Is the Spending Binge Going to Be Effective?

[Lord Tammerlain]

I think what both of you guys are missing is that products will not be produced for long if there is not enough demand to support the production level. If demand drops, so will production. But demand can definately exist despite there being a limited supply of products. Many industries (like mine) don't produce anything until something is ordered in advance. My products are custom made to meet the individual consumers needs. I only produce when I have orders, and if I have no orders, I stop producing. It pretty much works the same way even with factories that mass produce generic items. Their production will reduce shortly after demand is reduced, and their production will increase shortly after demand is increased (there is a small buffer of existing inventory which explains the sort delay in response).

Think about a fast food place, are they going to keep making hamburgers between 2pm and 5pm at the same rate that they make from 11am-2pm and 5pm-7pm? Of course not, their production level matches their demand level. What about a massage parlor, do they give massages when they have no customers to massage? What about a roofing company - do they repair roofs when there is no one needing their roof repaired?

There can also be demand for products that are not in production for one reason or another. Don't you think that there is demand for anti-aging pills? Of course there is, but it goes unfulfiled because there are no legititmate anti-aging pills. There was certainly demand for viagra long before viagra was ever produced - if there was not a measurable demand for viagra, viagra would have never been marketed.

I think that phat's point is that unless people are working they have nothing to exchange for goods and thus they have to be working (and thus producing) before there is a demand for goods, sure there is some logic to that, but the REALITY is that there is no incentive for the company to produce (and hire people) until AFTER demand has been demonstrated. However it may not be true that people who don't produce have nothing to exchange for products, certainly there are lots of people (anyone with savings, people on unemployment or other entitlements) who don't work or produce who have money to use in exchange for goods.

Businesses absolutely WILL NOT produce without consumer demand, however consumers can definately have demand without businesses producing. Thus production follows demand. Demand HAS to increase before businesses expand.

Overall I agree with you, business are not going to produce goods or services without a demand for them.

With said demand production will occur

 

[phattonez]

I for one will tell you that. I don't know that excess goods are being produced, I have to assume that the high unemployment rate is an indicator that fewer goods and services are being produced.

People are producing less, and making less, and spending less. The production level at my business has decreased because demand has decreased, that has forced me to reduce my staff, which in turn now provides less in income to myself and the work force, so we all spend even less. I have paid down my debt (a little), but I don't know that the money that I have returned to the banks has be lent back out to anyone, they probably either still have the cash or they used the cash to cover losses on defaults.

That's what scares me about this economy. There is nothing to stop a spiral downward. Unless something changes, like someone letting loose of a lot more money in the form of spending, there may be no way to climb up once we hit bottom. Maybe we have already hit bottom, but from recent economic reports I am not at all sure about that. Bottom could be having an economy like in the stone age for all I know.

This is deflationary spiral theory which makes no sense. We aren't suddenly going to go back to the stone ages. We know how to produce things and we all have become accustomed to a certain life. We have to adjust production to those areas where people demand it. If we just try to raise demand in general, we're not really responding to the problem which is production focused in those areas where it isn't profitable anymore. Allow profiting businesses to expand (you need failing businesses to fail for this).

 

[phattonez]

Depends on what is being done with the savings. If it just being kept in a bank to ensure the bank has the required capital reserves (due to loss's on loans) it will not stimulate the economy. It might keep the amount of lending from dropping even more (ie loans called back)

More savings = more loans than would have been possible without those savings.

 

[phattonez]

You are only stealing economic activity if said economic activity would take place

Profiting businesses can pay salaries and the people working there will spend/save. Raising demand in general means that the pay that the people get from the succeeding businesses is worth less, you dilute the incentive to work for the business that is profiting.

 

[VanceMack]

This is deflationary spiral theory which makes no sense. We aren't suddenly going to go back to the stone ages. We know how to produce things and we all have become accustomed to a certain life. We have to adjust production to those areas where people demand it. If we just try to raise demand in general, we're not really responding to the problem which is production focused in those areas where it isn't profitable anymore. Allow profiting businesses to expand (you need failing businesses to fail for this).

I think thats a really viable point. A lot of people have doomday vision. When they think of economic collapse they envision cities in rubble...the day the world stood still. thats simply not going to be the case. WHEN things collapse...and they ultimately will because we are still adding to the debt and are at the point where we cant even pay the interest let alone the debt...everything will kind of stop...then start again. the difference? Those with unsecured savings will likely lose everything. But gold will still be gold, property will still be property, those that work and are driven to succeed will survive and thrive, and those that wont arent now anyway.

 

[drz-400]

More savings = more loans than would have been possible without those savings.

Savings is dependent upon income. If income falls it does not necessarily follow that there is a higher quantity of saving just because the saving rate increases. Income depends upon spending.

 

[drz-400]

This is deflationary spiral theory which makes no sense. We aren't suddenly going to go back to the stone ages. We know how to produce things and we all have become accustomed to a certain life. We have to adjust production to those areas where people demand it. If we just try to raise demand in general, we're not really responding to the problem which is production focused in those areas where it isn't profitable anymore. Allow profiting businesses to expand (you need failing businesses to fail for this).

A recession is not caused by competition. This is a post hoc fallacy. Recessions are largely caused by changes in expectations. Howver, the business cycle can cause a competitive business to become unprofitable.

 

[oldreliable67]

You're not going to be able to expand enough on profits alone. And you need lending to hold you over during the bad times.

Not exactly. Depends on profit margins and how much of those profits you retain and reinvest in the business. If your margins are high enough and you can reinvest enough, you can grow gross revenue fast enough such that the only borrowing you might need would be seasonal working capital lines. There a number of clasic examples of what used to be called "growth companies" or the "nifty fifty" that, by retaining earnings (rather than paying dividends) and reinvesting those earnings, were able to grow revenue and expand without incurring any debt whatsoever. The better of these were able to continue earnings growth right through contractions, with in most cases, only a modest slowing in growth rates.

As industries and companies mature, as competition is drawn by the relatively high margins, revenue growth rates slow, and it becomes more and more difficult to increase shareholder wealth thru retention/reinvestment of earnings. At this stage in the lifecycle, debt typically begins to consitute larger portions of capital structures, dividends are increased and more earnings are allocated to share buybacks.

Remember the classic "DuPont formula" from oh-so-many years ago? The relationships embodied therein (for return on equity, profit margins, growth rates,etc.) still hold true today. Do they still teach that in Finance 101?

 

[imagep]

Profiting businesses can pay salaries and the people working there will spend/save.

Sure, that's what we all want.

Raising demand in general means that the pay that the people get from the succeeding businesses is worth less, you dilute the incentive to work for the business that is profiting.

You are assuming that production will not increase to meet the increased demand. Business production levels expand and contract to meet demand. If demand increases, businesses will expand and hire people, employers will have to compete for employees by paying higher wages, more people employed and good salaries will increase demand even more, which starts the expansion cycle all over again. Prices can actually drop despite higher wages as companies increase productivity though economy of scale and as more people make more money some of that money gets invested providing capital for businesses to use to expand with and ALSO providing start up money for new businesses who want to get a piece of the expanding pie. The additional production coupled with more competition tends to lead to lower prices, so the employees salary has even more buying power to purchase more with.

Rising demand in no way "dilutes the incentive to work", if anything it is quite the opposite. Increased demand may create inflation, but only when the demand is not met.

 

[imagep]

This is deflationary spiral theory which makes no sense. We aren't suddenly going to go back to the stone ages. We know how to produce things and we all have become accustomed to a certain life. We have to adjust production to those areas where people demand it. If we just try to raise demand in general, we're not really responding to the problem which is production focused in those areas where it isn't profitable anymore. Allow profiting businesses to expand (you need failing businesses to fail for this).

Sorry, I must not have been clear. I wasn't refering to a deflationary spiral, I was refering to an unemployment spiral downwards. I do agree that we all have become accustomed to a certain standard of living, and that since we know how to produce we have a desire to produce. But no one is going to produce for others unless the others have cash to purchase what is being produced. If unemployment gets worse, less people have money, they they are purchasing less, which causes businesses lay off more people and the cycle starts all over again - it can be a never ending cycle unless something changes.

Most people live paycheck to paycheck. Businesses will not expand until someone starts buying more and people cant start buying more if they are unemployed. Unless they can just magically appear some money, I don't see anything that can stop the downward spiral unless government significantly steps in.

 

[imagep]

I think thats a really viable point. A lot of people have doomday vision. When they think of economic collapse they envision cities in rubble...the day the world stood still. thats simply not going to be the case. WHEN things collapse...and they ultimately will because we are still adding to the debt and are at the point where we cant even pay the interest let alone the debt...everything will kind of stop...then start again. the difference? Those with unsecured savings will likely lose everything. But gold will still be gold, property will still be property, those that work and are driven to succeed will survive and thrive, and those that wont arent now anyway.

Thats a darn good reason to get your money out of the banks and to cash in those CD's and money market accounts, maybe even to sell off your stocks. Basically liquidate all money and near money type investments and buy just plain everyday STUFF that will still have value if everything does "stop".

But if our economy does stop, exactly what restarts it? A new government with a new currency? A dictatorship who tells us all that we have to go back to producing or else? Who profits from the stop and restart?

 

[Ahlevah]

People are producing but people are spending less. So I'm wondering what is being done with the goods that are produced. I mean, is anyone seriously going to tell me that the increase in saving is doing nothing for the economy?

I was at an outlet mall the other day and stores there were packed with merchandise, but the windows of almost every store were plastered with "SALE: $50% OFF!" signs (except the SAS store where we went to buy shoes.:blink. I'm tempted to say that many of the goods have gone to replenish inventories that were pared back at the outset of the recession. A lot of the so-called increase in saving is actually a liquidation of debt, especially as banks write down loans. So I'm going to tell you that it's not resulting in increased consumption, at least not yet. But eventually (years from now?) households will repair their balance sheets and they'll be in a better spending mood.

 

[imagep]

I was at an outlet mall the other day and stores there were packed with merchandise, but the windows of almost every store were plastered with "SALE: $50% OFF!" signs (except the SAS store where we went to buy shoes.:blink. I'm tempted to say that many of the goods have gone to replenish inventories that were pared back at the outset of the recession. A lot of the so-called increase in saving is actually a liquidation of debt, especially as banks write down loans. So I'm going to tell you that it's not resulting in increased consumption, at least not yet. But eventually (years from now?) households will repair their balance sheets and they'll be in a better spending mood.

If households repair their balance sheets by defaulting on debt, does that mean thata FICO score of 600 will be the new 700? Will banks look at credit scores and say "OK, you only were late a few times during the great recession, thats better than most, we consider that perfect credit"?

 

[Ahlevah]

If households repair their balance sheets by defaulting on debt, does that mean thata FICO score of 600 will be the new 700? Will banks look at credit scores and say "OK, you only were late a few times during the great recession, thats better than most, we consider that perfect credit"?

No, but businesses will become increasingly desperate to find ways to bypass banks and get money to people directly. For example, GM, which sold GMAC a while back, just bought subprime lender AmeriCredit. Dealers were complaining that not having an inhouse finance arm was hurting sales. The question is whether households will return to their profligate spending. Anecdotally, I've seen quite a few people at my place of employment swear off credit cards; they now pay cash for everything. The rest are getting second jobs to pay off debts, while others are filing for bankruptcy or are on strict spending diets. Very few of them have much in the way of discretionary income. All of them, of course, are employed, at least for now.

 

[phattonez]

Savings is dependent upon income. If income falls it does not necessarily follow that there is a higher quantity of saving just because the saving rate increases. Income depends upon spending.

Do recessions generally produce lower aggregate income? Yet don't recessions generally produce higher savings rates?

Are some industries and companies experiencing profit in the midst of the recession? Yes.
Are some companies and industries failing? Yes.
Should resources be diverted to those industries that make money? Of course.
How can succeeding comapnies grow if you try to artificially raise demand? Artificially raising demand means that there is less value saved; there is no way around that. This means less to lend. How are profiting companies going to expand without capital? They can't. So artificially raising demand (stimuli) actually hurts the succeeding business at the expense of trying to help the failing business. How is that in any way a good economic proposition?

 

[phattonez]

A recession is not caused by competition. This is a post hoc fallacy. Recessions are largely caused by changes in expectations. Howver, the business cycle can cause a competitive business to become unprofitable.

Does change in demand have anything to do with a recession? If yes, then wouldn't we want the economy to shift production to those new demands? If so, then raising demand in general would only serve to slow that process by decreasing available capital.

 

[phattonez]

Sure, that's what we all want.

And there are businesses now that are profiting.

You are assuming that production will not increase to meet the increased demand.

It can't right now in the successful businesses because the capital is not there because demand has artificially been raised, savings have been tapped by inflationary policies.

Business production levels expand and contract to meet demand. If demand increases, businesses will expand and hire people, employers will have to compete for employees by paying higher wages, more people employed and good salaries will increase demand even more, which starts the expansion cycle all over again. Prices can actually drop despite higher wages as companies increase productivity though economy of scale and as more people make more money some of that money gets invested providing capital for businesses to use to expand with and ALSO providing start up money for new businesses who want to get a piece of the expanding pie. The additional production coupled with more competition tends to lead to lower prices, so the employees salary has even more buying power to purchase more with.

You're looking at aggregates. Raising production or consumption in general or meaningless. We want higher satisfaction, and that only happens when we produce the things that people want.

Rising demand in no way "dilutes the incentive to work", if anything it is quite the opposite. Increased demand may create inflation, but only when the demand is not met.

Inflation leads to less capital goods being available which leads to succeeding businesses not being able to expand.

 

[phattonez]

Thats a darn good reason to get your money out of the banks and to cash in those CD's and money market accounts, maybe even to sell off your stocks. Basically liquidate all money and near money type investments and buy just plain everyday STUFF that will still have value if everything does "stop".

But if our economy does stop, exactly what restarts it? A new government with a new currency? A dictatorship who tells us all that we have to go back to producing or else? Who profits from the stop and restart?

An economy does not stop because we haven't lost our demand or our capability to produce. Any economy left to its own devices will not just kill itself. It's an absurd proposition. People won't just starve because the expect money to be worth more later. At some point, the expected utility from saving matches the expected utility of spending, and people will start spending again.

 

[phattonez]

Sorry, I must not have been clear. I wasn't refering to a deflationary spiral, I was refering to an unemployment spiral downwards. I do agree that we all have become accustomed to a certain standard of living, and that since we know how to produce we have a desire to produce. But no one is going to produce for others unless the others have cash to purchase what is being produced. If unemployment gets worse, less people have money, they they are purchasing less, which causes businesses lay off more people and the cycle starts all over again - it can be a never ending cycle unless something changes.

Most people live paycheck to paycheck. Businesses will not expand until someone starts buying more and people cant start buying more if they are unemployed. Unless they can just magically appear some money, I don't see anything that can stop the downward spiral unless government significantly steps in.

Here's what you do. Let businesses that see a profit expand and let failing companies fail. People will go to those businesses that are succeeding and will produce the things that people want. In a short amount of time you will have a robust economy that produces what people want. You will have high unemployment for a little while, but it will be over quickly. This is getting on a few years of lower growth than expected with high unemployment. Why is liquidation not the better option

 

[imagep]

Here's what you do. Let businesses that see a profit expand and let failing companies fail. People will go to those businesses that are succeeding and will produce the things that people want. In a short amount of time you will have a robust economy that produces what people want. You will have high unemployment for a little while, but it will be over quickly. This is getting on a few years of lower growth than expected with high unemployment. Why is liquidation not the better option

Im totally with you on letting failing businesses fail. But if we have lots of unemployment, and even an increasing rate of unemployed, who, other than out government, is going to be able to increase spending which will allow sucessful businesses to expand?

Im just saying that without some type of change in our system, there is nothing to turn the downward economic spiral into an upward economic spiral. Either the rich have to start spending more, or the middle class has to start spending more, or the government has to start spending more. If the middle class have no jobs, it is really unlikely that they will start spending more. The rich apparently have everything they want and are already spending every penny that they choose to spend, I really cant see them just to suddenly start buying more stuff as there is only so much stuff that they can utilize.

On a macroeconomic level, I understand where you are coming from: If companies would just start expanding, they would hire more people and those people would have more money to purchase the products that they produce. That is perfectly logical. But it just dont work that way. Companies are not going to randomly start expanding unless thdre is an increased need for their products and services. That increased need has to come from some where. Since we already eleminated the rich and the middle class, and since the poor have no money ever, then it may have to be up to our government to be what increases spending.

Believe me, I hate the concept that our economic recovery is going to have to be driven by the government. I hate government spending, I hate the fact that the cost of the government spending is going to eventually be on the backs of the american tax payer. But better that than a lost decade.

Which scenario will provide us with a wealthier life style: being unemployed and totally unproductive, or working our arse off making $x/year but having to pay a higher rate of taxes?

 

[FilmFestGuy]

That was for the war, not to help the economy.



I'm not so sure that this is undeniable. I want to see some proof for this.



At the expense of the death and misery (rationing) caused by war and war production. Not worth it.

If anyone tells you that you don't need savings in an economy, ask them how businesses are going to expand. No business expands on profit alone. There will always be a crash when you lend too much of what you have saved (too much is pretty subjective though ). Furthermore, your rate of expansion should be based on people's time preference. Why invest in the future when people want to spend now? It wouldn't make sense. We need to expand based on when people think their money is best spent.

The top tax rate remained above 90% through 1963 and growth continued in the nation at remarkable rates.

It's funny, Republicans always point to the 1950s boomtimes as the best time in America - but they ignore that the top tax rate was 91% most of that time.

Top US Marginal Income Tax Rates, 1913--2003 (TruthAndPolitics.org)

Here's the growth rate during that time period:

GDP Growth Rate (Recent History)

So, tax rates slow down growth?

Oh, and may I also point out that Reagan's recovery didn't start in earnest until 1st Quarter of 1983.

Comparison: that means that Obama's recovery is actually 6 months ahead of Reagan's (who also had low approval ratings at this point in his term).

Now, I'm not saying Obama is Reagan - hardly - but everyone who hates on Obama imagines in their pretty little heads that Reagan saved the day right after he took office. Indeed, the job growth under Reagan didn't begin until his second term. Throughout most of Reagan's first term, unemployment went up at a rate MUCH higher than it's gone up under Obama presently. Indeed, when Reagan took office unemployment was 7.5%. At the EXACT point in his first term that Obama is now, the unemployment rate was 9.5%. Notice: Data not available: U.S. Bureau of Labor Statistics

So, if Reagan was given time and understanding, why does Obama have to fix a MUCH larger crisis than Reagan had to fix overnight?

Please answer that.

(oh, and I'm having linking problems again from BLS: here's a copy of the table of numbers regarding Reagan's unemployment rate):

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1981 7.5 7.4 7.4 7.2 7.5 7.5 7.2 7.4 7.6 7.9 8.3 8.5
1982 8.6 8.9 9.0 9.3 9.4 9.6 9.8 9.8 10.1 10.4 10.8 10.8
1983 10.4 10.4 10.3 10.2 10.1 10.1 9.4 9.5 9.2 8.8 8.5 8.3
1984 8.0 7.8 7.8 7.7 7.4 7.2 7.5 7.5 7.3 7.4 7.2 7.3
1985 7.3 7.2 7.2 7.3 7.2 7.4 7.4 7.1 7.1 7.1 7.0 7.0
1986 6.7 7.2 7.2 7.1 7.2 7.2 7.0 6.9 7.0 7.0 6.9 6.6

 

[TurtleDude]

the tax rates on the top 1% next year will be the highest effective tax rates in US history. Far far more people will be in the top bracket as well. What was the cutoff point for those top rates back then in current dollars? Less people now pay income tax (percentage of the US Population) than any time in the last 60 years. ANd this of course is what the dems want-a majority voting block that can be bought to vote dem by promises that they won't pay more taxes to pay for more socialist spending--only the "rich" will be soaked.

 

[FilmFestGuy]

the tax rates on the top 1% next year will be the highest effective tax rates in US history. Far far more people will be in the top bracket as well. What was the cutoff point for those top rates back then in current dollars? Less people now pay income tax (percentage of the US Population) than any time in the last 60 years. ANd this of course is what the dems want-a majority voting block that can be bought to vote dem by promises that they won't pay more taxes to pay for more socialist spending--only the "rich" will be soaked.

Where the hell do you get this information? The top tax rate will be higher than 91%?

You can't be serious.

 

[TurtleDude]

Where the hell do you get this information? The top tax rate will be higher than 91%?

You can't be serious.

look up effective and get back to me

 

[oldreliable67]

As TurtleDude suggests, there is a significant difference between "effective" and "marginal." Remember that, until they were simplified (sort of), there were a number of tax brackets with increasing rates. The top tax rate applied only to the top x% of income. IIRC (and I may not; if somebody wants to look it up and correct me, I would appreciate it), even when the top marginal rate was 91%, the mean effective rate was significantly lower, something in the low to mid 30% range.