Elinda wrote:
varusword75 wrote:
Elinda,
Except the academics are the ones trying to convince everyone that 2+3 does in face equal 23.
They are?
Yes, they are. And if you guys would stop just blindly supporting whatever the side you like says, you'd see it. The entire economic theory upon which the stimulus spending (a whole lot of spending in fact) was based on does assume that economic output can be measured purely by dollars flowing around and not by goods and services actually produced. So if I pay you $100 to insult me and then you pay me the same $100 to insult me back, we have generated $200 dollars worth of economic output according to this theory. If I pay someone $500 to dig a hole, and then a second guy another $500 to fill the hole in, I've generated $1000 of economic activity.
What the theory fails to address is that you really only have the original $100 (or $500) that existed as the result of some prior actually productive endeavor. Money is a placeholder for real goods and services. When we start looking just at the monetary policy and ignoring the value of the things those dollars represent, we can easily arrive at absolutely absurd conclusions (like handing the same money back and forth in exchange for things that would otherwise have no value somehow makes us all richer).'
What's so amazingly ironic about this is that those who do understand what's going on and are able to step back and say "that's absurd" are often the ones labeled as not understanding what's going on, by the very people so caught up in the numbers that they lose sight of the larger picture. This is further muddled by the fact that the math being used does work and does accurately model monetary effects in most cases. But when one stops measuring those effects as a result of "honest" economic activity and starts trying to manipulate the outcome by manipulating the numbers, you get absolutely wrong results.
Let me give an example that might make more sense. If more people have usable and valuable skills, more people will be employed at good wages. Those wages represent the value of whatever it is they do (making widgets, whatever). If the value of their widget making skills is high, they will be paid more because they are generating more value to their employer. As a result, the laborers will have more spending cash and will turn around and buy more widgets (and other things of course). This supports the whole process. We could step back and look at the trend and see that because more people buy stuff (increased consumption), the producers of those things have greater profits and can thus hire more workers. So there's a connection between consumption and employment.
But here's where it goes wrong: Someone just looking at the money flow might conclude that all you have to do is hand more money to consumers and you'll create more employment, thus "stimulating" the economy. But the flaw in that thinking is that the reason why the dollar used to buy something is worth something to the producer of the good is because of the value of what the labor that earned the dollar produced in the first place. If that dollar was earned as a result of making something (or providing some service related to the making of something), then increased consumption results in increased "real" profits in the market, and thus will lead to increased employment and more wages and more consumption potential, completing the circuit. If that dollar is *not* earned via that process, it doesn't. For exactly the reason why paying people do to things that aren't themselves valuable doesn't make anyone more wealthy. It does not increase the total value of the monetary supply in the system.
The principle behind the idea of demand side stimulus spending (most demand side spending really) assumes that you can artificially create an effect by short circuiting the system. But if you skip the whole "making something of value to others" step, you aren't really accomplishing anything. Worse, in order to get those dollars to artificially increase consumption, you had to take them from somewhere else. The "somewhere else" usually ends out being a part of the economy which would otherwise have made things of value to others. Thus, the net effect over time is negative.
It's really not speculation. It's common sense and math. You can't just hand something between two people and make more of the thing you're handing around. You just can't. And anyone who honestly steps back and looks at what we're doing economically can see this. It's just that so many people get so caught up in the money calculations and formulas that they don't see that those calculations and formulas only work if certain assumptions are left in place. When you remove those assumptions (like removing the connection between dollars and productivity), you break the chain, and those same formulas don't accurately predict outcomes anymore.
Edited, Feb 11th 2011 4:28pm by gbaji