Wednesday, September 4, 2013

Lessons from Understanding the Business Cycle

As you are well aware, the economy has been doing poorly since late 2007- and the unemployment rate has gone from 4.4% in May 2007 to 10% in October 2009 and it has tapered down slowly since.  7.6 in April, 2013- 7.6 in May and June, and then 7.4 in July. This is not robust growth. And so it is a critical time to understand the business cycle and the role that aggregate demand plays in growing the economy.

Lets start our look at the business cycle with the conditions for the economy to grow because that is what we would like to see happening.

The economy grows and people are hired because consumers demand more products and services. No business owner hires another employee until they have to- when they need another employee to help deliver products or services.

Now,  it is necessary to address a few myths that are still floating around after the last presidential election; you hear a lot of talk about job creators- and that if we would just get off their back with burdensome regulations and cut ruinous taxes on them, well, they would get busy producing jobs..

Well, this is simply not true. Reduce taxes, and give them free rein to cut their costs for protecting the environment, would make them more profits and make them wealthier- and this is good for them and the elected officials that depend on their support to get reelected- but it doesn't get anyone else hired- because new employees are expensive, and no one is going to hire anybody until new employees are needed to provide services or produce new products.

In fact, any smart businessman is always trying to reduce his overhead and keep his labor costs down. This makes good business sense, but leaves large holes in the job creation theory.

So back to our conversation on the business cycle and generating business growth. It takes increased consumption of goods and services- this is often all lumped together under the phrase "aggregate demand"-
and so what can we do to create more aggregate demand?

It takes money. Who has money to spend? Consumers are generally about 70% of the nations economy, but consumers are strapped. They are laid off, scared, saving more money and being trifty. It does not look like consumers are a good bet for more spending.

Maybe we can turn to business investment? This is pretty much back to talking about job creators again. No business is going to nvest, unless they see the possibility of potential growth in sales. Now some smart business people do invest when things are slow- often buy up bargains, or figure out ways to build market share for when growth returns, but in the aggregate, business by nature does not lead the way out of a recession but wait to invest when the signs point to recovery.

So who has money to spend? The US government has money to spend. What on? Well that is a political decision that the politicians need to think deeply about. We will talk more specifics later.

We talked about how rich we are in America. Wealth is measured in potential goods and services produced, not just adding up money and measuring GDP. Money is just the means of exchange, not the real wealth. We talked about money not being a commodity nor is there any chance we are going to run out of money.

The Federal government creates money on spreadsheets. In fact, all countries in the world now are on fiat economies and spend money by spreadsheet. They can spend money wisely or irresponsibly, but money is there if you are a currency issuer. This is as compared to a currency user. We talked about that here. This condition makes a critical difference about how money can be used. This is a critical point of confusion in people's thinking and a powerful deterrent to finding solutions to a slow economy.

The government spending money increases demand. If the government adds new employees, those new employees have more money and start spending. The companies that they buy from see increased demand and start hiring again. The business cycle is in growth.

If the government gives money to states or cities, states and cities can spend money, write contracts for projects, hire more teachers, more fireman, more support personnel at whatever level, aggregate demand increases,

No one speaks more eloquently on the subject of the business cycle and creating economic growth than John T Harvey, professor of economics at TCU. Make sure you take a look at his article in Forbes magazine-  The Real Job Creators: Consumers, .

More aggregate demand stimulates more growth. The economy is not naturally stable, it is either growing or shrinking and it is build in automatic stabilizers that don't let economic changes gather speed and destructive power. These automatic stabilizers have been created by our elected representatives over the decades from the Great Depression.

Unemployment insurance is good for the unemployed, but also just about the most effective way to replace spending in the economy otherwise lost.

SNAP helps keep kids eating but also supports the food industry and jobs providing food.

When the economy grows, progressive taxes put more money in government coffers but also puts a damper on growth that might become inflationary.

For government to spend in a down economy- well it does take deficit spending. It is therefore essential that you understand the true implications of government spending. 

So then arguments about government spending should revolve around how we spend, not whether we are printing money and not balancing a Federal budget. Make sure you explore the page on understanding deficit spending. We must use the tools we have, to deal with the crises we find ourselves.

We have great challenges around which we need to invest. It makes sense. Rebuild America. Invest in research to solve Carbon pollution problems. We need new fossil fuel free transportation fuels. We need reliable and steady sources of carbon free energy. We have water issues to deal with- and air and water pollution we cannot afford to live with. LINK  All this research,  all the infrastructure investments needed in transportation, in energy efficiency, in all the things congress says we cannot afford, need to be done and people need jobs. Lets get it done.

Now, this is not a conversation most politicians are even willing to have. At the present time, budget deficits can stoke up primal fear- much like an accusation of being soft on communism could create in the 50s and 60s.

No politician can talk about government investment unless they make the obligatory gesture to balanced budgets in the future. Politicians right now are happy to keep the economy depressed- and millions of people unemployed- millions more underemployed, and live with impeding challenges that should be considered national security issues, just because of the power mythology about government spending.

Please look over this site. Please look at some of the other references provided and think for yourself.

What is good for people? Is austerity working anywhere. Austerity is the opposite of what I advocate here. Has austherity anywhere helped balance budgets or did it just put people into the streets of Europe demanding change? Well, I am always ready to jump into another topic....

but please think about the subjects raised here. If you have a question or comment please add it below.

Bottom line: We need sensible growth that is sustainable and that addresses serious energy and environmental issues. Investment puts people to work. Simple facts. Why are these critical investments not happening?
More References

You need to know a guy named Warren Mosler. Multimillionaire who understands how the economy works. In fact, it made him super wealthy.  He has a great resource called the Seven Deadly Innocent Frauds of Economic Policy

And you might have already seen me reference Fort Worth.s own brilliant economist, John T Harvey. He is a professor at TCU. He has an excellent article in Forbes magazine that touches on these same issues. Why the Private Sector NEEDS the Government to Spend Money

No comments:

Post a Comment

So what do you like to add? All comments are moderated.