Do you really think it's a good idea to get people to spend more money?

I've been hearing over and over again about how it's supposedly a good idea for government to take measures to encourage people to spend more money, that it will help drive the economy, or something like that.

But people need that money for the future.

Is it really such a good idea for government to be trying to (permanently long-term) alter people's spending habits?
(when it's not necessarily in that person's individual own self-interests I mean)

If you just try to make people spend more, is that really going to be in the best interests of the economy?
It sounds to me like a one-sided solution where proponents of that are not examining the other side.
Yes, people might be earning more money but they'll also have more expenses.
Isn't that all just encouraging more materialism? People toiling away and working more for more things they don't really need. It's one thing if an individual chooses to do that on their own accord, but why would you encourage that?

 

There are a bunch of issues relative to your post, and you're confusing an individual situation of the effect of spending on the economy as a whole, which was what I stated.

As I explained in the other thread, 70% of GDP is based on consumer spending. So in general, if there is more overall spending, the economy improves. If there is less overall spending, the economy contracts. A contracting economy is generally considered a bad thing. We call it a "recession." So yes, as a general proposition, more spending is good for the economy.

And in fact, spending data shows that over the past three decades, spending growth has become slower, and along with it, economic growth.

Now of course, for any given individual, the situation may be different. It can be detrimental for an individual to spend more than his income.

I always liked this quote from David Copperfield: "My other piece of advice, Copperfield," said Mr. Micawber, "you know: Annual income twenty pounds, annual expenditures nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

So more spending by a particular individual may not be good for him. And I never claimed anything otherwise. But you're taking an individual situation and applying it to the economy as a whole, which is not a valid analysis. What is good for an individual may not be good for the economy, and vice versa.

IMO, the spending problem we have is largely related to the fact that since the Reagan "trickle down" revolution, we have gutted the great engine of spending, the middle classes.

In 1980, the bottom 90% of Americans got about 65% of the gross national income. Today it is down to 50%.

Between 1979 and 2012, real GDP grew 138%. In that same period, the real income of the bottom of the top 5% grew by 308%. In that same period, real median income grew by just 8%.

And with that decrease in relative income, the spending power of the middle classes has also decreased, relative to the economy. Relative to GDP, the middle classes are getting a lot less income, and thus have a lot less to spend, and thus we've see less spending and hence less GDP.

If we want to see stronger GDP growth more akin to decades path, we need to stop pampering the richest at the expense of the middle class, we need to reverse policies that have effectively redistributed income (and hence wealth) from the bottom 90% to the rich, and in effect, reverse "trickle down".

 

But is higher GDP, for its own sake, really an "improvement" in the economy?
I don't think so, and I have a lot of questions about "encouraging" people to buy things they would not otherwise buy, and using that to drive up income.

Agree with you here.

It's sort of like me mowing my lawn, or me cleaning my home, if you want to see it that way. Does trying to incentivize me to do more really benefit me?

That's why I'm not really seeing any big beneficial macroeconomic effect.

 

If people are going to "spend themselves out of a recession" I really think that has to be income-based driving the increase in spending, rather than the other way around.

The increase in income will then drive the increase in spending naturally on its own, in the most optimally efficient economic manner.
(assuming no high level of inequalities)

 

Sure, generally speaking. Who likes recessions and having less income and purchasing power?

One person's expenditure is another's income. Decrease the expenditure and you decrease income.

Not really like that at all. When you mow your law or clean your home, you're not spending any money which becomes income to someone else.

If you paid someone for these things, then you'd be increasing income for someone else.

It's not only fact but logical for the reasons set forth above. When you spend, it creates income. And the opportunity for someone else to spend as well.

Add that times many transactions per day and 300,000 million people, and you have a big beneficial macroeconomic effect.

 

Recession present extraordinary circumstances. The problem with your point is that in a bad recession, incomes are going down. So spending decreases. With less demand, business cut production, lay people off, with more decreases in income. People have less income and are afraid of having less in the future and cut back spending more. It can become a vicious cycle.

 

Yes, but you're trying to increase expenditure from the same people you're trying to increase income to.
That's like trying to pull yourself up by your own bootstraps.

Why not just try to encourage these people to earn more instead?
In a recession, prices usually fall, so that should be the natural economic signal that drives consumers to spend more.

Yes, but that's a temporary economic effect in a cycle. You don't want to be artificially incentivizing consumers to be spending more money in an economy continuously.

Would you agree with that?
Maybe just during downturns that could become severe, but you don't want that constantly all the time.

And I don't see it as much of a solution for very long drawn out recessions, that probably have more to do with other structural issues than just cyclical effects.

 

Yeah kind of.

You don't think they want to earn more?

Consumers don't spend more if they don't have the money or they are afraid they are going to lose their jobs.

The question is how much damage is going to be done.

You don't need to artificially incentivize them, if they are getting more money they will spend it.

I don't think I said we should incentivize them to spend all the time, they will do it anyway. In fact, I said that each individual has a unique situation.

If you're referring to our discussion regarding inflation, what I said was that inflation or deflation would possibly create a short term incentive to spend or not spend. If you think prices will go up, but not your income, you may be tempted to purchase something sooner. Vice versa with deflation.

Not sure what your point is.

 

That's where lower prices offset their reluctance to spend. When people can't find jobs, they're willing to work for less. That in turn lowers prices (to some degree, a complicated topic) that in turn provides more of an incentive for other people to spend. That's the natural free market "invisible hand" way of operating and adjusting to come to a balance.

 

Point is that argument you used wouldn't apply in that situation.

 

What I don't understand is what you mean by "it as much of a solution"

I said: "Recession present extraordinary circumstances."

You said: "And I don't see it as much of a solution for very long drawn out recessions ..."

What are you talking about "it" which you don't see as much of a solution for long recessions.

 

Except, as I keep pointing out and you keep ignoring, is that people don't spend when they think they are going to lose their jobs. They tend to hold onto every dime they have in case they lose they job. And then they sell their assets and pull their money out of the bank if they think they could lose it.

That "natural free market" often wipes out huge swaths of wealth, the economy, and livelihoods before things get better.

 

For the sake of simplicity, just imagine a two-person economy. I mow your lawn and you clean my windows. (And let's suppose for some reason I was unable to clean your windows and you were unable to mow your lawn, maybe I'm really old and can't go up on a ladder, and you have terrible grass allergies)

Now let's simulate not having enough money. We both start saving all our money and are reluctant to hire the other.
But, we're so anxious to save money, that we are also more anxious to earn money to be able to save it. And so we are willing to work for less. Eventually the price point will come down to a level that we will both be willing to work and hire the other.

This is a very theoretical example, but it demonstrates the concept I am trying to propound. The free market does have ways of solving these type of problems.

 

Bogus use of 'natural' of course. Evolutionary economics does tend to be rather scathing, ultimately suggesting that market forces are destructive and we get stuck into inferior equilibrium.

 

In the meantime, because the window owner is afraid the lawn owner won't hire him, and the lawn owner is afraid the window washer won't hire him, neither hires each other, and the lawn turns into a jungle and the windows become disfunctional from lack of cleaning, and by the time they get to the point of hiring each other for nothing, a lot of unnecessary damage has been caused.

 

Hence my use of quotes. "Natural free market" is one of those vague and ambiguous terms that can mean many different things.

 

And even if they hire each other for approaching nothing, that's still economic exchange taking place. The same economic exchange (in this example) as before, just with a lower nominal GDP.

 

If you don't have any money, it doesn't matter how low prices go.

 

Yep. But its not vague. It is deliberate misinformation. Its on a par with 'perfect competition is possible, let's just have markets of potatoes'

 

After destruction of the economy. What's your point, and how did we get to this discussion from talking about how money creation and the Fed works?

We are off topic, so let's save further discussion on this point for another thread.

 

That's not true, there's always some level of money, however small.

But maybe like Reiver, you're not just talking about labor but are talking about capital inequalities.

 

All this sounds like a debate between the Austrian school of economic thought and Keynesianism, with Reiver as our resident Marxist.

 

I'm not a Marxist. You, however, is a fascist.

 

Oops, I'm sorry, don't you use the term "Socialist" to describe yourself ?

 

Most Socialist schools of thought aren't Marxist. Didn't you know?