This is an alien concept to many people and economic policy makers. See the parent article. They report on a capital glut, but are puzzled that it exists. The Fed keeps pumping capital into the economy in hopes it will fuel growth. But pumping capital into a capital glut doesn't do much.

Look at Japan since 1989. Japan hit this about two decades before the US did. They never really figured out what to do about it. That's discouraging, because if Japan had a solution, we'd have a success to look at.

So nobody really knows what to do about a capital glut and a demand shortage.

Back in 2013, HuffPost ran an article pointing out that had minimum wage kept up with inflation, it would be $10.50/hr and actually more like $21 if it had kept up with productivity growth [0]. That, of course, assumes that the original minimum wage rate was set reasonably, but I can promise you that few people, save some well-educated counter-cutlurists, can live on $7.50/hr these days. And even if they could, they wouldn't really be spurring demand in the greater economy.

[0] http://www.huffingtonpost.com/2013/02/13/minimum-wage-produc...

But there's definitely a need to reduce poverty. And there's a need to allow ourselves to stop working as hard as we do. A basic minimum income would help accomplish these things. Where do we get the money from? It doesn't really matter, there's plenty of it sloshing around. As Charlie Munger said:

“This has basically never happened before in my whole life. I can remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe – I’m really flabbergasted. How many in this room would have predicted negative interest rates in Europe? Raise your hands. [No hands go up]. That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory….

I think something so strange and so important is likely to have consequences. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors. You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.”

Simplified primer by Joseph stiglitz.

http://huffpost.com/us/entry/world-economy-2016_b_8908560.ht...

Really? There is nothing you could improve in the human condition that would make life better?

The world isn't static.

In pure economic terms, curing cancer has little benefit to society. Cancer is not any one specific disease. It's a class of diseases, of which there are thousands (or more) of variants.

We may stumble on some amazingly technologically advanced cure to some forms of cancer but the more rare the form, the less likely there will ever be a treatment.

Most people get upset when you talk about humans as assets because we're indoctrinated at a very young age to value human life above all else.

If you can, in fact, speak about humans in economic terms of supply/demand. We have an overabundance of people, and nothing useful to give them jobs to do.

It's like the current oil market. Oil was highly valued due to the inelasticity of supply. Now that there is a glut of over supply and inelasticity greatly reduced, the value has dropped dramatically.

The supply of humans capable of doing useful work used to be somewhat constrained. Now, we have more people than can be reasonably assigned to do useful work without essentially paying them to warm a chair. Yet, like the oil market nothing is stopping people from having more kids and increasing the supply. The government even directly subsidizes people for the number of children they have due the persistent belief that GDP is directly dependent on population.

People can increase their value proposition by earning many degrees and racking up huge amounts of debt but, unless you're going to work in the industries that are thriving, it's a buyers market for employers.

Business owners have their choice pick of the herd. They can keep wages as low as possible and skim more cream off the top because there's a line out the door of people waiting the replace a worker who quits.

Who knows, maybe this is just the supply limit (ie in environmental science terms) as it applies to the human population. Poverty and misery is the expected result of making too many people before we can come up with enough useful reasons to sustain them.

One counter to this argument is that as this process of overpopulation (relative to useful jobs) begins to happen, standard of living decreases.* As standard of living decreases on average, people start to have less children. So the imbalance is somewhat self-correcting, it's just that human lives are getting to be longer while the time between inventions that obviate the need for human labor seems to be getting shorter.

Longer average lifespans (with the same legal retirement age for social security, medical benefits) exacerbate this problem.

But there is always one industry that can be fueled by human lives and that looks great on an economic balance sheet - war. It decreases surplus labor, increases nationalism and social cohesion (if people generally see the necessity of the war), and injects a huge stimulus of demand into the economy through gov spending on all sorts of goods for the war effort, as well as investments in R&D that adds to the country's infrastructure base.

If the latency between idle/restless/poor/disenfranchised population and meaningful/useful jobs gets to be too large, then all it takes is a spark to start a protest, rebellion, or war as people have nothing else to really live for.

* I would use GDP/capita to have a more quantifiable benchmark, but I find GDP to be almost completely useless when accounting for things that matter to actual human beings such as quality of social cohesion, potential social mobility, amount of pollution, etc.

That seems counter to all actual evidence doesn't it? The places with the poorest standards of living have the most children and visa verse.

We actually have some pretty good existing examples to draw from to conclude this. Japan has arguably the highest standard of living, but also a decreaseing birth rate.

Women in Australia and America are having children later in life, and having fewer of them as well.

Meanwhile in developing countries where access to birth control and education are more limited, birth rates are sky high.

Production does not fund other things, and disease cures are not something that people willingly buy. Excess production just wastes resources on things people do not want to buy (unsold automobile inventory, etc.) and is enabled by access to too much speculative capital. Redistribution of that capital (in the form of higher taxes) into government-mandated and funded research programs to find cures for cancer is how you find a cure for cancer. Disease research in the United States is not funded by pouring water on your head (http://www.nbcnews.com/health/health-news/ice-bucket-challen...) or Tim Ferriss (https://www.crowdrise.com/timferriss), but by the $30 billion budget of the National Institutes of Health.

The person you replied to said "production isn't the problem, distribution is", and you seemed to agree with that in your comment. Getting poor people cars and houses and services isn't a production problem, it's a distribution problem. It's a pricing problem. It's an efficiency problem. Producing more cars isn't going to make them easier for poor people to afford.

And even when they do overestimate demand, like you said, it gets marked down. So it all gets consumed in the end, and the producers might not even take that big of a loss depending on how much it was marked down. And the poor people benefit from that too of course.

Unless people start throwing away new cars then they aren't over producing.

About throwing away new things - heard of planned obsolescence? That's what companies now do to cope with falling demand. Yes, your car maker does it too.

I don't actually think they are overproducing. They make a huge markup on new cars, so having to discount a few that don't sell isn't a loss.

Also factories are pretty much large fixed costs. Overproducing actually doesn't cost that much. The car might only cost $500 worth of raw materials, but the cost of the factories and infrastructure necessary to turn that into a car is massive.

>(aka. no one wants to buy the last few carrots)

Which is literally only true for vegetables, not the economy in general. And you only need to sacrifice a handful of vegetables to for it, so it's a fixed cost.

But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down. The only reason to underproduce is to increase demand. But if you lower supply and demand doesn't increase, you've already been overproducing. So if they're closing factories, it means they've been overproducing.

Which was done just after a recession. That's not evidence of overproduction in general, just one year when demand unexpectedly went down.

>But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down.

But if we can produce so many cars, why are cars still expensive? Shouldn't the ability to create massive supply drive the price down a lot?

There are plenty of people that want new cars. And are willing to pay for them. It's not like we have more cars than people actually want. It just costs a lot to make a car. And that cost includes fixed costs like the factory itself. But factories wouldn't be closing down if other costs weren't also very large.

Yes in theory we could make millions more cars than we do. But not for free. It would require buying more materials, hiring more workers, building new production lines, etc. Those costs must be greater than the expected return for selling another car. Otherwise they would already be doing it.

But again, we're talking economics right now. The subject is production. Once again I ask: you said we're limited by our ability to produce, do you have anything to back that up? And no, saying "it costs a lot of money" is not proof of a production bottleneck, it's proof that companies hire accountants.

So at this point I'm going to step away from this conversation because I don't think it's going anywhere. You've made me think a bit about economics, so thanks. Good conversation.

What I'm arguing for is on how we should look at universal basic income. Some people see UBI as a way to increase aggregate demand. I see UBI as a way to get rid of poverty, so there would be no such thing as what you call "the poor". The difference is that I don't see a lack of aggregate demand as a problem. If we could rid our society of poverty without making a dent in aggregate demand, I see that as a win.

Another way to think about it is in terms of productivity. Do we really need to make everyone more productive? Do we need to be make the poor maximally productive before lifting them out of poverty? Why can't we just lift them out of poverty?

People regularly die from starvation, but the world produces more than enough food to feed everyone. It is a problem of distribution.

There are hundreds of thousands of vacant homes in San Bernardino, there are many thousands of homeless that could easily be transported there. If those homeless were to move into those homes they would soon be evicted or arrested and imprisoned. This is an issue with ownership, not distribution. Much food from local restaurants, cafes, and grocery stores is thrown out every day as it nears expiration. Thousands of hungry would love to enjoy this food rather than waste it. This food could be donated or even left out for people to scavenge, yet it ends up in locked dumpsters. Again, this doesn't sound like a distribution problem but instead a problem with ownership.

We do produce more than we need, if need is conditioned on ability to pay.

Redistributing wealth means spreading out ownership more.

For the people with no excess of capital, though, we can improve the situation.

That's like saying "Restaurants have food, and there are homeless people in the city, so why can't we distribute the food from the restaurant to hungry homeless people in the city?".

If you were to distribute foods from the restaurant to the hungry people in the city, then these restaurants won't produce that food, because they are not a charity, they are in the business.

Similarly, if you don't figure out where this money would come from, you will soon stop seeing all this money you want to give away.

A basic income is a far better solution than our current mess of bureaucratic welfare programs that are both inefficient and rife with harmful unintended consequences for those they intend to support. Milton Friedman's "negative income tax" was intended to be a basic income until it was bastardized into the EITC.

If you don't give basic income for kids, then people with a lot of kids won't be able to live.

Of course, you can adjust the amount between the too extremes of full basic income and no basic income for kids, but just because you have a target standard of living and give the parents money to meet that for the kids, doesn't mean the parents aren't going to turn around and spend that money on themselves. They might not care that their kids are in poverty as long as they get the drugs/alcohol/new car/fashionable clothes or whatever.

As you already stated, bureaucratic welfare programs don't work, so what is the solution here?

I've never seen this discussed, and it seems like a major oversight of the basic income proponents.

You've got to search for an alternate location, consider schools, work, commutes. Neighbors. Etc.

I can see major arguments for managing rent as a social function.

Though that depends heavily on supply and demand factors as well.

Economic incentives should encourage local, suitable (even for apartments) housing in an area to be approximately equal to the number of jobs in that area (then pad up slightly for BIG if that's also an 'employer').

1) If a single mother/father only spent 1 hour a week taking care of their kid, they would surely be punished for neglect. So we are willing to literally coerce people who choose to be parents into working at least 52*18...938 hours. At a minimum wage of $5.35, that is at least $5,000 of coercion.

2) If we have a workable basic income, then someone shouldn't find themselves in the desperate position of having a medical procedure done to make ends meet unless we don't have universal healthcare.

I know of 3 small children in my own life whose parents collect welfare, and are meth addicted.

Maybe for the first 20 years of the program every child affords a parent some additional BI based on the child's age. Raising a child when health care is inexpensive(my vision of BI does include pretty much free health care), job's are optional, and schooling is free makes the most expensive times to be early in the child's life when they are constantly outgrowing their clothing and beds and using up diapers at an impressive rate.

Eventually the amount of BI awarded becomes sufficient for most family situations(Star Trek post-scarcity style) or other factors like perfect birth control allow us to remove the child BI bonus.

Imagine the minimum income for children was diverted into services. So the government buys free clothes, school breakfasts+lunches, and medical insurance. This decreases the cost for a poor family to raise a child which allows you to give less money per child, and reduces the incentives for child farming.

This sounds like the edge case a non-parent would bring up. People who make poor life choices make them for far less insightful reasons that time-value calculus.

It would take an unbelievable amount of money for me to have another kid. It would be cheaper to buy my retirement.

A living wage means just that: what is required to support a worker, their family, including children, and educate them, to provide the next generation of workers. Adam Smith discusses this at length in Wealth of Nations (Book 1, Chapter 8: https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...)

You'll find other examples in Richard Meier, Science and Economic Development, 1966, dating to California during the Great Depression.

China has for years done intense injections into its economy (both top and bottom down), with worker training programs, state owned enterprises, etc; and now they became so reliant on the artificial demand created by their own government that they have huge slack in inventories. There's a reason why copper/steel/oil are plunging.

There aren't many, if any, examples of "demand drives growth" working in a long term situation. In the short run economies simply need to work out their gluts, and slack. Famously coined "creative destruction," the unhealthy aspect (especially after Keynes) is that growth become a policy goal rather than sustainability in that growth. To this Keynes said "in the long run we're all dead," putting short term growth into focus of government policy makers rather than long term growth which often requires negative GDP growth and recessions.

Anyhow, you're also mischaracterizing the Chicago School and Milton Friedman. There is no claim that you can "never run out of demand." And the "freshwater school" is about discretionary policy of government policy, not whatever you just tried to say. This is one reason why Friedman was fond of the "Friedman rule" or the "K% Rule," because it took discretionary powers away from the Federal Reserve. The idea is that with rational expectation of monetary growth the market can set its expectations to not be prone to monetary policy failures. The same is true of government failures. The idea of "market failure" is a criticism, but the Chicago School doesn't deny market failure exists, only that the government should have a limited discretionary role involved in picking up any demand slack.

If the government bought wheat, for instance, to keep its price high and keep farmers employed; then burns it, this creates asset misallocations, though it is technically creating demand (this still happens to this day.) A policy measure is put into place to address a problem, but instead of the market correcting to shift to different types of production it continues its course and creates slack in other areas (such as too little corn, or soy.)

This has been done successfully but without the burning. Just keep the price stables buying when the price fall and selling when the price goes up.

The idea of a buffer should be easy to understand here in HN. It can be done with all kind of things: http://bilbo.economicoutlook.net/blog/?p=23578

This "creative destruction" doesn't look very rational, don't you think? Is it not the goal of an economy to provide a good life for the human beings in that economy?

We should be able to do better than destroy capital in order to start again the game, but this time with less people owning more of the pie.

And there is no need for the government to be involved in that either. If there was really predictable price fluctuations between years, investors could make money buying up commodities on good years and selling during bad years (and they do.)

I just said that it have been used successfully as a way of buffering prices, without the need of burning anything, in comparison to this "creative destruction" that he sees as necessary.

The comment I was answering, talked about a government buffering mechanism as something wrong and destructive (burning real wealth). I just pointed that this kind of mechanism is not necessarily destructive.

In the next paragraph he proposes that the only way to go out of recessions is the "creative destruction" of capitalism. This is effective destruction of real wealth. It seems, that if the markets decide to destroy real wealth, then it's OK.

My answer was only about that and I was not saying that the buffering mechanism created demand.

Interestingly enough, even if I was not claiming anything about that before, there is a buffering mechanism that would create demand, and keep inflation in check: Job Guarantee as a buffer mechanism of jobs.

http://www.epicoalition.org/docs/buffer_stock_employment_mod...

I am not totally convinced about the idea myself, but I think it deserves more attention

Of course, this can be done not completely blindly, by investing 10 to 1 with existing investors, or providing a guarantee to return 50% of lost capital, or having milestones companies need to hit, or have experts in the field provide "votes" toward getting higher levels of funding after examining their progress so far.

At better approach to stimulating demand would be to offer a cash prize or a guaranteed purchase contract for specific innovations that meet defined criteria. For example, what if the US federal government offered to purchase 10 million doses of a 90%+ effective Zika virus vaccine at $100 per dose? I'll bet that would encourage private investors to take a gamble.

The Chicago School has always been quite diverse, from its early days with Frank Knight, Jacob Viner and Henry Simons to later periods of law and economics, new institutionalism and other tendencies.

Saltwater/freshwater came about because of a dispute in the dominant neo-Keynesian macro at the time (which both sides subscribed to) regarding the IS-LM model and the Phillips curve unemployment-inflation trade-off. Naive expositions of IS-LM had ignored the money demand function, which Friedman pointed out and ended up kickstarting the monetarist controversy. Phelps and Friedman also discovered a flaw in the absolutist Phillips curve and augmented it for rational expectations in 1968, destroying its former validity and anticipating the ensuing stagflation. This influenced Barro and Lucas to start the rational expectations revolution in macroeconomics, but it ended up being taken overboard to model always-clearing markets and other perfections.

Make no mistake, though. Both sides were operating in the same general framework. Most Chicagoites absolutely did not deny that there could be aggregate demand shortfalls. They were mostly Keynesians like the rest.

The connective tissue is that in order to think that, it helps if you think there's untapped demand constrained by monetary policy.

At the margins, the cost of additional production is so low that there are multiple deflationary pressures even if everything looks normal.

The basic Market Monetarist ( the intellectual sons & daughters of Friedman ) stuff these days is quite interesting. It's very little fun because there's nothing to it to where you can have a "program" - either spending or austerity - to fit the ( lack of ) ideology[1]. So policy makers aren't interested. My favorite Monetarist - Scott Sumner - gets dismissed by such as Paul Krugman, saying that the stories are too hard; that's the politics are wrong[2]. It's not an assault on it even; just a dismissal. Very enlightening.

[1] which is in itself an ideology with certain blinders on - one I ascribe to, unfortunately.

[2] which I think means it has no politics and resembles control theory too much. If everybody can buy the Monetary Policy expansion pack for MATLAB and check the economists' work, there won't be any economists beyond a level....

I believe this is a phenomenon captured by the term "Pushing on a string."

These schools differ in their analysis of the business cycle, that is the fluctuations around equilibrium output that are called booms and recessions/depressions. Saltwater economists believe that you can have too little/too much demand during booms/recessions. These are generally called "out of equilibrium" conditions. Neither group claim that in equilibrium, you can run out of demand.

Source: I have a PhD in economics.

EDIT: also see vezzy-fnord's answer, most "Freshwater" economists are and were some kind of Keynesian.

Instead of trying to increase demand to match supply, what if we decreased supply, like having a four hour workweek?

There is nothing wrong with a four hour work week. The reason people still work long hours is not careful engineering of the economy to keep demand high, but people's natural desire for essentials like healthcare, and also luxuries and status-signalling goods. Also hours seem to be decreasing in Europe, which has a different culture to the US.

Also, one (left-wing) colleague of mine made the following point to me when I said something similar about economic growth: Would I be happy to see the world level out on a 1920's standard of living, including healthcare? If not, why is the current standard of living acceptable? Especially when a given average standard of living will also entail people who are much worse off. So to raise the standard of the worst off, we most likely need growth for everyone.

Sure they do. The concept of "Unlimited Wants" and Thorstein Veblen's "Pecuniary Canons of Taste" pretty much wrap up a capital glut. Spend it. Money flows somewhere. A demand shortage is not necessarily permanent (horse carriages vs automobiles withstanding)...that's one of the many reasons why the word pivot exists in YC vernacular. Everyone/everything living consumes. There are demands that are fundamental, and demands that are extraordinary. A market exists for all demands, no matter how small or how large. Demands = needs small or great. If you are selling buggy whips in the automobile age, yeah, you might have a demand shortage...so think and pivot. Absolutes have a place in extremum; an exercise left to the reader.

Then with that tax you re-invest in infrastructure, exploration of new resources, and even missions to space. (I'd rather we have a (robotic) mission to the asteroid belt than mars...).

How is it not an idea and an idea simultaneously