What drives the economy is people creating value. When people have created value, they can exchange that value for things they want from other people who have created value.

Simply handing people money to spend is not stimulative because it does not create value. Put another way, taking money from A and giving it to B so B can buy things from A does not (and cannot) make A wealthier.

The route to greater wealth for A and B is that both A and B specialize in creating things that the other wants. Then, they trade, and each winds up with a higher standard of living than if each tried to do both. Economies are built on the greater efficiency that comes from specialization, and the resulting trade.

Either way, the process of creating 'real value' on both sides cannot get started in some cases because neither A nor B has any confidence (or capital to support their confidence) that the other side will have the currency to buy the real value they intend to create.

Sure, the currency itself just goes around in circles, and only acts as a catalyst to creation of the 'real value' we are after. But by injecting actual currency to one side or the other (through tax cuts or other means) we increase the aggregate demand and thus amount of flow of this currency in the economy as a whole. This could then (hopefully) increase the confidence of A and B that the other will buy their real value and thus is a way to restart the circular flows of productivity that ultimately creates jobs (and real value).

His talk sort of just assumes you are aware of all the above. His actual point is that by giving tax cuts to the wealthy instead of workers a greater percentage of the stimulus / tax cut stays in bank accounts and thus the effect on aggregate demand is less.

(As eloquently put by Jimmy Stewart in "It's a Wonderful Life".)

Therefore, placing currency in the hands of the masses can and will drive value creation, because it will assign economic value to what brings value to the masses.

Sure they can, according to some models.

Here's the argument: Say A and B produce goods for each other, and so A might buy something from B for $5, and B might come back and buy something from A with the same $5. They are happily creating value, trading back and forth. Now, say something scares A so that he wants to save some of his money instead of spend. Then B is getting less income from A, and so she also becomes worried about her future income and spends less. Then A gets even less money, and is even less willing to spend. As you can see there is a feedback cycle where A and B produce (and spend) less and less. This is a recession.

Now give B some money, possibly even taken from A. Now B is getting a more reliable income, an is more willing to spend on A, who thus earns more and becomes more willing to spend on B, and so on in positive feedback.

This is basically Krugman's "Babysitting Co-op" scenario.

It also assumes that A stuffs the money into the mattress rather than lending it to C, who uses the money to create something that B wants to buy.

It's a very simplistic two-part scenario and has a lot of problems, not in the least what the 'something scares A' part of it. It also assumes that nobody else wants to buy products from B.

In fact the more I read it, the less I am convinced it has any merit at all.

Which? The model ealloc describes or the Babysitting Co-op scenario? They aren't actually the same.

John makes software for law firms. His software has lots of bugs. John justifies this because he can make more money by adding features and isn't at risk of losing his cash flow because there are no competitors in his space. IMHO, John has an obligation to write better software simply because his constituents deserve it. I also think it could be warranted that he charge even more for it at this point. While I'm not sure bug-free software is a universal good, there are definitely products that ought to be better or not exist (pornography and cigarettes come to mind). The government should not have to regulate these.

Value does not exists per se.

You are so simplicistic here, guys, when you talk about rich and poor.

I know you are not so young, but sometimes it seems you are a group of small kids talking about life.

The reason there is so much political emphasis on job creation is that the unemployed are a small but vocal minority, who's political decisions may rest almost entirely on job growth. Whereas value benefits a lot of people in a small way, but value alone probably will not be enough to sway someone's voting decision.

Economy has no rules outside the square we create. So, there's no such thing as Economy per se.

You have to remember that the reason a group of people doesn't go out and take what they want is that there is a State, there are laws, there is a monopoly of legitimate force (the police): all of this can survive only if there is a contract between state and the people. All the people, not just the rich or who has a job or <put a category here>

The community of people is far, far more than the State. Cultural/religious norms shape the State and the rules. If corruption is tolerated, for example, it doesn't matter what the official State rules are.

Furthermore, economics are baked in to human nature. Indeed, gender differences are a kind of specialization of labor. Economic activity and surplus allows the creation of the State, not the other way around. In fact, while certain State activities like protecting property rights advances the Economy, most activity by the State is parasitic on the Economy.

Well, if you think fishing and hunting are economy, go with that.

States can certainly make trade easier and safer (though it doesn't always do so), but to say trade cannot exist without the state is simply wrong.

Yes, there has to be a customer; but identifying that customer, discovering his desires, and satisfying them in a way that creates net value for all parties is the role of the entrepreneur. Doing that successfully is not a trivial task, and entails substantial risk. Saying that this isn't a value-added activity is like saying that scientific research doesn't create value because the physical world already is what it is, or that explorers and cartographers are useless because the land that they're mapping already exists.

And entrepreneurs and investors do create jobs: if a venture fails because it turns out that the demand wasn't there to begin with, the employees of the venture still get paid - not by the customer, but by the investors, out of the capital that they've risked and lost.

The necessity of demand is the 'elephant in the room' because so much of the political argument so far has revolved around increasing benefits for the suppliers, rather than increasing demand. The argument has been, "we're supposed to make the wealthy wealthier, and then -- magically -- they will create more jobs."

If the necessity of demand isn't the elephant in the room, then why isn't there broad political support for higher tax rates on the wealthy? Why isn't there broad political support for economic stimulus packages? Why isn't there broad political support for universal health care, a significant expense for poor and middle-class Americans? Why isn't there broad political support for lowering taxes on the poor? Why, instead, do I keep hearing such balderdash as, "The poor pay no taxes at all"?

Nobody's saying that business people don't add value to the economy. What people like this guy -- and me -- are saying is that they don't add value all by themselves. And, if that's a point that people can agree on, then the very next question is naturally, "Why do the bulk of our economic strategies focus only on benefiting them then?"

If a venture fails due to low demand, yes, some investor and some capitalist assumed risk and have presumably lost something. But, worse still, are all those other people -- those employees -- who didn't have anything to risk in the first place, and are now back to looking for work again. In your scenario, there wasn't any net job creation, there were just some positions temporarily filled.

And, anyway, if the business people do the market research they're supposed to do first, and the demand isn't there, they won't bother starting anyway.

Let's stop making up fairytale scenarios. Let's start getting specific. Let's look at things like leveling-off or falling consumer demand for gasoline [1], and then let's look at the tax breaks afforded to oil companies [2], and let's ask ourselves: if we're doing everything right, if we're granting these companies record profits [3], then why haven't they lowered gas prices to increase demand like the magic formula says they will?

[1]: http://soberlook.com/2012/03/us-consumer-is-saying-no-to-hig...

[2]: http://www.washingtonpost.com/business/economy/how-much-do-o...

[3]: http://thinkprogress.org/climate/2012/02/08/421061/big-oil-h...

> If the necessity of demand isn't the elephant in the room, then why isn't there broad political support for higher tax rates on the wealthy?

Because the two concepts have nothing to do with each other, and support for higher taxes on the wealthy - or anyone else - has antecedents in much more basic underlying principles that many do not share, and often strongly oppose in their own right.

> Why isn't there broad political support for economic stimulus packages? Why isn't there broad political support for universal health care, a significant expense for poor and middle-class Americans?

It's because people oppose these ideas in their own right, and see them as being unjustifiable means even if they could achieve their stated ends.

Many people do not want macro-level attempts to manipulate their economic situation at all. Many people do not want to outsource responsibility for their health to external institutions at all. Many people resent that these intimate and personal aspects of their lives are being politicized and turned into public questions in the first place.

> Why isn't there broad political support for lowering taxes on the poor? Why, instead, do I keep hearing such balderdash as, "The poor pay no taxes at all"?

I'm not sure where you've heard that, but I assume that you and whomever you were discussing the matter with had two very different definitions of the term 'poor'.

> What people like this guy -- and me -- are saying is that they don't add value all by themselves.

Nothing ever does. The very concept of value implies that there exists at least two distinct entities: the thing being valued and the being doing the valuing. In commerce, there are at least two valuers and two 'valuees' in every transaction.

This is basic and obvious, and I don't see how it generates any new or significant perspective on any question.

> But, worse still, are all those other people -- those employees -- who didn't have anything to risk in the first place, and are now back to looking for work again.

Since you're intent on analyzing everything from a macro-level perspective, consider that if a certain proportion of all startup ventures are doomed to failure from the outset, and that these ventures provide a certain aggregate number of jobs, then those jobs represent an ongoing pool of jobs that is not supported by market demand.

In other words, some proportion of total jobs is always being subsidized by capital losses, rather than by aggregate demand.

But to your point of this being 'worse', I'd ask "worse than what?" If you choose to support yourself by taking a job working for a third party rather than applying your labor to the direct satisfaction of your needs and desires, then the risk of losing your job is always present, regardless of whether or not the business you work for is sustainable in its own right by market demand. The only way to eliminate this risk is to avoid being dependent on a single external source of income in the first place (which, in my opinion, everyone ought to do to whatever extent they can).

> And, anyway, if the business people do the market research they're supposed to do first, and the demand isn't there, they won't bother starting anyway.

Market research is hardly an exact science. Accurately gauging market demand is extremely difficult, and ventures fail all the time. The core problem of economics is one of epistemology.

> then why haven't they lowered gas prices to increase demand like the magic formula says they will?

What magic formula are you talking about? What problem, exactly, is the profitability of oil companies an indicator of in the first place?

You assume here that demand is possible, it just needs to be created through marketing. I get that that's what marketing does -- I really do. I read a great article recently about the rise of marketing in the U.S. as a way to get people to buy things that they didn't know they needed, as a consequence of the industrial revolution creating a surplus of products.

But that's not what we're talking about here.

We're talking about an economic environment in which people don't have enough money to spend. And the solution to that -- and, it seems, your solution as well -- seems to be to give more incentives to the people who do have money to spend.

So that's what I'm trying to point out to you. I don't think it should be a revelation; I'm surprised it's even a point of debate. I've done a couple of quick searches online for citations for some of my arguments elsethread -- there are a ton of other citations which I could bring which could be altogether summed up as, "companies have more money than ever before, and consumer demand is still low and consumers still don't have money to spend."

So, at what point should we step back and say, "OK, this strategy isn't working"?

You object to my macro-level perspective on economics. I object to the idea of managing a system as complex as economics at anything other than the macro level. I honestly do not understand why any economic strategy should not involve the entire economic ecosystem.

> Because the two concepts have nothing to do with each other...

Granted, but I was leading into that with the next couple of questions. Taken out of context, no, they're not related. In context, yes, they are.

> It's because people oppose these ideas in their own right, and see them as being unjustifiable means even if they could achieve their stated ends.

But, seriously, achieving their stated ends would justify their means. You seem to be saying here, "Sure, those are solutions to the problems, but people don't support them even if they do solve the problems." ...OK, so, why? Seriously, why are economic stimulus packages unjustifiable, but austerity is not? There are quite a few Greeks asking this same question right now...

> Many people do not want ... Many people do not want ... Many people resent ...

I hate to do this, but "many people" is not a good counter-point. I'm trying to stick either to specifics, or to things that I could produce citations for, or to things which (I hope) are clearly opinion. Would you mind doing the same? Otherwise, we're just making things up.

For example, you say, "Many people resent that these intimate and personal aspects of their lives are being politicized and turned into public questions in the first place." OK, I'm one of those people. Let me explain: I've worked hard, for years, to claw my way from poverty -- actual homelessness, not enough money for food, all that good stuff -- up to lower-middle-class, and I'm working hard to at least stay there. I'm also the owner of a small business.

So, I should be one of the darlings of the Republican constituency, right? I wish it were so.

I resent that our country is still arguing about health care and tax breaks for huge corporations and tax breaks for wealthy people, while making it sound like these are all things which benefit me, when they don't. I am living this. It's not politics to me, it's life.

My company builds long-term relationships with its customers. A year ago, my biggest client had their research funding canceled. There is a ton of work they would love to pay my company to do, but they can't. Not because they're choosing to save it instead, but because they don't have the money.

My company recently enjoyed its highest-ever billing cycle, just last month. Great news, especially when my overall trend has been pretty good. But, right now, I have $30 in my accounts, because my company is also right now suffering through its slowest recent month in actually receiving our invoices, since so many of our clients are running a little short on money right now.

I have, for better or for worse, a middle class mentality. I don't care as much about accumulating money as I do about doing things with it. I have lots of projects and hobbies. I have a truck that I'd like to finish the R&R on. Better yet, I'd love to pay someone to finish a huge chunk of it for me, to get it done faster. But, I can't afford it. I would have liked to go climbing last Saturday, like I do every Saturday, but, I couldn't afford it.

I would like to hire a sysadmin/junior developer, to ease my workload and free me up to work on some of the other long-term projects we have instead. But, I can't afford it.

Now, this is the part where I'm supposed to say -- if I were wealthy or if my business were bigger -- that it's all the fault of those mean old taxes.

But it's not.

The biggest problem facing my business right now is that my customers don't have any money.

So why are we still debating the supply side of economics when it's the demand side that is suffering so badly?

> I'm not sure where you've heard that

http://www.dailykos.com/story/2011/05/31/980891/-The-poor-pa... http://progressive-charlestown.blogspot.com/2012/02/is-it-tr... etc.

If you would like to pay my hourly rate, I would be happy to do more Google searches for you. :-) (Meant just in good humor, no offense intended.)

If they don't have enough money to spend, what's with all of the money that's circulating every day? What's with the (admittedly contrived) metric of GDP indicating that there's about of $13 trillion of value being generated via economic transactions in the United States each year.

You're also neglecting the fact that money isn't actually worth anything intrinsically; it's entirely a token of exchange that merely represents the actual utility value of the goods and services that are available for trade in the market. If the money supply remains constant but the real economy expands, then each dollar is worth more; i.e. if what you were saying is true, we'd see deflation. The fact that prices of goods seem to gradually increase suggests that, if anything, there's more money in the economy than is proportionate to the real demand that exists in the market.

The bottom line is that if there's real value to be obtained via trade, then trade will take place, and the value of the unit of exchange will simply fluctuate in response to the real value that exists in the market.

What you're really complaining about here is that people aren't spending money in the way that you expect/desire them to. You're treating the results of actual people's manifest choices as though they're a problem that needs to be corrected, as though people pursuing their own goals in life are obligated to conform to your expectations in doing so.

> So, at what point should we step back and say, "OK, this strategy isn't working"?

Why don't we take it a step further back, and consider whether and when it's appropriate and efficacious to design and implement any top-down strategies for what fundamentally amount to other people's lives. That's what economies are, after all, no matter how many layers of abstraction and aggregation you pile on top of your understanding.

> You object to my macro-level perspective on economics. I object to the idea of managing a system as complex as economics at anything other than the macro level.

Right, that's the fundamental disagreement. You've got it in your head that economies are somehow predictable systems that conform to well-understood models, and which can be managed via carefully-calculated planning.

The reality, of course, is that economies are vastly complex emergent phenomena whose patterns form from the individual decisions of billions of human beings in real time, and which follow no consistent and predictable rules at the macro level, and indeed may adhere to no fixed set of rules whatsoever, and for which, in any case, no theoretical model can even be tested in a controlled and scientific way.

I don't intend to be dismissive or condescending here, but I unfortunately can't think of a more descriptive summarization here: you're just wrong.

> I hate to do this, but "many people" is not a good counter-point. I'm trying to stick either to specifics, or to things that I could produce citations for, or to things which (I hope) are clearly opinion. Would you mind doing the same? Otherwise, we're just making things up.

I'm not making a counterpoint; I'm answering your question. You inquired as to why so many people seem to oppose your list of policy positions. This is why. You're seeing the dispute as one over which means best pursue uncontroversial ends. In reality, most of the opposition is the result of people opposing the intended ends of those policies.

> So, I should be one of the darlings of the Republican constituency, right? I wish it were so.

Either them or the Democrats. Both parties seem to have a philosophy similar to what you're advocating here.

> It's not politics to me, it's life.

I'm not sure I understand what you mean here. Why do you resent that other people have opposing positions to yours? I don't mean to sound condescending, but I really don't understand how the description of your personal circumstances relates to the discussion. What was it intended to be an example of?

> I have, for better or for worse, a middle class mentality.

What does this mean? What does it mean to have any kind of a class mentality?

> Now, this is the part where I'm supposed to say -- if I were wealthy or if my business were bigger -- that it's all the fault of those mean old taxes.

Of course it's not. Not for large-scale business anyway; capital-intensive ventures with external investors calculate their tax burden as a cost of doing business, and we can't quantify how many businesses never launched because the tax burden would have pushed them into unprofitability. And although it's possible that cost and complexity of taxes actually do prevent many very small businesses - e.g. those run by families or individuals - from being sustainable, even this isn't the crux of the objection.

The problem is that taxes provide revenue to the government, and what those taxes are spent on is almost invariably destructive. Tax 'the wealthy' so we can have more foreign wars, TSA strip-searches, email surveillance and drug wars? No thanks. Tax 'the wealthy' so we can implement more policies that treat people's lives as instantiations of presumptive socioeconomic categories and shoehorn them into patterns of behavior irrespective of their own goals and intentions? No thanks. Tax 'the wealthy' so we further politicize deeply personal value judgement relating to matters such as health care and education, simply to make the macro-level picture look pretty? No thanks. Tax 'the wealthy' so we can artificially create more customers for your business? No thanks - tweak your business model, not the world around you.

I'd love to live in a world without taxes. In this world, I prefer for my taxes to go into pork-barrel projects, the pockets of corrupt lobbyists, and general waste, anything really, that prevents taxes from funding the grandiose ambitions of people who want to remake society and people's lives from the top down, and especially those who prefer for everyone to outsource their happiness and security to outside institutions and abstract 'systems'.

> If they don't have enough money to spend, what's with all of the money that's circulating every day?

The amount of money in circulation has very little to do with how it's distributed or where it's circulating.

> Why don't we take it a step further back, and consider whether and when it's appropriate and efficacious to design and implement any top-down strategies for what fundamentally amount to other people's lives. That's what economies are, after all, no matter how many layers of abstraction and aggregation you pile on top of your understanding.

This is particularly ironic given that not much further down in my previous comment, I said exactly the same thing -- that economies amount to people's lives -- and I gave my own life as an example, and you didn't understand my point. You are very much lecturing to the choir here.

> You've got it in your head that economies are somehow predictable systems that conform to well-understood models, and which can be managed via carefully-calculated planning.

1. Please point out where I said that.

2. "Managing" -- really, influencing -- economies is in fact one of the roles of government, by definition.

3. Only a couple of short paragraphs above, you said: "If the money supply remains constant but the real economy expands, then each dollar is worth more; i.e. if what you were saying is true, we'd see deflation." This is a rule. If it is true, then we have a system of rules, and, while it may not be absolutely predictable, it is still a system which is subject to predictable behavior. You can't have it both ways. You can't say in one breath that you can use a constant money supply and an expanding economy to predict deflation, and then in the next breath say that the system isn't predictable. So, if someone like me comes along and says, "I don't think that continuing supply-side policies are leading to a healthy economy" -- which, again, was the only point of all of this -- then perhaps instead of saying, "you're wrong because it's unpredictable", you might point out which rules are being broken.

> The problem is that taxes provide revenue to the government, and what those taxes are spent on is almost invariably destructive. Tax 'the wealthy' so we can have more foreign wars...

Why are you bringing this into the discussion? I never once even brushed past the Federal budget, or how taxes are being spent. If you could set aside your own prejudices for just a moment, I think you'd find that you and I would agree on a lot of points here. But, that's not what we were talking about.

The most charitable reading I can give your comment here is that you're suggesting we throw the baby out with the bathwater. That, because taxes are sometimes, even often, used for evil things, that they are inherently evil. I think it is sufficient to say that I disagree with that.

> ...anything really, that prevents taxes from funding the grandiose ambitions of people who want to remake society and people's lives from the top down, and especially those who prefer for everyone to outsource their happiness and security to outside institutions and abstract 'systems'.

And this is when I knew we couldn't continue to have a discussion.

This all started from a video and some brief commentary on it. To summarize the points: tax policy in the U.S. has in recent years favored large corporations and wealthy individuals; those favors have been justified by an ideological belief that those businesses and individuals will use their advantages to create more wealth; and that empirically does not seem to be happening as we are seeing falling savings, widening income gaps, continued unemployment and underemployment, continued stagnant consumer spending, weak investment markets, and an overall sluggish and stubborn economy.

How did we get from those points to "funding the grandiose ambitions of people who want to remake society and people's lives from the top down"??

For anyone who really has no idea what Gormo is expressing opposition to here but is truly open to at least understanding "the other side" -- might I suggest borrowing a copy of Ameritopia[1] by Mark Levin from the library? Mr. Levin attempts to go through some of the philosophical history of the debate between those advocating top-down "Utopian" solutions vs those advocating bottom-up "Individualistic" solutions.

[1] http://www.amazon.com/Ameritopia-Unmaking-Mark-R-Levin/dp/14...

It can be a little dry and the author never apologizes or backs away from which side of the debate he believes is right; but he does make a solid attempt to get at the root of this whole contention.

All this talk of taxing the rich and the various wars on women, college loan recipients, etc... is really just a distraction or at best a side-effect of the real issue of the Individual vs the State.

Wow, seriously?

As an extreme example, and something no one is proposing: give all unemployed people a $1 million cash payment. They'll spend at least some of that money, which will create demand.

More seriously as an actual example that happened, in December 2008 (during the worst of the GFC) the Australian government made cash stimulus payments to most Australian families. This is credited with stimulating spending (ie, demand) during the Christmas period[1], which of course keeps retail employment high, which in turn puts money in employed peoples pockets etc etc. A second cash payment was made in April 2009.

The Australian government also spent large amounts of money on infrastructure projects. Being government, this took longer to spend, so most of that spending occurred right as the effects of the cash stimulus was wearing off. Construction is a big employer, so that helped support employment too.

Finally, the (huge) Chinese stimulus[2] kept the Chinese economy growing, which in turn increased demand for Australian exports.

The outcome was mostly positive: Australia was one of the few developed nations to avoid recession in 2008-2010. Unemployment is at historically low levels and inflation is also low.

Note that NONE of this was supplier initiated. Businesses were worried and were laying people off, and it was increases in demand via economic stimulus that reversed that trend.

[1] http://www.canstar.com.au/global-financial-crisis/

[2] http://en.wikipedia.org/wiki/Chinese_economic_stimulus_progr...

(1) The data (when compared to the recession forecast) doesn't support the idea that household spending is what boosted the economy. Instead, business investment and exports appeared to prop up the Australian economy.

(2) The Rudd government didn't try anything (broad stimulus, cash payments, home rebates, auto stimulus) that wasn't tried in the United States. If you believe these things succeeded in AUS, you'd have to have a convincing argument as to why they didn't in the US.

Obviously this is a tough nut to crack and there are really too many sourced to cite. Here is an article that talks a little bit about the data:

http://www.theaustralian.com.au/business/opinion/how-mining-...

NO doubt the Rudd government's big budget stimulus helped keep Australia out of recession last year. But mining was at least as important in producing the unexpectedly good performance.

I agree 100% with that conclusion.

Also, at odds to your point (1) above the same article says:

So the stimulus cash handouts and capital works look to have done most of the work by pumping up consumer and government spending. Treasury suggests budget stimulus added 2 percentage points to GDP growth last year.

It goes on to point out that this was insufficient in itself to explain the growth in the economy.

Clearly, demand stimulus by government hand-outs isn't a sustainable, long term model to grow an economy. BUT contra-cycle government spending can be an important tool to stimulate growth, especially through periods of uncertainty. (To make it clear this isn't a political point: Australia was able to do this because of large surplus budgets run in the period up to 2008/09 by the previous government. That was good policy during that period, and the stimulus was good policy during the crisis).

Note that in the US the stimulus package was radically smaller (compared to the size of the US economy) vs the Australian package. Additionally, it actually did reduce unemployment[1]. It is unfortunate that the US didn't follow that up, and instead made things worse via austerity measures.

[1] http://www.cbo.gov/publication/42715

Government-funded spending does spur economic activity--true. However it is merely temporary and is essentially borrowing money from the future to buy fake economic growth today--which is why governments reserve it for truly crisis situations like the ones you list above.

My point is that money-in-pockets stimulated demand, not marketing...

Marketing only increases the amount of pie you get when compared to no marketing at all, it doesn't increase the amount of pie available to get however. The problem is not in grabbing more pie than everyone else, the problem is a shortage of pie being made available because certain people collect pies as a hobby and they are doing rather well these days and have fantastic new methods to collect and store pies, so leaving less pie around for everybody else.

If that's so I can tell you quite a number of very successful companies that should never have been started. ;)

It can be summed up by the famous if possibly apocryphal line by Ford: "I pay my employees enough to afford to buy my cars."

When the masses have no currency, in effect, that's signaling to the economy that their needs are of no value. Therefore, businesses that solve the masses' problems gain no economic value from it, and will not generate real value.

So currency has no intrinsic value, but it does signal to the economy which needs are more valuable. And currently, one of the claims is that the middle class and poor's needs are valued so low, that it is creating economic stagnation, and there's little incentive to solve their problems.

When a consumer chooses not to buy something, i.e. commerce does not take place, saving occurs. Savings means there will be money available in the future. Money available for a small business loan. Money available to buy shares in a company, freeing up capital from the person you bought the shares from. That capital could actually end up in a new venture that makes it cheaper to produce X, or make X last twice as long, producing more savings in the economy.

That decision by the consume NOT to purchase something tells the producer that they better figure out some way to reduce the price, or go under. Capital, including human capital, frees up for more productive uses. Occasionally imbalances (e.g. too much capital tied up in housing) cause a massive recession, but most of the time this process is relatively benign. Victims of this cheap-credit fueled bubble and recession don't have money to save and invest right now, but innovation will provide jobs again one day. It happens every recession, sometimes longer than others.

Creative Destruction: it's the primary reason why we're all not planting seeds or hunting right now.

i.e., consumers aren't "choosing" not to buy because they're saving the money instead, they're "choosing" not to buy because they don't have any money.

This is exactly why it is so, so important to foster a healthy middle class: they love to spend money. Give them $10,000, and they'll spend $9,000 of it.

We do not right now have a healthy middle class, and I'm super interested in whether or not our economy will recover without addressing that.

i.e., consumers aren't "choosing" not to buy because they're saving the money instead, they're "choosing" not to buy because they don't have any money.

I don't see how your argument is necessarily justified by article. It seems entirely possible that families are trying to put food on the table, whenever possible, rather than save for the future.

This is exactly why it is so, so important to foster a healthy middle class: they love to spend money. Give them $10,000, and they'll spend $9,000 of it.

We do not right now have a healthy middle class, and I'm super interested in whether or not our economy will recover without addressing that.

How do you know if the middle class is healthy? Can you define middle class?

That's actually what I was trying to say, I probably just wasn't clear. I was responding to webXL's opening sentence, "When a consumer chooses not to buy something, i.e. commerce does not take place, saving occurs." I don't think that saving is occurring, I think that people are trying to put food on the table right now, as you say.

> How do you know if the middle class is healthy? Can you define middle class?

To be fair, I'm not aware of a strict definition of "middle class" -- it's one of those amorphous abstractions that everyone refers to without ever bothering to see if they're talking about the same thing.

However, if we define some basic properties of "middle class" -- owns a home (probably with mortgage), has some savings, has reasonable credit, owns two vehicles (for a family) of recent vintage and in decent condition, college educated, etc. -- I think it's pretty easy to see from the news of the last several years that they aren't doing too well these days. Their mortgage is likely upside-down if they bought their home in the last decade; their car is probably requiring more frequent repair; their credit probably isn't as good as it used to be; their savings are diminished; and tuition is expensive.

If you can find any recent good news for U.S. middle class families, I would honestly love to read it. :-)

I.e. if there are no mortgages, people buy what they can afford and housing prices remain low. If there are mortgages, suddenly house prices skyrocket since buyers can afford vastly higher prices, making mortgages a requirement for owning a home.

A good position to be in if you're a bank; now you get a big slice of all action.

But there are also the unintended consequences: people buy things they can't actually afford, like you said, and people begin to qualify for buying homes as investment vehicles, which really screws with things.

So I'm not smart enough to figure that one out.

But does it actually have that effect? Once everyone is using mortgages, everyone is back in the same place as before mortgages.

To put it more concretely: before mortgages, houses might average around $100K because the average person simply cannot afford any higher. Once mortgages arrive, houses might spike to $300K, because your average person can afford that mortgage. So while the example family might not have been able to afford the $100K house because they had $80K, a mortgage won't help because now houses are around $300K.

So I don't quite grasp how this would affect rents. That seems to be an orthogonal issue.

While your statement is not entirely false, it paints a misleading picture of how the economy at large works. Outside of venture capitalism, credit for running businesses tends to be provided by banks, and banks just create the necessary money out of thin air whenever they find a creditworthy borrower, i.e. a business with a solid business plan and with a reasonable expectation of sufficient demand for its product.

When the overall savings rate rises, it becomes less reasonable to expect sufficient demand for products, which means less creditworthy borrowers, which means less loans given out by banks.

Occasionally imbalances (e.g. too much capital tied up in housing) cause a massive recession

Not quite. The recession isn't caused by capital being tied up in housing. "Putting capital into housing" is just economics-jargon for spending money on houses. And that tends to create jobs in the construction sector.

The recession comes about when private households can no longer use their houses as collateral for loans to fuel demand because the value of those houses is reassessed.

Creative Destruction: it's the primary reason why we're all not planting seeds or hunting right now.

I think you'll find that the primary reason why most of us are not doing these things is actually creative construction. The destruction part is only really beneficial when one gets stuck in a local optimum.

This activity is ultimately underwritten by deposits.

It should also be noted that paying down debt is counted as saving from a statistical perspective. It just means value is being transported back in time versus forwards.

Yes and no. First of all, deposits are created whenever a bank gives out a loan. So it is not the deposit that makes loan creation possible, but rather the reverse: creation of loans is where money in deposits comes from in the first place. Without loans there would be no deposits.

Now the outstanding loans given by the bank are on the asset side of its balance sheet and there must be something corresponding on the liabilities side. For most banks, deposits are indeed a large part of liabilities.

However, the liability may just be a loan from the central bank or from other banks instead. It's not strictly necessary for banks to have deposits at all (and there are banks which specialize in such a way).

The only reason why it makes sense for banks to attract deposits is that they typically pay less interest on those deposits than they would have to pay for other refinancing options.

And again, all this doesn't say anything about the dynamics of the system, i.e. it doesn't say anything about loan creation. It's not like there is some process where the banks say "Look, we have X more deposits than loans, so let's give out some more loans". Some banks operate with more deposits than loans, others operate with less. In the end, they give loans whenever they find a creditworthy borrower.

In the overall system, i.e. when summing over all banks, the sum of loans is roughly the same as the sum of deposits, because loans are where deposits come from in the first place. (I say roughly because owners of deposits can transform them into other types of assets such as bonds.)

What determines sufficient demand? It's the chicken and the egg. Or is it: Profits lead to innovation. Innovation leads to cheaper goods. What's left over is new demand? Or demand dries up for product X, and demand is available for product Y?

Now, in some way he, being as lame as he is in this presentation, has proven his own argument.

A lot of wisdom is imparted on the wealthy to be leaders of the economy. But not everyone who is wealthy is actually very wise. They have succeeded in making money. But that in itself does not elevate them to God status. Don't believe me? Let us look at Exhibit A:

Rich guy from Seattle who has "started _dozens_ of companies."

Roll presentation.

And what's with use of the term "capitalist"? Are there lots of socialists in America now? Are American workers not capitalists?

Workers (as in people who work for a wage) aren't Capitalists (as in the Noun).

You don't have to be a Socialist if you are not a Capitalist. There are not 'a lot' of Capitalists anywhere (proportional to the overall population).

It's true you don't have to be a socialist if you are not a capitalist. But in terms of `ist's, what else would an American likely be? A communist?

His entire argument flows from this assumption.

The speaker's argument revolves around inequality, by leading to lower consumption by the lower classes, making an economy unsustainable. This assumes domestic lower class consumption is the driving force behind GDP, which further assumes a diminishing consumption function (consumption as a function of household income). The consumption function is, in fact, quite linear [2]. The speaker also ignores investment, public sector spending, industrial investment (firms buying from other firms), and export industries.

Thus, the notion of consumers being the only pillar of economic activity and by proxy job creation is faulty.

A better argument would be wealth concentration compromises meritocracy and the social trust that binds society together. This isn't a new argument. So the speaker elevates novelty over accuracy in pursuit of a perception of profundity, fallacy be damned.

[1] http://data.worldbank.org/indicator/NE.CON.PETC.ZS?order=wba... (2010 countries ranked by consumption/GDP)

[2] http://wps.aw.com/aw_miller_econtoday_12/0,7965,904285-,00.h...

Likewise "more consumption" is not a goal in itself. Wellbeing of people is a goal, consumption might be a way to achieve it. But because you should be careful what you measure, trying to increase consumption is probably bound for disaster.

The problem is not creating more jobs, it is distribution of wellbeing.

Here's the thing, you can't force people to be productive enough to be able to consume at the optimal level. All you can do is provide an environment where being productive is easier.

I think that guys like Ford are job creators, but most capitalists don't have the foresight to enact such bold policies.