Tuesday, April 10, 2012

Jared Bernstein — What Is This Thing Called…Escape Velocity?


Jared Bernstein asks an important question.

Read it at On the Economy
What Is This Thing Called…Escape Velocity?
by Jared Bernstein

11 comments:

Matt Franko said...

"What is this thing called escape velocity?"

How about another mis-applied and mis-guided use of a term from physics within the academe of economics...

TIP: Get your own terms in Economics!

Resp,

paul meli said...

@Matt

Yet another economist that believes (wrongly) that the economy is a perpetual-motion machine so that if we can just jump-start it to get it rolling it will power itself on through the magic of the private sector. No friction is acknowledged.

No discussion of what "fuel" or input source we need to "excite" the system. Like spending.

Does it not occur to these guys that supply can't create it's own demand? At least not unless nearly every business in America rolled the dice and started hiring people they don't need and carrying losses indefinitely until people were able to spend again.

That has almost zero chance of happening in my view.

Matt Franko said...

P,

The 'invisible hand' is supposed to take over at some point.

These are major league morons we are dealing with here.

Resp,

Tom Hickey said...

And Bernstein is actually one of the good guys. But the fog is thick.

That's why Dean Baker beginning to get it is a big deal.

Anonymous said...

"supply can't create it's own demand"

Hang on, that just sounds wrong.
Maybe building a whole economic theory around "supply creating demand" is wrong, but surely supply can create demand?

The guy who created the first bicycle was laughed at, until people got the idea and suddenly wanted their own.
Many, many similar examples.

paul meli said...

"The guy who created the first bicycle was laughed at, until people got the idea and suddenly wanted their own.
Many, many similar examples."

Demand is more than the "desire" to buy a new and revolutionary product.

It requires that agents also have the "capacity" to follow through on their desires.

Demand "demands" that both of these requirements are present simultaneously.

Your example assumes the capacity (ability, resources, funds) exists. There is no basis for that assumption.

@Tom

I agree with you - this is a very big deal. People are looking for answers to a way out of this awful mess.

Because of our affinity to let others do our thinking for us and deferring to those "experts", having mainstream economists like Baker joining with already established MMT spokespersons like Jamie Galbraith is hopefully the beginning of a major breakthrough.

There are a lot of smart people in the world but having a lot of knowledge about things that are just wrong by definition makes their smartness less than useful.

The hive-mind nature of the internet empowers those of us that are willing to make trial-and-error adjustments to our thinking to achieve a higher understanding of whats better for all of us.

Eventually the PTB will have to realize that they can't hide the truth from us.

Anonymous said...

"Your example assumes the capacity (ability, resources, funds) exists. There is no basis for that assumption"

Except that, of course, it would be difficult to imagine a society in which there were no resources, ability, or "funds". Once something is "supplied" and a demand for that thing comes into being, the means to pay for the thing supplied can be worked out. The "funds" don't necessarily have to be provided by an external body (i.e. government, for example).

paul meli said...

"Except that, of course, it would be difficult to imagine a society in which there were no resources, ability, or "funds". Once something is "supplied" and a demand for that thing comes into being"

There is no requirement that there are "no" resources, just not enough resources as disposable income for a significant segment of the consumer class to make it untenable for them to buy many things that they may want.

Like, for instance, right now, where many people are encumbered with high debt-to-income ratio's and couldn't buy what they wanted without giving up "necessities".

It would be a fool's errand for people in that situation to attempt to borrow money to purchase the "next big thing".

That kind of demand would have to come at the expense of demand for substitute products.

No net increase in demand.

Apple isn't so much creating demand for it's products as it is cannibalizing other companies that aren't able to compete. Their success comes at the expense of others. Apple can'r grow the economy if the government doesn't enable that growth by deficit spending, generally.

More accurately, the economy as a whole can't grow with new and better products that consumers want without follow-through by the government in creating new finacial assets.

Financing consumer purchase through credit has a finite limit and it appears we are there.

This is an either-or situation.

Tom Hickey said...

Demand is based on income and producing supply generates income. Notional demand without supply means no goods to buy, and production is what generates income. The basic New Classical view is that creating an environment for investment will generate the income for workers to buy what they make, and that the economy tends to equilibrium at full employment. The Keynesian view is that there is no natural tendency to equilibrium and when demand falls for whatever reason, which often happens as the business cycle shows, then it may be necessary for government to step in and give demand push, since fostering investment wont increase investment when firms don't see any enough demand on the horizon.

Broad brush stroke conceptual model, but that is essentially the argument. MMT is a Keynesian-type solution that shows why demand falls due to demand leakage and how to fix it by govt offsetting the level of non-govt saving that is resulting in demand leakage in order to restore the level of effective demand that will lead to increased investment.

Anonymous said...

"More accurately, the economy as a whole can't grow with new and better products that consumers want without follow-through by the government in creating new finacial assets."

Ok, so the government in this case has to spend to reduce financial fragility and possibly also private indebtedness. But in this imagined scenario they are responding to a sequence of events which begins with an initial 'supply', not with an initial 'demand'. Given the default government support of banks as now instituted (I hate this as much as the next man), even this idea is questionable. Someone like Greenspan, for example, might be quite content with allowing a private credit bubble to run its course and then for the government to just step in and pick up some of the pieces at the end. I would completely disagree with this approach, but the basic point remains that the sequence could potentially be either supply leading to demand or demand leading to supply.

"The Keynesian view is that there is no natural tendency to equilibrium and when demand falls for whatever reason, which often happens as the business cycle shows, then it may be necessary for government to step in and give demand push"

This I agree with.

paul meli said...

"…the sequence could potentially be either supply leading to demand or demand leading to supply."

Yep. It's the common chicken-or-egg conundrum.

Obviously we disagree on which is more causal - supply or demand.

A single company can't succeed if it is limited to selling to it's own employees (in general). If enough companies are producing products that can be sold in the aggregate then a system dynamic becomes possible, but fragile.

It seems to me that a system like this would have to be very finely tuned to be stable and highly prone to breakdowns because of various frictional losses and inefficiencies, such as saving, profit-taking, uneven distribution, weather, natural disasters, disease, etc. Every natural system has frictions and it is not possible to eliminate such things entirely.

These inefficiencies and frictions can be overcome by net government spending. Credit can do it for a while but eventually (very soon) the system will lock up or reach an equilibrium (come to rest - not good).

I don't see any way a supply-first paradigm can avoid this winding down phenomenon, which is inescapable.

Supply-side looks like perpetual motion to me and so far at least that is impossible according to known laws of the universe.

Highly efficient central planning might be able to make such a system work but I have no confidence in such measures, at least not with the government we have.

Much simpler to spend into the economy and let the animal spirits chase the prize. As long as you give a car gas it runs, but you still have to steer it and maintain it.

Of course, I could be100% wrong about this but that's how the system appears from where I sit.