative to those in foreign countries encourage investments at home, and discourage investments abroad. Further, low interest rates deflate currency values, further discouraging investment abroad and encouraging export growth. To invest abroad, companies must purchase foreign currency. You cannot simply borrow dollars in the United States and use those dollars to buy factory space in Malaysia.
It is true that the increased exports can have the effect of encouraging direct foreign investment, because domestic corporations become flush with foreign currency, and it is often more practical to invest that currency than convert it (at cost). This is not generally considered a bad thing, however (it helps lower the trade deficit, for one).
airborne18 said:It is because defense spending grows the entire economy. Defense contractors have thousands of suppliers and so does the DOD. But it has to be spent on new projects.
Defense is probably the best return on spending.
Thank you! We desperately need to build and rebuild or repair infrastructure right now. It's pretty hard to hide overruns in asphalt costs, gravel, etc unless you're operating in a state that is totally corrupt. Maine is very rural, and we are a critical cross-road for trade between Maritime Canada, PQ, Ontario, and the NE states. Our roads and bridges are falling apart, costing us (and the truckers using the roads) lots of money in unnecessary repairs.mugaliens said:Hardly. Have you any idea of the billions of dollars which go missing in the defense industry every year?
mheslep said:The missed elephant in the room in discussions about abolishing interest rate controls is how does the government control the money supply in an expanding economy? The government prints the money. I'm interested in some 'out there' schemes that envision taking away that exclusive power some day, but until then the government owns the presses and must have a mechanism for putting the money into play, not too fast, not to slow.
The thread is about the impact of interest rates, and thus by definition is not about fiscal policy, only monetary.brainstorm said:Fiscal policies?
http://en.wikipedia.org/wiki/Monetary_policy...Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.
In its original conception, a liquidity trap resulted when demand for money becomes infinitely elastic (i.e. where the demand curve for money is horizontal) so that further injections of money into the economy will not serve to further lower interest rates. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate.
The liquidity trap, in Keynesian economics, is a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply
One: QE, as a last resort, because apparently it is not clear how well it works.CAC1001 said:What do they mean by "...or increasing the money supply" if the way you lower interest rates is by increasing the money supply? Is there an alternative method?
loseyourname said:Remember the Fed has twin mandates of full employment and price-level stability. Nothing it has done has put much of a dent in unemployment, but a large point of the quantitative easing measures and other programs was to avoid deflation and prop up price levels via dollar devaluation as well as asset purchases to directly prop up specific asset prices. That part of the program has worked perfectly well, but actual GDP growth depends entirely on what investors and spenders actually do with all of this new money. The only portion of GDP the Fed can directly control is export demand via dollar devaluation as well as its other methods of exchange rate manipulation, but it's only likely to ever go halfway with this and neither the G20 nor the US Treasury are even happy with just the dollar devaluation.
That remains to be seen. Bernanke has to eventually exit all that colossal QE without either 1) creating substantial inflation or 2) imposting draconian interest rates to prevent 1)loseyourname said:[...]Nothing it has done has put much of a dent in unemployment, but a large point of the quantitative easing measures and other programs was to avoid deflation and prop up price levels via dollar devaluation as well as asset purchases to directly prop up specific asset prices. That part of the program has worked perfectly well,
brainstorm said:I have the impression that although the government is often accused of using economic interventions to reduce "the gap between rich and poor," that what it really does is stimulate the maintenance of class-distinctions in GDP distribution.
I'm not necessarily claiming that wealth-disparities are good or bad. My point is just that politics tends to view government subsidies as geared toward closing the gap, whereas I think it ultimately has the opposite effect. To me this is hypocrisy to claim to be helping the poor while really just fattening the middle-class while leaving the poor and disenfranchized in the same position they are always left in.
Why not just sell fiscal stimulus and government subsidies as a way to promote more elite lifestyles among the middle-class? The only reason this would fail is because part of middle-class culture is denying one's relative elitism and spoiled lifestyle.
If you don't believe me about this, see if no one responds to this posts by vehemently denying that the middle-class is spoiled, claiming that they just live comfortably and that should be a fundamental right (except for the poor and working class never seem to get access to that right).
mheslep said:That remains to be seen. Bernanke has to eventually exit all that colossal QE without either 1) creating substantial inflation or 2) imposting draconian interest rates to prevent 1)
Right, I wanted to emphasize the on going nature of Fed action, which could be like the man falling off a high rise and upon passing each floor, saying "so far so good". Or not?loseyourname said:"Has worked." I'm not trying to predict the future. It's obviously pretty risky and the Fed Board is fairly divided about it. I'm not endorsing the program, just saying that, to this point, we've avoided deflation, which Bernanke obviously fears more than inflation, and to the larger point, the Fed can still do plenty even with interest rates at zero.
Is this true? I know the Fed used to try keep interest rates stable back in the 70s only to have its policies produce stagflation. I was under the impression that after that, the Fed, starting with Volcker, mainly focused on keeping inflation in check, which essentially meant not letting the money supply grow too quickly.loseyourname said:You can target interest rates by controlling the money supply or target a money supply. The Fed currently targets interest rates but it hasn't always chosen this path.
An econ professor likened the difference between adjusting the discount rate or reserve requirement vs. open market operations to control the money supply to the difference between using a meat cleaver vs. a scalpel to cut meat.It can also make changes to the discount rate and reserve requirement to implement monetary policy, but it rarely does, almost never changing the reserve requirement and only using the discount rate for dire emergencies like 9/11.
