demand-side economics

[unblock]

it's fairly obvious to me that what this economy needs is a SERIOUS push on the demand side.

the current crisis had its origins in many places, but the real problem at this point is that the american consumer is paralyzed. unable to get out from under great debt, facing mounting energy and other costs, and unable to significantly increase income. the result is that the suppliers and then the investors are paralyzed as well, waiting for the consumer to show signs of life before trying to extract yet more wealth.

quite aside from the fact that many people are hurting and deserve help, quite cynically, the economy and therefore the rich bastards NEED the consumer to get some serious help from the government. EVERYBODY will benefit from a major demand-push.

i propose the following:

- drastically increase the personal exemption for federal income taxes from $3,500 to something more like $10,000. so a family of 4 is income-tax exempt through the first $40,000 of income.

- cut the payroll taxes in half (undo the reagan doubling). fund the difference out of the federal budget.

- dramatically increase taxes on personal income at higher brackets. after having exempted the first $40,000, even higher marginal tax rates will have a long way to go before catching up. once income exceeds something like $250,000, tax rates should be 40% or so, and income beyond $600,000 or so should be 70%.

- tax all income the same. no fair taxing back-breaking labor higher than leisurely passive investing. tighten other exemptions.

- keep the minimum tax, but readjust it as if it had been indexed for inflation from its inception, and keep it indexed to inflation.


in short order, people will be paying off their credit cards and clamoring for houses and goods and services. sure, it will lead to a deficit in the short run, but that's what keynesian economics is all about.

once the consumer has cash in pocket, businesses will be clamoring to extract that newfound wealth. those earnings will return the budget to balance, as the economy starts booming again.


simple, huh?

disclaimer: i plucked the actual numbers out of my butt. maybe somewhat different numbers would make more sense. the point is just to do something big. not this $300 stimulus crap. most people need quite a lot more than that, and if there's money in the hands of consumers, the economy will boom to try to extract it.

[GoesTo11]

1. Hair of the dog?

You've got two arguments here. One is about having more progressive tax policy - and thus more even distributions of income / wealth, the other is about needing more demand. But consumer demand is the dog that bit us. We could have high demand by giving a big tax cut to the rich too, they would just demand more yachts. Heck, we could even require that they spend it on yachts. But we don't really need to be buying more crap. Even progressive tax cuts that lead to crap buying wouldn't be that great. They would temporarily provide a little boost to production - although more in China than anywhere in the US. But after that, where would we be? What we really need is more spending on things of common value - infrastructure, human capital (education and preventative health care), public spaces, museums & arts, transportation, R&D, etc. All this stuff we have neglected for decades has impoverished us. We need more of that to stop the downward spiral. Fringe benefit: investing in that will get people back to work too. May not be as much profit in it, in the short term.

[unblock]

4. not the best analogy. we all MUST consume, to some extent. just not to excess

and right now people are struggling just to consume the necessities while paying mortgages and credit card debt.

the numbers should be sized so as to get consumers to the point where they can get out from under and consume a healthy amount, but not an excessive amount.

separately, i have other reform ideas about how to keep the economy from going into boom-bust cycles, to keep bubbles from forming, and to make these emergency rescue/bailouts more logical, fair, and best of all, paid. those things are needed to keep us on the right track, but that's fodder for another thread....

[cliffordu]

2. I'm thinking more trickle UP economics....

A strong working class, unions and all, get paid first.

Then the bosses

Then the owners....

Then the speculators/day traders(value-free scumbags).

Prolly all wrong and airheaded, but it was the way I lived as a kid.

[onethatcares]

3. nice thinking but miltons' diciples have been in the books for a long time.

shit, cheney goes back to the 70s along with rummy and the rest. the breakdown of the American economy has been fought for and damn close to won for the past 50 years. The cons have learned to lie with a straight face to their supporters and their supporters in turn eat it up. They've bankrupted us, straight out, and ,,,,,,,,,,,,,,,,,,,they have no regrets, they got theirs.

[unblock]

5. a valid point, but i prefer not to give up entirely....

[Selatius]

6. Pass the Employee Free-Choice Act. Rebuild America's unions to renegotiate higher wages.

The only reason why factory jobs paid as high as they did in the first place was because of the presence of unions and the unions' fight for better pay and benefits. When those factory jobs left, American workers were forced back to square one.

With the Employee Free-Choice Act, huge employers that are not manufacturing based could be struck and unionized, huge employers like Wal-Mart and Starbucks.

[unblock]

7. i certainly agree that unions have a rightful place in a functional economy

and it's absolutely scandalous how they've been demonized. management acts collectively and that's capitalism, but labor acting collectively is communism somehow.

[Dreamer Tatum]

8. You don't think that's an inflationary idea?

It most assuredly is.

[unblock]

9. not necessarily:

there are several things that can keep inflation temped down:

first, if the economy gets back on track, the dollar will strengthen, bringing the price of oil in particular down.
second, the fed can tighten in order to keep the economy and inflation from booming too much too quickly.
third, money in the hands of consumers is only inflationary if they use it to bid up goods in limited supply. given that a lot of the money would go toward just paying down debt, this wouldn't apply so much. plus, suppliers will quickly expand once they see that consumers are able to spend again. the extra supply would help keep prices from rising much.

eventually, when people are in a better position and the economy is more functional, they can keep cranking up rates to bring inflation back down.

[Dreamer Tatum]

10. Comments

The economy getting on track is inherently inflationary, unless it's caused by factor price declines.

The Fed tightening money restricts demand by fiat.

What else do you expect people to do with money? More money equals more aggregate demand, no matter what they spend on.

Supply doesn't follow demand; supply only increases at all price levels and interest rates in response to factor price changes.

Cranking up rates, again, restricts demand, which is why it's both deflationary and contractionary.

Right now the price of oil and the value of the dollar are crucial. It is VERY good that output is not shrinking while the dollar strengthens and, therefore, oil prices fall. The world is realizing that our economy is in the best position to recover, which
will favor our fundamentals.

Despite the number of graduates of the Chicken Little School of Economics, we are in a position to weather the financial crisis via supply shocks, stronger currency, and slow moderation of inflation. I am guardedly optimistic.

[unblock]

12. i am guardedly optimistic as well

times are tough, and the banks still have bad debt to work out (i've heard estimates that they might only be halfway through the process!) but once this process is through, the coast should be clear. we just have to avoid an implosion in the meanwhile.

my thoughts on tinkering with the economy are indeed partly to let the consumer lead the way out but partly to seize the political opportunity to correct some wrongs that decades of republican/rich-minded policy makers have done to the tax system and so on.

[Greyhound]

11. I'm thinking we should just trash the whole system and re-start the model we were

given in the beginning.

Congress has the right to coin money and establish the value thereof. No private banks, no interest, no central banking system.