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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (45481)	9/1/2010 1:04:35 PM
From: TimF	Read Replies (1) \| Respond to of 71588

We know that higher income households are more likely to bank the cash than spend it. No we don't know that. We do know that higher income people save or invest a larger percentage of their income. That doesn't mean they save or invest more of the next marginal dollar under any circumstances, or in the particular situation of our economy. I'm not rich. If I made more money, or had lower taxes I would save it (defined broadly, including paying down debt), if I was rich, I might not spend it, but I'd be more likely to do so. Of course my personal preferences at different income levels are hardly definitive, or even important evidence, for what will happen in the whole economy, but generally the spending of the rich is more flexible. They can cut back more easily if they are taxed more. Middle class people with mortgage payments that account for a larger fraction of their income, and poor people who's consumption is mostly for keeping themselves alive, have less scope to reduce their spending. Beyond that if the rich (or anyone else) does save the money, then they are making money available for other people's consumption or investment. They (esp. the rich) are unlikely to put it under mattresses. Also investment is spending. You buy stock, bonds, gold, new production equipment etc. Its not consumption spending but it is spending. It either goes back in to the private economy, or it goes to the government which helps support all the spending that the people who think government should try to increase demand want (well true some of it is invested overseas, which has some benefits, but not in terms of short term increase in American demand, and perhaps not in short term increase in demand for American goods and services, but there hasn't been an enormous increase in such investment, money flowed in to US treasuries more than any other security)

To: DuckTapeSunroof who wrote (45481)	9/1/2010 1:33:23 PM
From: TimF	Read Replies (2) \| Respond to of 71588

Tyson’s Keynesian Confusion Posted by Mark A. Calabria UC-Berkeley Professor, and former Clinton economic advisor, Laura Tyson lays out why she believes we need a second stimulus. Her op-ed is a worthwhile read for understanding the basic assumptions behind modern Keynesian thinking. Foremost among those assumptions is a belief we are in a recession due to “a collapse in private demand.” In Professor Tyson’s world, if only everyone would buy more, everything would be OK (starts to sound a lot like President Bush in 2002). But what exactly has been going on with private demand? Judged by private personal consumption expenditures, it is actually up and higher than at any point during the boom, after reaching bottom in the Spring of 2009. The following chart, from the St. Louis Federal Reserve, nicely illustrates the direction in private demand. So if Tyson’s narrative that weak demand is holding back employment is false, or at least incomplete, then what is holding back unemployment? In a word: Investment. Unlike consumption, which has largely rebounded, investment today is about 20% below its peak. Of course we should keep in mind, that peak was a bubble. The good news is that investment in such things a equipment and software, are slowly, but steadily, climbing back. The real drag on investments is from the construction industry, particularly residential, which is still down about 50% from its peak. What most of this suggests to me is that unemployment is being driven mainly by a mismatch between skills of the unemployed and available job openings. You simply cannot, overnight, turn a construction worker into a nurse or computer programmer. Tyson seems to half-way recognize this when she argues for stimulus to be directed into education, although she only seems to be talking about future skills mismatch and ignores the mismatch facing the economy today. For if increased aggregate demand is all we need today to reduce unemployment, then wouldn’t the same hold true for future unemployment, removing the need for educational funding? At the end of the day, what we need to get employment increasing is to create an environment where business feel confident to invest. Mark A. Calabria • August 30, 2010 @ 12:43 pm cato-at-liberty.org