Quote: Original post by Prefect
Interesting questions. When you look at the big picture, they don't seem so mysterious. Look at the recent trajectory of GDP, for example. It is very obvious that output is less than it was a few years ago. Do you think that the capacity of the economy has similarly deteriorated in the same time frame?

I see no mechanism by which the potential capacity of the economy should have deteriorated, so the logical conclusion I draw from that is that it hasn't. Which in turn means that there is spare capacity.

Ill give you a mechanism: a detoriation of trust and optimism, a decreased inventory of willingness to take risk. But indeed, thats only part of the equation.

Quote:
Indeed, aggregate demand has dropped. But why?

Has it really dropped because people genuinely desire less? Or has it dropped because the financial crisis has prevented people from turning their desires into effective demand?

If this second case holds, then your analysis very clearly doesn't apply. If the first case holds, then your analysis does apply. So are you really saying that the first case holds - that people genuinely desire less?

We are back at the definition of supply and demand again. Stated demand is always infinite; revealed demand clearly dropped. Your maneurering inbetween the two does nothing but cause semantic confusion. Your insistence on assigning individual psycology to aggregate demand further muddies the waters.

The clearest way to put it is that the priorities of people have changed. Wouldnt we all love higher aggregate output? Sure. But for meeting a demand for more wine (or whatever), an idle car factories is every bit as useless as idle sand.

Note that the car factory isnt any more or less 'idle' than the aforementioned sand is; is has no value as long as it doesnt fit into the demand picture; that you somehow see it as more valuable than sand is probably either a sunk cost fallacy or some intrinsic theory of value fallacy. Stuff that nobody wants does not have any value.

Quote: Original post by trzy
Bubbles are indicative of an allocation problem. And in an even broader sense, wealth inequality is indicative of an allocation problem.

Bubbles indicate market failure.

Quote: Original post by trzy
Central planning doesn't work. Expanding the government does not make the economy more productive. Rather than allowing markets to clear and money to be allocated to activities that create sustainable growth, it instead flows to prop up or expand existing activities.

Central planning worked well during WWII. It's a question of conditions and your one size hates all government approach is ill informed. You can't have a big economy without a big government because big economies make big demands on government.

Quote: Original post by trzy
Investing in road repairs and bridges in places that need them is a great idea, but what if you build bridges to nowhere, like Japan did, in order to prop up a powerful construction sector? What happens when the projects are over? You'll be left with construction firms unable to meet even larger payrolls asking for even more money to support the status quo. What if what we need to do is export more? How will expanding local government bureaucracies help?

Japan went about building infrastructure through a series of half measures, so it never got the immediate impact necessary to kick start it's economy. The analogy is a wage laborer who catches cold but who dares not take time off for fear of losing his job. If he takes two aspirin as he should, he'll fall asleep and miss work and get fired, so instead he takes one aspirin so that he can keep working even though he's sick. He's not as productive as he could be and it takes longer for him to recover.

Quote: Original post by trzy
The solution needs to be more robust than that.

You sound like Paul Krugman!

Quote: Original post by tstrimp

Quote: Original post by way2lazy2care

Quote: Original post by trzy The collection of tax revenue for non-productive uses (fruitless wars, the Department of Education, etc.) can be thought of as an allocation inefficiency

wat?

Education is one of the single MOST productive uses of allocating taxes. That's actually the thing that pisses me off the most about politics in the US. Everybody always whines about all the things people need, but half of those things would be completely solved by having a workforce that has readily available education that won't put you into debt for 15 years.

Except it isn't productive.

Spending per primary school student by country
Spending per secondary school student by country

We pay almost more per student than any other country, yet where do we rank when it comes to education? What sort of value are we getting for our money?

Education Statistics by country

So tell me, by what measure is our spending on education productive? How exactly has the Department of Education helped the state of our education system? Are we better now, or before the Department of Education was created?

Edit: Just to make myself clear. The last two questions were not rhetorical. I don't know if or how the DoE has helped, and I am having trouble finding any comparisons for education levels before the DoE was in power.

You're mixing apples and oranges. Apples: productive uses of allocating taxes. Oranges: comparative rank of American students.

The question is: Dollar for dollar, how much economic activity is generated by government spending on education compared with government spending in other areas? International ranking has very little to do with that.

By the way, "DoE" is usually taken as short hand for the Department of Energy, not the Department of Education.

At any rate, I'll believe that conservatives care about education when they drop their anti-science attitudes towards health and environmental regulations.

Quote: Original post by Eelco

Quote: Original post by Prefect
Interesting questions. When you look at the big picture, they don't seem so mysterious. Look at the recent trajectory of GDP, for example. It is very obvious that output is less than it was a few years ago. Do you think that the capacity of the economy has similarly deteriorated in the same time frame?

I see no mechanism by which the potential capacity of the economy should have deteriorated, so the logical conclusion I draw from that is that it hasn't. Which in turn means that there is spare capacity.

Ill give you a mechanism: a detoriation of trust and optimism, a decreased inventory of willingness to take risk. But indeed, thats only part of the equation.

I agree that those factors are a problem, though I don't see how they would reduce the potential capacity of the economy. After all, pessimism normally doesn't destroy factories, and mistrust doesn't cause workers to lose qualifications or work experience.

So those factors certainly play an important role in causing the capacity of the economy to go idle, and to reduce investment. However, pre-existing capacity doesn't disappear just because people become less optimistic.

Quote:

Quote:
Indeed, aggregate demand has dropped. But why?

Has it really dropped because people genuinely desire less? Or has it dropped because the financial crisis has prevented people from turning their desires into effective demand?

If this second case holds, then your analysis very clearly doesn't apply. If the first case holds, then your analysis does apply. So are you really saying that the first case holds - that people genuinely desire less?

We are back at the definition of supply and demand again. Stated demand is always infinite; revealed demand clearly dropped. Your maneurering inbetween the two does nothing but cause semantic confusion.

I have been very careful to distinguish desire from demand. Desire plus money results in demand. If you are unable to see the distinction, that's your problem.

Quote:
The clearest way to put it is that the priorities of people have changed. Wouldnt we all love higher aggregate output? Sure. But for meeting a demand for more wine (or whatever), an idle car factories is every bit as useless as idle sand.

I see no evidence that the crisis has changed people's desires. Perhaps you can point to such evidence, or are you just making stuff up?

It seems very clear that the "desire" part of "desire plus money results in demand" has not changed in any significant way; it's the "money" part that was eliminated by the financial crisis.

Quote:
Note that the car factory isnt any more or less 'idle' than the aforementioned sand is; is has no value as long as it doesnt fit into the demand picture; that you somehow see it as more valuable than sand is probably either a sunk cost fallacy or some intrinsic theory of value fallacy. Stuff that nobody wants does not have any value.

The difference is that nobody has an unfulfilled desire for sand.

By the way, you may be misunderstanding the situation if you only think about US car companies. Obviously US car companies produced products that became less popular, and it is up to them to either change their product line or go under. There is no doubt about that. That problem started to raise its head before this crisis, though the crisis probably accelerated it. In any case, the situation of US car companies is not the crux of this economic crisis.

What has happened is that, at a highly aggregated level, people have unfulfilled desires while the economy has the capacity to satisfy those desires. However, the financial crisis removed the money that would be necessary to turn the desires into demand and bring the two sides together.

Why not find some way to bring those two sides together again?

Quote: Original post by LessBread
The question is: Dollar for dollar, how much economic activity is generated by government spending on education compared with government spending in other areas? International ranking has very little to do with that.

How exactly do you measure that?

Quote: By the way, "DoE" is usually taken as short hand for the Department of Energy, not the Department of Education.

Thanks, I'll keep that in mind.

Quote: At any rate, I'll believe that conservatives care about education when they drop their anti-science attitudes towards health and environmental regulations.

It's always one side or the other for you isn't it? I never said anything about a republican plan being better, just that the department of education is not delivering.

Quote: Original post by tstrimp

Quote: Original post by LessBread
The question is: Dollar for dollar, how much economic activity is generated by government spending on education compared with government spending in other areas? International ranking has very little to do with that.

How exactly do you measure that?

Along the lines laid out in these sources.

Multiplier (economics) && Fiscal multiplier

"Measuring the Effect of Infrastructure Spending on GDP"

Pocketful of Multipliers (II): Options for Stimulus Packages

Quote: Original post by tstrimp

Quote: At any rate, I'll believe that conservatives care about education when they drop their anti-science attitudes towards health and environmental regulations.

It's always one side or the other for you isn't it? I never said anything about a republican plan being better, just that the department of education is not delivering.

I didn't mention Republicans, I mentioned conservatives. Either way, they're the ones attacking the Department of Education and they have for a long time. So don't kid yourself, this is a one side or the other issue.

Quote: Original post by LessBread
At any rate, I'll believe that conservatives care about education when they drop their anti-science attitudes towards health and environmental regulations.

I'm a fiscal conservative and I am very very pro education.

Quote: Original post by trzy
To arrive at solutions, we must first identify what problems we will actually face in the future and whether our values might impede our ability to address them.

Agreed. Just don't be the proverbial supercomputer that predicts tomorrow's weather with 100% accuracy, but just needs 2 days to do it.

Even Deep Blue stopped its gazillion calculations at 7 moves deep and actually made a move.

Quote:
What sort of future do you fundamentally want?

One that everyone do their jobs right.

So I think I'll stop confusing myself with all this and go finish one of my damn crappy games for once.

Quote: Original post by Prefect
I agree that those factors are a problem, though I don't see how they would reduce the potential capacity of the economy. After all, pessimism normally doesn't destroy factories, and mistrust doesn't cause workers to lose qualifications or work experience.

So those factors certainly play an important role in causing the capacity of the economy to go idle, and to reduce investment. However, pre-existing capacity doesn't disappear just because people become less optimistic.

Not if you exclude optimism from total capacity, but why you would do any such thing is beyond me.

Quote:

Quote:
The clearest way to put it is that the priorities of people have changed. Wouldnt we all love higher aggregate output? Sure. But for meeting a demand for more wine (or whatever), an idle car factories is every bit as useless as idle sand.

I see no evidence that the crisis has changed people's desires. Perhaps you can point to such evidence, or are you just making stuff up?

I propose that as an alternative to your interpretation; of course I cant really look into everybodys' heads. Either way, are you lying here, or below, where you acknowledge the car industry as an example of such a shift?

Quote: It seems very clear that the "desire" part of "desire plus money results in demand" has not changed in any significant way; it's the "money" part that was eliminated by the financial crisis.

Fiat money or any form of credit can only exist by the virtue, and in relation with confidence and optimism about the future. To say confidence disappeared or money did is essentially the same thing.

Quote:

Quote:
Note that the car factory isnt any more or less 'idle' than the aforementioned sand is; is has no value as long as it doesnt fit into the demand picture; that you somehow see it as more valuable than sand is probably either a sunk cost fallacy or some intrinsic theory of value fallacy. Stuff that nobody wants does not have any value.

The difference is that nobody has an unfulfilled desire for sand.

People have many unfulfilled desires.

Quote:
What has happened is that, at a highly aggregated level, people have unfulfilled desires while the economy has the capacity to satisfy those desires. However, the financial crisis removed the money that would be necessary to turn the desires into demand and bring the two sides together.

Or so you assert. Its not a matter of finished cars sitting on the parking lot. That we could get more cars on the parking lot without drawing upon scarce resources that may be better used elsewhere under present circumstances is rather implausible.

Quote: Why not find some way to bring those two sides together again?

We agree that the crux of the matter is confidence/credit. I can think of a few ways to restore my confidence, but they would pretty much all involve the government retracting its grubby hands. The recent nominal expansion of credit didnt exactly boost my confidence about the future, for instance.

Quote: Original post by Eelco

Quote: Original post by Prefect
I agree that those factors are a problem, though I don't see how they would reduce the potential capacity of the economy. After all, pessimism normally doesn't destroy factories, and mistrust doesn't cause workers to lose qualifications or work experience.

So those factors certainly play an important role in causing the capacity of the economy to go idle, and to reduce investment. However, pre-existing capacity doesn't disappear just because people become less optimistic.

Not if you exclude optimism from total capacity, but why you would do any such thing is beyond me.

This is really bizarre, because it just seems so incredible to me that anyone would consider optimism as a part of capacity.

Let's say I own an assembly line that is capable of cranking out 1000 units of some widget per day if run at full load. Will the assembly line magically be able to produce 1100 units per day just because I am more optimistic? Will it magically lose the ability to crank out 1000 units per day just because I become pessimistic? Of course not.

Now if I am pessimistic about prospective sales, I will probably not use the full capacity of the assembly line. Maybe I will run it only 50% of the time, producing 500 units per day. But that doesn't change the fact that the capacity to produce 1000 units per day is still there.

Conversely, if I am optimistic about prospective sales and I am running at or close to full load, then I will probably start investing to increase the productive capacity.

This is exactly what I wrote: optimism/pessimism can affect investment, which you might think of as the derivative of productive capacity, and they can affect the utilization of existing capacity. However, they are not a part of the productive capacity.

So I don't know, maybe you have a strange definition of productive capacity.

Quote:

Quote:

Quote:
The clearest way to put it is that the priorities of people have changed. Wouldnt we all love higher aggregate output? Sure. But for meeting a demand for more wine (or whatever), an idle car factories is every bit as useless as idle sand.

I see no evidence that the crisis has changed people's desires. Perhaps you can point to such evidence, or are you just making stuff up?

I propose that as an alternative to your interpretation; of course I cant really look into everybodys' heads. Either way, are you lying here, or below, where you acknowledge the car industry as an example of such a shift?

Neither. As I've clearly written, I consider the shift in the car industry to be orthogonal to the crisis - not caused by the crisis, though perhaps accelerated by it. It seems that you believe that this is wrong, but in any case the things that I wrote do not contradict each other.

Quote:
Fiat money or any form of credit can only exist by the virtue, and in relation with confidence and optimism about the future. To say confidence disappeared or money did is essentially the same thing.

That depends on what kind of "confidence and optimism" you're talking about. If the government announces that you and everybody else have to pay them 1000# in their own money by the end of the year or they will lock you up in jail, then clearly the government's money will be viable.

You could say that this only holds because you are "confident and optimistic" that the government is able to throw you in jail if it wants to. That's not exactly the kind of "confidence and optimism" that we talk about when we analyse investment decisions.

Quote:

Quote:
What has happened is that, at a highly aggregated level, people have unfulfilled desires while the economy has the capacity to satisfy those desires. However, the financial crisis removed the money that would be necessary to turn the desires into demand and bring the two sides together.

Or so you assert. Its not a matter of finished cars sitting on the parking lot. That we could get more cars on the parking lot without drawing upon scarce resources that may be better used elsewhere under present circumstances is rather implausible.

My point is not at all about how things should be allocated. I am not saying that the resources should necessarily be used to make cars. I am looking at the bigger picture, here. The big picture point is that right now, the resources are not used for anything useful at all. They're not used for making cars, they're not used for making something else. That is certainly not an optimal outcome.

(I should relativise that by saying that ecological considerations should play a role when it comes to e.g. fossil fuels. However, this is not the case when it comes to labour, where a huge amount is currently idle for no good reason.)