(Attention) Stupid Economics question

[Toxin]

(Before you read: I have little politics and economic experience/knowledge, and I would like for you guys to share with me what you know, without ripping my ass open, because I am certain you weren't born with knowledge either)


If the economy is so bad, wouldn't it just fix out if all americans increase spendings?

[Bullet Wound]

But its my understanding that they don't have money to increase spending because the economy is bad, so unless they grow money trees, I don't think that would work.

[Lefty]

But its my understanding that they don't have money to increase spending because the economy is bad, so unless they grow money trees, I don't think that would work.

There working on it
http://www.virid.us/blog/uploaded_images/money-tree-704455.jpg
haha but no

[LegalSmash]

(Before you read: I have little politics and economic experience/knowledge, and I would like for you guys to share with me what you know, without ripping my ass open, because I am certain you weren't born with knowledge either)


If the economy is so bad, wouldn't it just fix out if all americans increase spendings?

it goes a lot deeper than just "Americans spend more". If it was a matter that consumer spending was the only thing down it would be easier to deal with, this problem starts at the top however, and runs down:

Banks did stupid shit with money, as did investing groups, as did regular consumers, when the activity resulted in a LOT of wiped out savings and income lost, people get scared and tighten up their spending a lot.

Housing sales went from average pricing point/average sales price which could be invested into a similar building in a similarly situated area in 1999-2000 to superinflated price points and a sales price that would not get you a 1 bedroom in the same area. Add to this the fact that the McMansion (giant house made in cookie cutter fashion) was the building blue print of the day, most houses on the market that cannot be sold are oversized, overpriced, and in some cases due to building problems, uninhabitable.

Add to this the car trouble, where US manufacturers decided it would be a great idea to make SUV's and light trucks to the exclusion of compacts and subcompacts, damn the fuel efficiency so long as soccer moms could stick more of their bastards into the back seat... well, the Jappo's and the Roreans and other market participants ate up the market share that the big three willingly left out to garner their SUV orgy...

add to this the fact that the big three US manufacturers are union whores, and were supporting union pension contracts that were tantamount to corporate welfare for employees because the companies did not want the bad publicity of busting a union contract, the Foreign car companies outcompeted them at every turn....

So we have a surplus of shitty houses, of shitty cars, and a LOT of people who were investing lost a LOT of money because of bad regulatory practices and lack of monitoring of new "financial instruments" (read: Shit we just made up oy vey).

This is just the effects on the upper middle class.

Add to this the cost of education having skyrocketed, funding at an all time low, and most students walking out of school with more debt than the price of a new car, and draconian laws preventing students from discharging debt in bankruptcy and you have a whole crop of educated, but financially pressed people that don't have the money to contribute to the economy... by the time they have the money, they'll either have kids or have been so in debt for so long that their spending habits would be minimal.

Credit was given far too freely for big ticket purchases (houses, vehicles, commercial appliances) for bad reasons, now a great deal of persons who charged up a LOT will get to discharge the debt in bankruptcy... which means the debt will not be paid, on top of that, the credit granting agencies, generally banks, granted credit because they thought they would make money based on the initial 'financial instrument' crap, so they are also low on capital.

Basically toxin, everyone is broke, everyone is scared to spend, and prices are not low enough to prompt spending on items that are subject to external forces (buying a large fuel inefficient SUV at a cheap price is a bad idea when gas was nearly 5 a gallon last year and is on its way back up), (buying a house for cheap when the property taxes are calculated at its "highest useful value" means that you will pay out the ass in property tax but have no benefit of being able to sell high because the value of the house is under the floor.

[Toxin]

Basically, instead of spending billions upon billions upon billions in programs that might not work, why not just give the American citizens money, but force them to spend it on something instead of saving it?

[broncoty]

Nah dude good question.

Ok here is my general understanding I have taken college level macroeconomics and I got a B :).

WE are in a recession which means our gdp (Gross domestic product) has shrunk for 2 or more quarters straight.

GDP is calculated by adding

Total Government expenditures + Investment + Private Consumption + and Net exports (Exports - imports)

GDP= G+I+C+Netx

Right now we Import more then we export so we have a negative trade imbalance which is bad for gdp so net exports is actually subtracted from the total Government expenditures, consumption and investment. This is part of the issue and our trade imbalance continues to grow larger.

Now let me address your idea that if we spent more then would the economy get better. The answer is theoretically yes but practically no.

If we take a look at the equation

GDP= G+I+C+Netx

IF the issue is that GDP is going down. Then in order to get it to grow again either Government spending, private consumption, investment or exports need to go up.

The theory behind the stimulus bill is that if government spending goes up then GDP will go up as well.

Your idea is if Consumption goes up then the economy would get better. That is partially true because as consumption increases GDP would increase as well. But one of the issues is scale. Right now if I go and max out my credit cards I could spend around 30,000$. Now if EVERYONE went out and spent 30,000$ then yes it could have a positive effect on the economy only in the short term. But people tend to not spend money during economic hard times so rarely does increased consumption help economies recover. (If anything the large amount of consumption by Americans rather than investing their money is a contributing factor to the current economic situation).

Because IF I go buy a car that is a short term boost to the economy. But If I INVEST by buying a piece of machinery for my business that will produce products and employ people that is a long term boost. A dollar spent in investment to buy a machine to make tacos goes much farther to stimulating the economy then a dollar spent on a taco.


Now since consumption is unrealistic to use to sustain economic growth; we are left with Government expenditures, Investment and exports to grow the gdp. Right now democrats argue that raising government expenditure is the answer. By borrowing money and spending it, the GDP will grow. Then as people have money to spend in consumption and investment from the government the economy will grow. This is generally referred to as Keynesian economics. One big factor that many people forget about Keynesian economics is the idea of the government paying off the debt it accumulates when economic times are good. The main reason the U.S recovered from the great depression was because of a very large increase in government spending due to WW2. This spending increased GDP and therefore the health of the economy. But the U.S government payed off the debt it has accumulated after the war.

The other side of the field is supply side economics(not to be confused with supply side economic theory aka john smith wealth of nations Bull shit) or also known as reagonomics. This theory is generally supported by republicans. The goal of reagonomics or supply side economics is to increase investment and consumption through tax breaks to companies. By cutting taxes for companies then companies can spend more on research and design, office materials, employees etc. As investment and consumption increase so does GDP and therefore the economy.

It is kind of unreasonable to increase exports without increasing investment first. I need to buy machines before I can build the computers to export to other countries. So to increase exports investment has to be increased first.

So generally it is a battle between Keynesian theory and Reagonomics as to what position government takes on the economy. Both of these theories are DEMAND side economic theories.

Now some people may argue that government should stay out of the economy. This is called laissez faire economics and is founded off the idea of supply side economics which was first exposed by John Smith in wealth of nations. Supply side economic theory is WRONG as proven by the great depression.

Explaining the difference between demand and supply side economics is tough with just words and is easier done with pictures and a basic understanding of supply and demand is also needed. So I would recommend taking a macroeconomics course whenever you get the chance.

But hopefully this helps you gain enough of an understanding to keep up during lunch room political discussions.

Let me know if I can clarify anything for you or if you would like to know anything else.

[Toxin]

Lunch room political discussions. LOL.
I wish we would be anywhere near mature enough to handle conversations like this during lunch.

But still, what I do not understand is...
You stop spending, economy goes down, workers get layed off which stop spending and cycle repeats.

Shouldnt it be:
You spent, economy increases, workers get employed because of the increasing number of customers, they get a secure income source and start spending and it repeats..

[Bullet Wound]

Lunch room political discussions. LOL.
I wish we would be anywhere near mature enough to handle conversations like this during lunch.

But still, what I do not understand is...
You stop spending, economy goes down, workers get layed off which stop spending and cycle repeats.

Shouldnt it be:
You spent, economy increases, workers get employed because of the increasing number of customers, they get a secure income source and start spending and it repeats..

After two people supporting good reasons why its not that simple, you still think that way...

People don't have money, so they can't spend it. Even if the government gives people money, they won't go out and spend all their money on things they want. Prices are far too high for people to just run out and spend what little money they have, they will save it and only spend the bare minimum.

Workers getting laid off has to do with the demand of the company as a whole, Americans are only part of the reason people are being laid off, the other part is that other countries don't want what Americans make, therefore they don't make as much, therefore fewer employees are needed.

Anyways that's how I think it is, granted I could be very wrong because I don't have formal education in this field.

[broncoty]

Shouldnt it be:
You spent, economy increases, workers get employed because of the increasing number of customers, they get a secure income source and start spending and it repeats..

It is not on a large enough scale.

and

Where do they get the money to spend? Very few people have money laying around. Should they get a loan? There is a reason the banks are failing at the moment. BAD LOANS. People are lent money which they cannot pay back. The banks then fail because they are not getting the money back..

Like everyone is saying man in theory what you are saying is correct. A healthy economy involves people spending not saving.

But currently very few people have money to spend and it is not on a large enough scale to effect something as large and as complicated as the U.S economy.

[PotshotPolka]

If the economy is so bad, wouldn't it just fix out if all americans increase spendings?


..........................

http://maaadddog.files.wordpress.com/2009/07/bitchslapped.jpg

Go search on Wikipedia Keynesian and Classical economics, it will sum up the two arguments for you.

[Toxin]

Meh. Thanks for clearing it up for me. Guess I still got a lot to learn.

[LegalSmash]

The basic idea you have would make sense if there were only 10 of us and we were an extremely isolationist country with a great deal of jobs with no competition... however:

Jobs are hypercompetetive right now.
Money in cash form only comes from work salary, loans, or payments, three things which are both either not being pushed out enough, or in the case of salary, have fallen flat in comparison to the price levels of daily living.

So in the basest terms possible toxin, shit gets more expensive, but people's take home pay is not enough.

Additionally, innovation in the market in many areas has fallen flat... take vehicles for example. Pushing a trade-in for a new SUV is not fixing the problem, but rather exacerbating it. Similarly, buying a house REALLY cheap, but still having to pay prop taxes and insurance premiums based on the highest value the house attained saps your finances and leads to a likely foreclosure.

Also, you must consider how many people DID go through foreclosure, bankruptcy, or repossession, these often traumatic experiences make a person even LESS likely to spend conspicuously...

To assert that the United States can "spend its way out of recession" both in the consumer and government sector is fallacy because people don't spend more than they absolutely need to when they have debt, are faced with financially tight times, and have high stress caused by those things.

In other words, your plan would work if and ONLY IF: The government wiped every single debt of every single person in the country, THEN gave them money, THEN told them WHAT to spend it on, THEN provided training to learn to budget and maintain a positive financial ratio, AND cleaned up any mess the person given money would inevitably get themselves into due to overspending.

That won't happen for the average person.

[Toxin]

So what in your opinion would be the very first step the Government should take to prevent our situation from getting any worse?

[broncoty]

So what in your opinion would be the very first step the Government should take to prevent our situation from getting any worse?

GTFO and lower taxes

[RedOctober]

GTFO and lower taxes

the gov't exactly gtfo. they are kind of already screwed that plan with this stimulus bill.

what we need now is more private business investing in new capital(land, labor, tech.) and increasing their efficiency. The only reason some companies are reporting gains this last quarter isnt because we are magically increasing revenue or pulling out of this recession, its because thy are cutting liabilities and new investing opportunities.

we new to stop trying to stimulate growth in the government sector jobs and subsidize private investing opportunities. That's the only way we are going to create jobs. and everyone knows that without new jobs rapidly appearing in all markets this recession is not over yet.

[phatman76]

There is a fundamental error happening when people think that consumer's saving and not spending makes their money "not help the economy." Virtually everyone who saves does so in a bank. Banks do not just hold onto money, the vast majority is reinvested and spent to make more money (often more effectively than a few people just going out to buy cars a la cash for clunkers). It is a myth that consumers who spend more are contributing more to the economic good as opposed to consumers who save. Either way the money will be circulated as part of the economy (unless you actually physically hoard the money under your bed).

If a government or consumer could spend itself out of economic crisis we would not have had an economic crisis for the last 100 years. In fact, the last successful massive save made by a person/government was J.P. Morgan in 1907. There was a banking panic and bank lending locked up (these are the loans banks and investment firms give to each other for various very important reasons). J.P. Morgan invested a shit ton of his own money (7 billion) and managed to stop the financial lockjaw. A very similar thing may have happened a few months ago when the Federal Reserve bank acquired a bunch of toxic assets and gave a bunch of money to banks also (of course, it is too soon to really tell if it was necessary or worked).

However, every effort by any government to increase consumer productivity or do "make-work" in the last century has failed. Why? Because if the government pays workers to dig ditches in the desert, the money comes from taxes or loans the government takes (debt) in the form of bonds. When a bank invests in government bonds, it gives its money to the government in return for a pay-back plan. However, if the money the government gets goes to make ditches, it is only really redistributing investment money away from private enterprise (which would have hired people anyways) and into useless ditches. The ditches do a lot less to "stimulate" the economy because they have no lasting benefit, only wages. They actually eat money in costs. If the bank had instead invested in a real company, say one that manufactured bicycles, not only would the same amount of people have jobs, but we would end the day with a pile of bicycles that could be sold. Those bikes would also let other people make money or contribute to the economy by getting jobs on paper routes.

Do you see where I am going with this? Even if it is more visible if everyone throws away their life savings or the government pisses away billions, we are merely moving the economics that we did not see or notice before into the open, in front of our eyes. We do this at substantial cost because it is less efficient and less market-driven. This concept was first outlined by the economist Frederic Bastiat in an essay aptly titled "What is Seen and What is Not Seen."

Bastiat gave another great example - breaking windows. If we break windows, we help the glass industry. We "see" that we are helping the economy. However, in reality, the money to fund the new windows and the glass industry did not come out of the ground, it was diverted by artificial demand (smashing the windows) from real demand (other industries that would have been invested in). That is why for every "stimulus job" you create, you are really destroying a regular job. There are not two jobs or two dollars where there was one before, you have merely obliterated what you were not looking at to create economic action in front of your face.

Logic just took a shit on "stimulus packages" everywhere.

[ReGIONALS]

Or if the 56billion 59bil? went to all the tax paying Americans (evenly) they would most likely do this.
1:pay off their house.
2:pay off their car.
3:buy another car.
4:take a nice vacation.
5:increase spending.
6:put the money in the bank and accumulate interest.
7: what ever the fuck they want.



now really what would stimulate the economy more giving the money to companies that already owed the government money or American citizens that would spend money on things they want and stimulate the economy?

[Italian Jew]

Or if the 56billion 59bil? went to all the tax paying Americans (evenly) they would most likely do this.
1:pay off their house.
2:pay off their car.
3:buy another car.
4:take a nice vacation.
5:increase spending.
6:put the money in the bank and accumulate interest.
7: what ever the fuck they want.



now really what would stimulate the economy more giving the money to companies that already owed the government money or American citizens that would spend money on things they want and stimulate the economy?

No

Did you even read anything previously posted by people who actually understand a thing or two about economics?

[LegalSmash]

No

Did you even read anything previously posted by people who actually understand a thing or two about economics?

Seriously.

To the guy whose quote was responded to by IJ here:

Part of the large problem is that people paying off debt and saving does not equate to spending. I'm a HUGE money hoarder. I don't give a flying fuck about "nice" things, even if I was wealthy, and I'm not. If you want the rabble in this country to go out and spend money on rims and new camo jackets at walmart, you MIGHT get SOME increase in economic activities in retail sectors, but that ultimately does not do much to improve the service industries (what are REALLY hurting), the housing industry, or the financial industry.

To be completely blunt:

The kind of person that would go blow a stack provided by the government on random trinkets is likely to:

1. Never have owned property, and not understand the benefits of doing so, or care to do so, because renting is easier and less complicated to the untrained eye.
2. Not purchase financial instruments or services... remember, big bad rappers have big Jewish accountants and lawyers... its their attorneys and accountants that invest for them, otherwise most musicians and athletes entire fortune would be in a mattress under their 300 thousand dollar depreciating lambo with spinning rims.
3. Do not save money, or invest in banking services, period. Growing up with nothing to save likely results in you NOT saving when you have money... its not a reinforced behavior.

The likely scenario is about 60-80% of Americans would either pay down immediately upsetting debt... which may not necessarily be the best one to pay down for credit and savings improvement, piss it away on some imbecilic pursuit, or get it ponzi'd right out of their hand by another fad "get rich quick" BS like flipping houses in a buyer's market or selling speakers in a deaf school.

The other 20-40% will likely use the money to pay off mortgages and save it until the economy shows signs of recovery in any or all of the following:
1. Daddy gets a job again.
2. Mommy gets a job again.
3. Health insurance is federalized and there is an option between nest-egging for a rainy health day or paying exorbitant premiums
4. Education prices go down and it does not cost 10-20 years of debt to finish a degree or seek certification.
5. We get into a war.

[Red]

Seriously if you get into Harvard/Yale/Princeton I will cut my wrists repeatedly.

[PotshotPolka]

Seriously if you get into Harvard/Yale/Princeton I will cut my wrists repeatedly.

He might as well. Professors with doctorates at my school spew nonsense about the bailout as essentially class warfare, and go on to give the Greeks a verbal BJ while ignoring economics.

[Widow]

Seriously if you get into Harvard/Yale/Princeton I will cut my wrists repeatedly.

Hi Im Red I make Friends

[Toxin]

Wait.. me? I will, believe me, I will. Will you cut your waist if I make it into MIT? Kinda liking Engineering now.

[Red]

yes

[phatman76]

He might as well. Professors with doctorates at my school spew nonsense about the bailout as essentially class warfare, and go on to give the Greeks a verbal BJ while ignoring economics.

I wish they gave greeks BJ's at mine, almost no Ivy league even has required classics courses or any incentives for students to pursue an education in the Socratic style.

[LegalSmash]

I wish they gave greeks BJ's at mine, almost no Ivy league even has required classics courses or any incentives for students to pursue an education in the Socratic style.

Its now in Law School. College is now a place where you smoke pot, eat Jimmy Johns, and have premarital sex with women who will look like their 50 by their 25th birthday due to all the drinking and assorted legal and illegal drugs.

[Red]

Its now in Law School. College is now a place where you smoke pot, eat Jimmy Johns, and have premarital sex with women who will look like their 50 by their 25th birthday due to all the drinking and assorted legal and illegal drugs.

Fun times those 4 years were.

[Repeat]

Its now in Law School. College is now a place where you smoke pot, eat Jimmy Johns, and have premarital sex with women who will look like their 50 by their 25th birthday due to all the drinking and assorted legal and illegal drugs.

God bless America.