do you feel stimulated

7/30/2019 Do You Feel Stimulated

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Palouse Liberty Project

http://www.palouselibertyproject.com

Presented by John Lafer, Nov. 2012



Gain a better understanding of recessions,how the government responds to them andwhy the response never works.

Give you the confidence to start an argumentover Thanksgiving dinner with your cousin.



The real problemRecessionsImbalances

RelationshipsThe Invisible HandTypes of Stimulus

Why it fails



Total income always matches the price of final goods.Prices = Wages + Profits = Income

There is always enough income to purchaseall of the current output.



If people are not spending, they’re saving. Which means they’re investing.

Folks don’t put much money under themattress.

When the money goes into a bank, it’s lent toinvestors for plant, equipment, inventory, etc.Despite what you hear, the US economy isnot “consumption driven.”

It requires investment, which requires saving.Too much savings is not the problem

China and India have much higher savings ratesthan us.The U.S. had a much higher savings rate when oureconomy was a powerhouse.



Unemployment reduces income.The only way to gain the income needed topurchase the amount of output associated

with full employment is to produce more.This does not mean the supply of goods, attheir current prices, matches the demand,but the problem is not due to lack of total

purchasing power.



Profits result when firms can sell their outputfor more than they pay for their inputs.Each firm buys a variety of inputs to produce

their output, and the output of one firm isoften the input of many other firms.Recessions occur when firms can’t hire allavailable resources and still make a profit.

With unemployed resources, the economy isoperating below its full output potential.



Full employment rests on a delicate web of price relationships for millions of products.And supplier-customer relationships :

Products are sold to a set of customers whoseoutputs are then inputs to still other firms.It’s not just that you sell something – it’s whobuys that’s important.

And quantity relationships , in which thecorrect amounts of each product are made.



Full employment rests on the ability of firmsto buy the available quantity of inputs, atthe prices asked, to produce and sell the

output required by their customers, at aprice which is both profitable and will bepaid by their customers.



And this must be true across industries,firms, geographic areas and seasons.All while reacting to change:

population; demographics; migration patterns;life expectancy; retirement age; technicalinnovations; crop harvests; buyer tastes; importsand exports; government policy; naturaldisasters; foreign-exchange rates; war; etc.

It’s simply a wonder that a modern economycan ever come close to full employment!



It works when prices freely float , signaling to everyonethat behaviors should change.

Firms come, firms go.People change careers. They move to where there are jobs.Students study the most-promising fields.

Firms discontinue poor-selling items.Farmers switch to higher-priced crops.They cut back on expensive fertilizer.Investors expand factories. Other factories close.

It works when resources freely move from where they areneeded least to where they are needed most.

From where they are not making a profit to where they will.From where they are unemployed to where they will be busy.

It works when firms can freely liquidate their badinvestments and good investments are rewarded.



These changes must be relentless.Ending a recession requires that balance berestored to the uncountable number of

supply, demand and price relationshipsacross the entire economy.A truly free-market economy will make theseadjustments.



The government line: the private sector is spending less,so the government needs to spend more.This is a fundamental mistake.

Recall, we know the problem is not a lack of spending.If the government engages in stimulus spending...

There will be a cost: higher taxes, more debt or inflation.It must work better than the price mechanism and free markets.

It is temporary – by definition.There must be an “exit strategy.”

What happens when the stimulus is removed?If the government fills a demand void, who fills it when they stop?

Stimulus does not create demand – it just pulls it forward.And it doesn’t pull straight; demand comes from “special” places. Debts eventually have to be re-paid, which reduces demand.Inflation eventually raises prices, which lowers real spending.



Raise taxes: reduces the purchasing power of thetaxpayers, thus canceling the stimulative effect.

This used to be called tax-and-spend stimulus .Borrow the money: reduces the purchasing power of the lenders, thus canceling the stimulative effect.

This is known as fiscal stimulus .They can’t do much more; we’re almost “tapped out.”

Print the money, which is what they’re doing today. Today, the central bank is printing the money and loaning itto the banks to lower interest rates. This is known asmonetary stimulus .Lowers interest rates (for awhile).They call it “quantitative easing” but it has another name. The rest is handed over to the government to spend.



The US is using a hybrid of fiscal andmonetary stimulus.

I call this two-fisted stimulus .

If the government uses monetary-fiscalstimulus and buys extra goods, those goodswill not be flowing to the firms that needthem to produce their output.

The firms, which need access to those goods,are being “crowded out” by the attempt tohelp the firms’ suppliers.



Money gets spent on goods that are over-supplied and not profitable.

This removes an incentive to lower output andmove inputs to produce under-supplied goods.

Price-supports all hinder the lowering of prices for over-supplied goods. Demand willnot rise to meet the (over-)supply.

Tariffs; quotas; min. wage laws; price guarantees



It helps borrowers, but it hurts savers(lenders) in equal measure .

Savers and retirees lose income, which cancelssome of the stimulative effect.

It only works until society sees the inflation.Interest rates go up, and higher than before.

It eventually drives down profit margins,

because it drives up prices of inputs morethan outputs.This causes more unemployment.

The 1% prosper; everyone else suffers.



Attempts to “stimulate” the economy aresimply ham-fisted.The economy will only repair itself if prices

are allowed to change, inefficient firms areallowed to fail, and resources – includingworkers – move to where they are needed.There are no shortcuts – only impediments.

do you feel stimulated

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