This is kind of prequel to my last post. I keep talking about creating demand, creating demand, creating demand. So what does that mean? It goes back to the notion of supply and demand. You can read up on the jargon filled details here: Supply and demand. In microeconomic theory, demand is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time. Right now there are plenty of products available for people to buy. The problem is that there aren't enough people with the "willingness and ability" to buy them. This chart illustrates that point very clearly: Job Losses: Comparing Recessions. The current contraction is far far worse than the prior downturns: 3.6 million — and counting — job losses as of yesterday is worse than the 2.7 million jobs lost in the 2001 recession, and far worse than the 1.6 million job losses in the 1990-1991 recession.

As more jobs are lost, fewer people have the "willingness and ability" to buy products. The companies that make these products see that the products that they have already made are not being purchased. It costs them money to make those products and when those products aren't sold they lose that money (remember the idea is to sell things for more money than it costs to make them). In response they scale back their production (that is, they reduce the quantity of the products they make). Since they aren't making as many products, they don't need as many workers, so they let those people go. It costs money to pay people and if they aren't making as much stuff, it's not rational to keep paying them. In short, this process continues in a downward spiral, spreading throughout the economy.

In order to reverse this process, people have to start buying things again. As more people buy things, surplus supply is sold and new orders for things are placed and the companies that make things respond by increasing the quantity of the products they make, hiring people as their need to produce things increases. The people hired in turn use their paychecks to buy things and the spiral reverses, spreading throughout the economy. The government is poised to step in and start buying things that the public isn't able to at the moment. That causes new orders to be placed, and new jobs created to fill those orders. The people hired to fill those jobs in turn spend their paychecks buying things and so on as described above.

My description here is very general. It's not perfect or exact. It can probably be nitpicked. The point is simply to sketch out the role that demand plays in the economy and why given the rapid rise in unemployment it's important that the government step into fill the void in demand and start the economy moving in the other direction. As the economy improves, the need for government stimulus subsides - at least that should be the goal. Whatever other ways there are for the government to step in, from the point of view of wanting to minimize the hardships experienced by people who have lost their jobs, it makes a lot of sense to spend money on welfare, increasing food stamps, extending unemployment benefits and even hiring people to move dirt from one whole to another (queue snarky jibe). It's not perfect, but it keeps large numbers of people from starving.

Quote: Original post by LessBread
If the government paid off people's existing credit card debts, no stimulus would result directly. That money wouldn't be spent buying things (thus increasing demand). Instead it would cover things purchased in the past.

If the government cut everyone a check, that money could be used to buy things or it could be used to pay off existing debt, so some of the money would create demand, some of it wouldn't.

Maybe I'm just being nitpicky but it seems that both would do the same thing. I mean if, according to my example, the government paid your mortgage every month for 12 months. That's at least $1000 a month in savings. The lender gets their money and the lendee has more disposable income. People with that much disposable income will spend. Very few will save most of it. It's human nature.

Also yes, it's deficit. But the amount of income (again according to my example) going back into the market would definitely paid down the debt and jumpstart the economy. I know it was a naive example but as Dredd agreed with, much better than what's being proposed.

That probably would have worked better last fall instead of the TARP. With something like 2 million more people unemployed since October, paying their mortgage for a year would be great, but it won't create enough demand. The President laid out the scope of the crisis the other day: "...it is expected that we are going to lose about a trillion dollars worth of demand this year, a trillion dollars of demand next year because of the contraction in the economy." (President Obama's Speech to the House Democratic Issues Conference).

Quote: Original post by Zahlman
A relevant bit of commentary from fivethirtyeight.com reader responses:

Interesting, but I think the author makes inappropriately broad, sweeping conclusions that are so ridiculously partisan that the whole piece is rendered irrelevant.

Example:

Quote:
The GOP is committing economic genocide when it makes it impossible for the poor to access that which is needed to sustain health. Should you be rendered unable to get to work because you are poor and cannot afford a car? Should you be left victim to AIDS because you're Black or gay? Should you be incapable of getting healthy food because of where you can afford to live?

I hate the GOP as much as any other sane person, but this is shear lunacy. The GOP is responsible for the lack of healthy food stores in poor neighborhoods? It's supply and demand as well as simple economics. Organic food is expensive! Non-organic (but still healthy) meals can still be had by shopping at regular stores but paradoxically, poor people choose more expensive and unhealthy fast food over cheaper and healthier alternatives like pasta, rice, vegetables, fruits, and water.

When I was in college, fast food was a luxury. The issue of ease of preparation might be a valid point, however. It does take time to cook your own meals but I have a hard time believing that most of America's poor are working so much that they can't find the time to brown-bag their lunches and prepare a healthy dinner.

I think the issue is really one of broken homes and dysfunctional families, and urgently needs to be addressed by better leadership and societal role models. Poor youth of the native population are all too often left to fend for themselves in contrast with the children of poor immigrants, who have strongly-knit families to fall back on.

It's a tough problem and I don't know what the solution is. I'm only thankful that I was raised in a family with a stay-at-home mom who cared for us, even if the lack of autonomy compared to my American friends frustrated me as a child. It was only later that I realized what terrible effects childhood self-reliance had on some of my former friends.

From that comment: "Now, you can't force a supermarket to open a store in the ghetto. But you can provide public transit that is at the same time cheap, clean, and fast. This will allow people to go where they need to to get healthy food."

Quote: Original post by LessBread
From that comment: "Now, you can't force a supermarket to open a store in the ghetto. But you can provide public transit that is at the same time cheap, clean, and fast. This will allow people to go where they need to to get healthy food."

I live in Seattle, we have excellent public transportation. The bus routes go through poor areas. In fact, there are very wealthy areas right next to extremely poor ones, so stores with healthy food are never far out of reach. There are still people who subsist on junk food. There are also a lot of poor, fat people with cars who prefer going to the Jack-in-the-Box drive-through which is more expensive than Trader Joe's. How do you account for that?

Quote: Original post by trzy
Non-organic (but still healthy) meals can still be had by shopping at regular stores but paradoxically, poor people choose more expensive and unhealthy fast food over cheaper and healthier alternatives like pasta, rice, vegetables, fruits, and water.

This requires:

(a) That you have enough education to understand that fast food is bad for you;
(b) that a proper grocery store opens up shop in your neighbourhood (and consider that businesses, being required to look out for their own bottom lines, will organize themselves in a way that exploits the poor whenever it is helpful to do so; see also (a)), or that there is decent access to public transit;
(c) for the case of food that requires actual cooking, that you can afford (to get yourself set up with) the appropriate appliances and maintenance (consider that a lot of these people are entirely homeless).

Of course, it's certainly a gross oversimplification to blame the GOP for all of this. But the question remains - what is the point of having a society at all, if not to provide a social safety net? And if we agree that having society is a good thing (how did we get where we are otherwise), then how can we support a political party that seems so opposed to the idea of maintaining that net?

Quote: but I have a hard time believing that most of America's poor are working so much that they can't find the time to brown-bag their lunches and prepare a healthy dinner.

The working poor commonly work double shifts. You might do well to calculate how far minimum wage would get you in your city.

Quote: I think the issue is really one of broken homes and dysfunctional families, and urgently needs to be addressed by better leadership and societal role models. Poor youth of the native population are all too often left to fend for themselves in contrast with the children of poor immigrants, who have strongly-knit families to fall back on.

I would agree that these things are incredibly important as well. I would also argue that government spending is certainly capable of doing *something*. You do have something like the Children's Aid Society in the US, right? And it isn't privatized?

Quote: Original post by Zahlman
A relevant bit of commentary from fivethirtyeight.com reader responses:

<snip/>

I'm not an expert on economics, but since this "commentary" seems to deal with other issues, I feel inclined to respond.

I'll sum up (my interpretation of) the article for the lazy: America has AIDS, unhealthy but cheap fast food, embarrassingly lacking public transport, etc. And "free market capitalism" is letting these problems persist, because it doesn't care as long as it's making money.

I am actually in favor of government intervention here. The state and/or city government should definitely hire some community organizers and start a few wholesome quality-of-life-enhancing development programs or whatever.

The problem happens when this scenario is blown up into a ZOMG deadly economy-killing national crisis!!1! requiring immediate intervention by the Federal government. Why the hell should I pay for a nation-wide program that targets an issue that is clearly under the jurisdiction of lesser levels of government?

Of course, there are some cases where centralization increases efficiency, but in every single one of the cases listed in that commentary, the city or state government is much more qualified to intervene.

State governments don't HAVE the money to do this stuff. And according to this website "Constitutions in 32 states and Puerto Rico require that their governors' budget proposals must be balanced. There are similar statutory requirements in 11 more states." States can't perform the same kind of stimulus the federal government can.

Many states are already finding it necessary to cut to the bone as is and are now in the process of trying to find more things to cut. The stimulus bill actually included a hefty chunk of money to give directly to state governments to help with their budget problems. But if this article is correct then the Senate bill has eliminated "$40 billion for state fiscal stabilization (includes $7.5 billion of state incentive grants)" among other things from the bill they began with.

Quote: Original post by Zahlman
The working poor commonly work double shifts. You might do well to calculate how far minimum wage would get you in your city.

Prove it. The majority of working poor are high school and college students working part time while attending school.