Some claim that Say's Law only applies when prices are fully flexible. They further claim that in the short run, prices are not flexible, therefore a drop in aggregate demand can cause a recession.

The system of production and distribution and consumption of eight track audio equipment fell and never came back.

The problem with today's economic environment is that it was spurred through the consumption of an "asset", housing equity, that was and probably still is inflated given trends in long term growth for something that depreciates to some degree over time. In order to further keep this gravy train growing, it required that housing prices rise rapdily to keep these people consuming or to justify risky borrowers who were lent the money for the Asset. It is not different than a broker who ponies up half of a stock. If it falls below a certain threshold you have the option of selling some off to be at a safe margin, or inject more cash to balance out the loan for the stock. These risky borrows are completely under water on an asset that is no longer worth the initial principle of their mortgage, assuming it is an interest only loan.

The obvious solution is to allow for housing prices to drop to market clearing prices, and make people return to consumption levels that match the value of assets held and income. Otherwise, you will only repeat the same mistake and cause yet another bubble if people are willing to lend. As White Fox mentioned, a general influx of government money does not increase jobs unless the reason behind the drop in demand is purely psychological. While some of it is no doubt fear in the value of assets, most of it is due to the fact that the assets were overvalued in the first place, and the government is actively trying to bail these individuals out. Let housing prices fall so those who did the right thing and lived within their means are not paying for the over consumption of buyers, and the greed of mortgage banks.

Ah, but those jobs that are beneficial for the most part already exist. As a matter of fact, I can think of no potentially beneficial jobs that the government can create that they have not already created.

This particular implication of Say's Law does rely on flexible prices, and prices in the immediate short-run are not flexible; however, Say's Law never implied that unemployment and shortages/surpluses could not occur in the immediate short-run, only that the tendency of markets would be towards eliminating these shortages and surpluses, as prices gradually adjust. The long-run, in other words. This becomes a disaster only under the fallacious Keynesian arguments that any amount of unemployment will cause a vicious cycle because of drops in aggregate demand. To realize why this is fallacious, we have to recognize the main premise of Say's Law, rather than one of its implications, and that main premise is that supply creates its own demand. In other words, if I go out and start producing something, people will want to consume some of what I produce, and in order for them to do that, they must become producers themselves and produce things that I am willing to trade my product for. This is true because the production must precede the consumption, thus Say's Law is true. Once we recognize the main premise of Say's Law as true, the implication which we are now analyzing follows suit.

__________________

If you're really worried about the rate of growth of the national debt, you should be overjoyed that the President is a Democrat.



The gross national debt compared to GDP (how rich we are) reached its lowest level since 1931 as Reagan took office in 1981. It skyrocketed for 12 years through Bush senior. Clinton reversed it at a peak of 67%. Bush junior crossed that line on Sept. 22 and hit 69% on Sept 30. That's the highest it's been since 1955.

Bush did three things to skyrocket the debt from $5.7 trillion to $10 trillion:
1. He lowered taxes on the rich (by far the biggest item).
2. He invaded Iraq instead of winning in Afghan-Pakistan (another $600 B).
3. He deregulated Wall Street speculators. That bailout has now "invested" $1T