A Logically Sound Rebuttal to Supply-Side Economics

[Lago PARANOIA]

As for keeping the US as the leading economic power, I think that's not possible.

Like you said, it could be possible if the United States made investment in education a top priority then implemented a mixed economy after throwing the doors open to immigration. Not just letting people flood the borders, but giving immigrants with college degrees ridiculous tax breaks.

Of course, this is never going to happen.

[mean_liar]

...government spending no longer works as a stimulant to the economy.

I have no idea why you say this. Multiplier effects are well-studied and well-understood and generally agreed-upon.

http://en.wikipedia.org/wiki/Fiscal_multiplier

Where does this astoundingly unsupported statement come from?

America in 1942 got out of the Depression incredibly quickly because while the stock markets collapsed during the 30s, the industrial base remained intact. They just needed to bring a lot of factories back up to full capacity.

I don't think the same is true for America nowadays anymore, as too many factories and plants have been totally shut down. And again, resource extraction (mining, oil drilling, etc) is being hampered by environmental protection laws.

Again, what?

http://www.federalreserve.gov/releases/ ... efault.htm

Industrial Capacity is marginally down, but utilization is in the toilet. American factories are more idle than usual but to assume that somehow America lost its industrial base in the last two years is weird. I'm already assuming you can actually do some light Googling to disprove yourself, so I'm more interested in why would you think that?


Regarding raw materials, K is correct about their externalization of real costs. It is ultimately cheaper to import raw materials than mine them, because then you don't, say, get cancer.


Finally, one-time costs such as the weakass stimulus package and Bush's wars don't actually carry large costs with them, long-term. Obviously in the case of the wars there are better things to spend them on, but the real looming threat regarding American debt is not A war, its ENDLESS war, its the effects of free-market forces and their accelerating costs on medical care and its relationship to Medicare and America's bizarre employer-provided insurance system, and its providing Social Security to people that are living longer with less money to retire on.

Everything else is basically just discretionary costs in comparison.


EDIT - Regarding the "Double Irish" and other accounting tricks:

The American corporate tax rate is what it is precisely because of loopholes like this. To my understanding, while the government wants to close these loopholes, at the same time they raise rates to get revenue back to wherever they want it to be. The equilibrium incorporates those loopholes into the taxation rates.

[Lago PARANOIA]

United States manufacturing productivity keeps going steadily upwards. The manufacturing base is as strong as it ever was. The problems are that A) other countries have also built up a stronger manufacturing base and B) while productivity keeps going upwards, manufacturing employment is going downwards.


The U.S.'s lower middle class is extremely fucked. It should be obvious that the gravy train of the 40s-70s is looooong over. If the government cared about these people at ALL they would start immediately getting these peoples' asses to college and/or opening up trade schools left and right.

[mean_liar]

Employment is down because (global) demand is down. You can address that demand shortfall with Keynesian spending, and that's its entire raison d'être.

[K]

I wonder if people will ever figure out that we don't actually need everyone employed. I mean, food production takes up less than 10% of our work force...

People need food, shelter, and entertainment. That's all we need to keep society running, and we could literally give all that away for free and still advance technologically and socially.

[Koumei]

That's dirty communist talk! We found a witch!

[Zinegata]

K->

First of all, I agree that US military spending is excessive. Let's get that out of the way.

Secondly, World War 3 is just the worst case scenario. I agree World War 3 is highly unlikely, but before World War 1 people were also saying that a global war was unthinkable because it would cause economic collapse due to the interconnected nature of international trade. Controls have been put in place to make war less likely since then(i.e. the UN), but war has struck out of the blue before.

The more likely scenario is this: If China begins to hurt economically, I suspect they may begin intervening militarily in Africa, South East Asia (i.e. Spratleys) and other areas where there may be raw materials that can be extracted. And that's not gonna be healthy for diplomatic relations across the planet, and that could eventually lead to a superpower showdown.

Finally, I don't really buy into the "America is the best consumer market" thinking. It's currently the best market due to the exchange rate, high consumer spending, and relative wealth levels. But China has a billion people and a growing middle class. I don't think it would be impossible for China to eventually switch from supplying plasma TVs to the American market, and instead supply its own people.

Environmental laws I covered below.

I have no idea why you say this. Multiplier effects are well-studied and well-understood and generally agreed-upon.

http://en.wikipedia.org/wiki/Fiscal_multiplier

Where does this astoundingly unsupported statement come from?

Read the whole statement. I didn't actually say "Government spending no longer stimulates the economy".

What I actually said was "American government spending no longer stimulates the American economy, because you have such an enormous trade deficit (and outsourcing) that the money that is supposed to stimulate the American economy actually goes to the rest of the world."

Again, there's a trillon dollar hole leaking money out of the American economy. That's the reason why Keynesian economics no longer work.

Again, what?

http://www.federalreserve.gov/releases/ ... efault.htm

Industrial Capacity is marginally down, but utilization is in the toilet. American factories are more idle than usual but to assume that somehow America lost its industrial base in the last two years is weird. I'm already assuming you can actually do some light Googling to disprove yourself, so I'm more interested in why would you think that?

Two things:

Firstly, I didn't say it disappeared in the past two years. I'm saying it's the trend for the past twenty-five years, because again the last time America had a trade surplus was way back in 1975. At the minimum, this indicates that American manufacturing has remained stagnant, while the rest of the world produced more stuff which it now sells to America.

Secondly, "I think", hence it was a guess.

If only utilization is down, and all those factories that are being closed in the news just form a small fraction of the total industrial capacity, then that's great. It's be easier for America to restart more local manufacturing. Give a tax incentive or something to encourage companies to up utilization.

Regarding raw materials, K is correct about their externalization of real costs. It is ultimately cheaper to import raw materials than mine them, because then you don't, say, get cancer.

We're getting to the point that there will soon be a very real shortages of many raw materials. China for instance is now looking at hoarding some types of rare earths:

http://gas2.org/2009/08/26/hoarding-the ... -elements/

So really, while environmental damage is regrettable and should be prevented as much as possible (i.e. by not letting BP and Haliburton drill for you), you need to have strong domestic raw material production to make your economy more stable. Otherwise there may be a repeat of the oil crisis of the 70s.

[Zinegata]

I wonder if people will ever figure out that we don't actually need everyone employed. I mean, food production takes up less than 10% of our work force...

People need food, shelter, and entertainment. That's all we need to keep society running, and we could literally give all that away for free and still advance technologically and socially.

Not everyone needs to work to provide everyone with basic goods.

But unless you can provide the people producing the basic goods with some kind of incentive/equivalent exchange, they will simply drop out of the economy.

That's what happened in Russia in 1917. The Russian Revolution was triggered by people starving in the cities - a starvation that happened not because there wasn't any food. It was because the Russian peasants stopped selling food to the government because runaway inflation had made money worthless.

Which is why -at the very minimum - you do really need to get people to dig holes and fill them up again.

[mean_liar]

What I actually said was "American government spending no longer stimulates the American economy, because you have such an enormous trade deficit (and outsourcing) that the money that is supposed to stimulate the American economy actually goes to the rest of the world."

Again, there's a trillon dollar hole leaking money out of the American economy. That's the reason why Keynesian economics no longer work.

Again, wrong. I understood you.

A trade deficit is not a bad thing unto itself. Having money to buy shit is awesome. It means you're on top and your currency is what everyone wants and your people have nice shit, made cheaply. The problem is the savings rate, not the trade imbalance: the fact that we are at a personal level spending tons of money we don't have is a lot more important than we are spending tons of money.

Keynesian stimulation still works in America and will continue to work, so long as it is actually employed. HINT: the stimulus everyone decries as a waste of funds not only was tiny (large chunks went to tax cuts, which are basically lost funds due to the imbalance you note, rather than infrastructure, which builds shit and feeds the economy), it also is roundly considered to have staved off 2-3% increase to unemployment.

Firstly, I didn't say it disappeared in the past two years. I'm saying it's the trend for the past twenty-five years, because again the last time America had a trade surplus was way back in 1975. At the minimum, this indicates that American manufacturing has remained stagnant, while the rest of the world produced more stuff which it now sells to America.

Secondly, "I think", hence it was a guess.

If only utilization is down, and all those factories that are being closed in the news just form a small fraction of the total industrial capacity, then that's great. It's be easier for America to restart more local manufacturing. Give a tax incentive or something to encourage companies to up utilization.

Point #1. America's trade surplus is largely the result of it being the shit-hot currency reserve of choice. US dollars are strong and will retain value, so people buy our bonds. w00t. Trade imbalances unto themselves are not a problem - and '75 was just a few years after the US abandoned the gold standard in '71.

Point #2. The issue with the US economy is that demand is down. You can't just give money to factories and pretend that "if you build it, they will come". You need real demand to drive manufacturing. It's the true reason why businesses in the US are sitting on massive cash reserves: they aren't operating at full capacity and see no point in ramping up.

[Zinegata]

Again, wrong. I understood you.

So... why bring up fiscal multipliers which don't address the trade deficit issue at all? The issue is the deficit taking money out of the American economy, even as the government tries to pump in more money to make it tick again.

Moreover, whether or not you think trade deficits are good or bad (I am firmly in the camp that says "very bad"), Keynesian economics works as follows:

1) Government hires Jack and pays him a monthly salary.

2) Jack buys basic goods from a store.

3) Store buys basic goods from the factory.

4) Factory expands to meet the demand from all the stores. To expand, the factory must thus hire more people, growing the economy, decreasing unemployment, and making people happy.

The problem with modern-day government stimulus (which is all government spending - not just the Stimulus package which) is that the factory doesn't have to be in the same country anymore.

So the benificiaries of large-scale government spending in the US aren't necessarily Americans anymore. The benificiaries are the people where the factories actually are - which in most cases is China.

Point #1. America's trade surplus is largely the result of it being the shit-hot currency reserve of choice. US dollars are strong and will retain value, so people buy our bonds. w00t. Trade imbalances unto themselves are not a problem - and '75 was just a few years after the US abandoned the gold standard in '71.

Point #2. The issue with the US economy is that demand is down. You can't just give money to factories and pretend that "if you build it, they will come". You need real demand to drive manufacturing. It's the true reason why businesses in the US are sitting on massive cash reserves: they aren't operating at full capacity and see no point in ramping up.

Point 1: Not really. Before the 70s America really was the biggest producer of goods in the world, and a lot of that was going to the rest of the world. Remember what K was saying about how America was basically the only industrial power left in the world after WW2?

Well, on top of that you need to remember that America basically outproduced pretty much all of the other powers (Allied and Axis) combined. And this in terms of actual goods produced - not just monetary numbers.

Hence, in the 50s and 60s America didn't have a trade surplus because of the exchange rate. It was because America was really producing a massive amount of goods - as befitting a country with its huge landmass and natural resources.

Point #2: The issue isn't that the demand is down. If the demand is down, then why is the Chinese economy still growing? If demand is down worldwide, all economies should be hurting equally. But it's pretty clear that the American economy is getting battered while China continues to boom.

Again, in a globalized world, there is always demand out there. The issue thus isn't about stimulating demand within your own country. It's being competitive enough so you can export and meet the demand of any country that wants your stuff.

And for America, that does mean giving manufacturers an incentive to offset the problems posed by the exchange rate and relatively high minimum wage. And stopping silly ideas like the service-based economy.

[Sashi]

The Chinese economy is growing because they are in the "burn everything for money" phase of capitalism that rapidly converts mud farmers into the middle class. That ballooning middle class is a super dense singularity of demand. But China is making sure that demand is met by China whenever possible.

What's low isn't a universal statistic called "demand", what's low is demand for US manufactured goods. The incredible strength of the USD means it can buy shit from China for pennies, but it costs gold bricks for China to buy shit from the US.

[cthulhu]

Total aggregate demand for asia is 11.6% of global GDP (this includes china).

Demand in asia full stop is low.

[Zinegata]

Not really.

http://en.wikipedia.org/wiki/Economy_of ... c_of_China

China exported 1.2 trillon dollars worth of goods in 2009. But they also imported a trillon dollars worth of goods in the same year. The only country which imported more? The United States.

But the US wasn't really able to take advantage of this demand. China's top three import partners are Japan (12.3%), Hong Kong (10.1%), and South Korea (9%).

So Hong Kong, a puny little island with no natural resources to speak of, got a bigger share of the Chinese market than the entire United States.

There's something seriously wrong with this picture, even considering that Hong Kong is a major "clearing house" of goods going from East to West and vice versa.

[cthulhu]

Sure, that's a huge chunk of change, but aggregate demand from SE and Central asia is only 11.6% of global demand.

[Zinegata]

Your figures are changing now. Is it Central Asia (which doesn't include India) and SE Asia (which doesn't include China), or is it Asia including China and India?

But, anyway, the demand is increasing in China. They weren't importing a trillon dollars worth of goods in 2008, but they were in 2009.

And the United States pretty much failed to take advantage of this demand.

That's really the reality of a free trade world. Whoever owns the factories and can keep selling products will win. While having an economy based on giving each other back rubs will get stuck with a huge pile of IOUs.

[cthulhu]

It includes both.

And sure, demand is increasing in china at 8% a year, which is strong.

But globally it's still fucked, because that leaves you with 2.2% demand to find that the OECD countries are not going to cough up with.

[Zinegata]

Source?

I ask because I want to check if it's aggregate consumer demand (which is indeed pretty low in Asia due to the emphasis on individual savings), or if it's overall demand - including industrial products (which it shouldn't).

[cthulhu]

Will have to get other laptop, was reading it on the news awhile ago.

[Username17]

China really isn't all that. They have an alarming growth curve, but they aren't the number one producer of basically anything. Their Oil Consumption is very nearly caught up to Japan, the US is still in a class by itself.

The thing that has people worried is that exponential growth is a big fucking deal. 8 percent growth involves doubling every 8 years. And China has enough people that if they ever started to use resources like Americans, the planet would die and take all of us with it.

But China is still the third largest economy in the world. And if the Eurozone centralized enough to count as an economy, China would be the fourth. t has alarming future trends, but right now they aren't number 1 in anything at all (except population).

-Username17

[CatharzGodfoot]

And China has enough people that if they ever started to use resources like Americans, the planet would die and take all of us with it.

That makes me wonder which country has caused more extinctions in the past 50 years.

[mean_liar]

So... why bring up fiscal multipliers which don't address the trade deficit issue at all? The issue is the deficit taking money out of the American economy, even as the government tries to pump in more money to make it tick again.

1) Government hires Jack and pays him a monthly salary.

2) Jack buys basic goods from a store.

3) Store buys basic goods from the factory.

4) Factory expands to meet the demand from all the stores. To expand, the factory must thus hire more people, growing the economy, decreasing unemployment, and making people happy.

The problem with modern-day government stimulus (which is all government spending - not just the Stimulus package which) is that the factory doesn't have to be in the same country anymore.

It's actually...

1) Government buys infrastructure and other large construction projects

2) First-world construction is locally-sourced and predominantly regionally-supplied

3) Local Contractors and regional suppliers get paid

4) Go to Zinegata's Step 2

It ends with:

N) Infrastructure upgrades reduce cost-of-business, easing future growth


So while you can't keep the money in the country at all stages, you can fund projects and efforts that favor that on the front-end. Its not difficult.

The fact is that America still makes shit. Lots of it.


[quote="Zinegata]

Point #1. America's trade surplus is largely the result of it being the shit-hot currency reserve of choice.

Point 1: Not really. Before the 70s America really was the biggest producer of goods in the world, and a lot of that was going to the rest of the world.[/quote]

We still are; only China and Germany out-export the US, and on a per-capita basis China falls off entirely.

Point #2. The issue with the US economy is that demand is down.

Point #2: The issue isn't that the demand is down. If the demand is down, then why is the Chinese economy still growing? If demand is down worldwide, all economies should be hurting equally. But it's pretty clear that the American economy is getting battered while China continues to boom.

China is booming (relatively because its fueled by a massive real estate bubble and dumped a massive Keynesian boost on itself.

[Zinegata]

But China is still the third largest economy in the world.

It's the third largest if you go by nominal dollar figures. But if you go by domestic Purchasing Power (a better measure), China is actually 2nd now - with a 9 trillon PPP dollar GDP compared to America's 14 trillon. If you really want to count the EU as a whole, they're bigger than both the US and China anyway regardless of which GDP figures you prefer.

http://en.wikipedia.org/wiki/List_of_co ... _GDP_(PPP)

Moreover, here's the kicker:

More than 75% of the American GDP is tied to services. Only 25% is provided by industries and agriculture. So of the 14 trillon dollars in the American economy, only around 3.5 trillon goes to producing goods anymore.

China, by contrast, has about 55% of its 9 trillon dollar economy devoted to industry and agriculture. So despite having a smaller GDP overall, China's industries and agriculture are now actually worth about 5 trillon dollars.

In terms of gross totals, that's considerably higher than what US industries are contributing now, so they are in fact outproducing everyone else in terms of goods.

Sure, they aren't winning on a per-capita basis, but that's because they have too many people.

Mean_liar->

Keynesian economics isn't just about construction however. It's about making people dig up and fill in holes just so they have money to buy goods.

Construction is a great industry to promote if you want to keep money circulating within the United States. And it does work - the Nazis may be evil, but building the Autobahns did help in getting the German economy out of its recession back in the 1930s.

However, you *can't* rely on government construction projects forever. Because while roads help facilitate the transport of goods, they don't actually produce goods themselves. Back in the 60s and 70s, there were a lot of newly independent African nations who went on an infrastructure spending spree, but it didn't cause their economy to boom - largely because while they built roads, people were still buying their consumer goods from the West instead of creating their own native industries.

And that's really the big problem of America today - even construction workers still buy goods that aren't necessarily from the United States. And the trade imbalance isn't small - again it's estimated to hit nearly a trillon dollars this year. While some trade deficit may be acceptable, the deficit is too high.

Worst case scenario? One day, the trade deficit will cause the dollar to massively lose value (because people have been keeping it artificially high, and when bubbles like that burst the result is often a crash rather than a gradual decline), making it much more expensive to export goods to the US. That'll cause massive inflation in the US which would just pile on to the unemployment problems.

[cthulhu]

Will have to get other laptop, was reading it on the news awhile ago.

Still looking for this. Web history isn't providing me the answers I want damn it.

[Juton]

Worst case scenario? One day, the trade deficit will cause the dollar to massively lose value (because people have been keeping it artificially high, and when bubbles like that burst the result is often a crash rather than a gradual decline), making it much more expensive to export goods to the US. That'll cause massive inflation in the US which would just pile on to the unemployment problems.

That day may be sooner than we'd like:

http://www.thirdage.com/news/quantitati ... _11-8-2010

[Zinegata]

cthulhu->

It's okay. No problem.

Juton->

Yeah. And the rest of the world is pretty much pissed off too:

http://money.cnn.com/2010/11/08/news/in ... ce=cnn_bin

Money quote from the German Finance minister:

"With all due respect, U.S. policy is clueless."

And given what happened to Japan a couple of years ago, I'm gonna have to agree.