1980s: The decade things started to go to shit

[+or-1]

Recession, S&L collapse, voodoo economics... [sarcasm]Yeah, the eighties was an excellent decade and Reagan was Jesus reborn. Hell, he single handedly knocked down the Berlin Wall and defeated the commies, didn't he?[/sarcasm]

 

[boneyard bill]

What economic policies do is to determine the split between rewarding labor and rewarding capital. What was decided in the 1980's was to shift the economy from rewarding labor to rewarding capital, from wages to profits. Increasing the amount of the nation's income that went to the wealthy was suppose to increase the amount of money available to invest in businesses to grow the economy from the supply side rather than growing it from the demand side.

These policies are pretty straight forward. Decrease taxes on the rich, increase them on the poor and the middle class. Suppress wages by suppressing unions, lower the minimum wage, reduce regulatory limits on employers requiring overtime, globalization, etc. These policies were put in place and are largely still the policies in place.

These policies have produced the income inequality that we see today. They haven't produced the increase in business investment that they were suppose to produce. Rather they have produced a series of asset bubbles in real property, homes and commodities, and in paper investments, stocks and derivatives.

While it can be argued whether or not the rich deserve an ever increasing portion of the nation's income, it is hard to argue that it has produced what it promised, increased business investment. Or that the asset bubbles that it has produced or the income inequality that is its method of producing the shift in income are good for the economy. The income inequality has produced, as intended, a lowering of demand. This lower demand has removed the incentive to invest.

We've been through this before. A mere paper demand is going to lead to inflation. In the old days that is really what inflation was. You are either going to get consumer price inflation or asset price inflation i.e. a bubble. Real is a product or service. Loose monetary policy will not produce real demand. If a business wants to increase demand, they have a simple solution. Lower prices. Let the recession play out. Consumers benefit from lower prices (which, of course, squeeze profits so you should like that). In the mean time, consumers are also able to get out of debt which increases aggregates savings. Then interest rates come down automatically, without any "stimulus" from the Fed.

Once out of debt, the consumer is now possessed of real demand. They have a surplus over normal expenses due to the elimination or reduction of their debt maintenance. All of this derives from real production and therefore constitutes real demand. Now you have real growth. More goods and services are actually produced. Loose monetary policies prevent this from happening. The result is that you get only inflationary growth which merely leads to another recession. We've tried these policies before and they failed. Other countries have tried these policies with disastrous results.

The '80's were a successful decade due to the monetary policies of Paul Volcker. The "supply side" policies adopted by Reagan may have helped that process and maybe they didn't. Certainly the tax cuts in the upper brackets didn't hurt because nobody was paying in those brackets any way. They still aren't paying in the highest brackets even though those brackets are lower. Just ask Warren Buffet.

But whether it did much good to reduce taxes across the board only to borrow the money back again because of the increased deficit, I don't know. Although Keynesians would surely argue that it did because you cut taxes for consumers while borrowing it from savers which is exactly why Kennedy, on the advice of his Keynesian economists, proposed tax reduction almost identical to Reagan's.

 

[lpetrich]

I think that this is a little clearer if we go back to the dictionary meaning of the words "conservative" and "liberal." A conservative is one who opposes change, who supports the status quo, the way that things are and the existing social, class order. A liberal is one who supports change, who puts change forth as the solution to our problems and who opposes the existing social order.

I think that historians use the terms in these broad ways, not the narrower single issue way that we do today.

Very good point, SimpleDon, and that's the sort of sense that the Arthur Schlesingers had had in mind.

 

[boneyard bill]

Very good point, SimpleDon, and that's the sort of sense that the Arthur Schlesingers had had in mind.

That's NOT what the Schlesingers SAID. They said that they used term liberal to apply to those who were seeking greater equality or trying to help the less fortunate. But if you look at historical contexts, it isn't always very clear who those people are since politicians appeal to different groups, and those groups don't always break down clearly by class interests.

 

[SimpleDon]

That's not the point. The Schlesingers, who came up with the chart, defined liberal as that group that sided with the poorer elements of the population against wealthy interests. But wealthy interests can be diverse and so can poor elements. You could argue that Lincoln represented wealthy industrial interests, he was, after all, a railroad lawyer. But he also opposed slavery. Poor southern whites, on the other hand, fought (literally) against Lincoln's policies which were also opposed by wealthy southern planters.

Wealthy interests are the prevailing social order. Slavery was the prevailing social order. A classic liberal is someone who opposes the existing social order. A classic conservative is one who defends the existing social order. See, simple.

Lincoln was held broadly liberal views for his era. It is no academic flaw that the rabid Republicans of that era were referred to as the Radical Republicans. Radicals are defined as wanting change for change's sake, to the left of liberals.

You are getting bent out of shape trying to apply the words as you understand them, a conservative is all that is good and just and a liberal is everyone else who is pure evil, to historical figures. The Schlesingers are writing an academic work and they need a little more precise language than these more common definitions used today.

What are your definition of the words "conservative" and "liberal?"

 

[ksen]

What are your definition of the words "conservative" and "liberal?"

I think you answered your own question.

You are getting bent out of shape trying to apply the words as you understand them, a conservative is all that is good and just and a liberal is everyone else who is pure evil, to historical figures. The Schlesingers are writing an academic work and they need a little more precise language than these more common definitions used today.

 

[SimpleDon]

What economic policies do is to determine the split between rewarding labor and rewarding capital. What was decided in the 1980's was to shift the economy from rewarding labor to rewarding capital, from wages to profits. Increasing the amount of the nation's income that went to the wealthy was suppose to increase the amount of money available to invest in businesses to grow the economy from the supply side rather than growing it from the demand side.

These policies are pretty straight forward. Decrease taxes on the rich, increase them on the poor and the middle class. Suppress wages by suppressing unions, lower the minimum wage, reduce regulatory limits on employers requiring overtime, globalization, etc. These policies were put in place and are largely still the policies in place.

These policies have produced the income inequality that we see today. They haven't produced the increase in business investment that they were suppose to produce. Rather they have produced a series of asset bubbles in real property, homes and commodities, and in paper investments, stocks and derivatives.

While it can be argued whether or not the rich deserve an ever increasing portion of the nation's income, it is hard to argue that it has produced what it promised, increased business investment. Or that the asset bubbles that it has produced or the income inequality that is its method of producing the shift in income are good for the economy. The income inequality has produced, as intended, a lowering of demand. This lower demand has removed the incentive to invest.

We've been through this before. A mere paper demand is going to lead to inflation. In the old days that is really what inflation was. You are either going to get consumer price inflation or asset price inflation i.e. a bubble. Real is a product or service. Loose monetary policy will not produce real demand. If a business wants to increase demand, they have a simple solution. Lower prices. Let the recession play out. Consumers benefit from lower prices (which, of course, squeeze profits so you should like that). In the mean time, consumers are also able to get out of debt which increases aggregates savings. Then interest rates come down automatically, without any "stimulus" from the Fed.

Once out of debt, the consumer is now possessed of real demand. They have a surplus over normal expenses due to the elimination or reduction of their debt maintenance. All of this derives from real production and therefore constitutes real demand. Now you have real growth. More goods and services are actually produced. Loose monetary policies prevent this from happening. The result is that you get only inflationary growth which merely leads to another recession. We've tried these policies before and they failed. Other countries have tried these policies with disastrous results.

The '80's were a successful decade due to the monetary policies of Paul Volcker. The "supply side" policies adopted by Reagan may have helped that process and maybe they didn't. Certainly the tax cuts in the upper brackets didn't hurt because nobody was paying in those brackets any way. They still aren't paying in the highest brackets even though those brackets are lower. Just ask Warren Buffet.

But whether it did much good to reduce taxes across the board only to borrow the money back again because of the increased deficit, I don't know. Although Keynesians would surely argue that it did because you cut taxes for consumers while borrowing it from savers which is exactly why Kennedy, on the advice of his Keynesian economists, proposed tax reduction almost identical to Reagan's.

I believe that you quoted me but your response seems to be to someone else or possibly to some other post that I have made. I will try to sort it out.

Inflation is nothing more than a general increase in prices. Or the loss in purchasing power of money. They are opposite sides of the same thing.

I don't understand the term "paper demand." The terms realized and unrealized demand were common in classical economics, realized demand being the demand actually resulting in a purchase. But they aren't used today.

Monetary policy involves money, the single most misunderstood concept in economics. Money is among other things the grease in the economy. Like the grease in a bearing you can have too little of it and you can have too much of it. The aim of monetary policy is to have the right amount of it so that it is not starving or alternatively irrationally feeding the economy. The aim of monetary policy is to meet the rational demand for money in the economy.

So you are right, loose monetary policies can't in and of themselves create demand. We have loose monetary policies right now. We are at the zero bound, effectively zero interest rates. And yet we are short of demand.

However, fiscal policies like Reaganomics can produce demand. The government buying things is demand. If they buy more real things they create demand. If they deficit spend then they are creating money by deficit spending. This new base money shows up as increased private savings or the other side of savings, decreased private debt. The greatest economic impact that Reagan had was his increase in deficit spending.

Arguably the economy in the 1970's had gone too far toward stimulating demand. I wouldn't argue with that. But the Reaganomics fiscal policies that were enacted then were a serious over reaction to any shortage of capital that we might have had then. And the continuation of these policies over the last thirty years has produced the large amount of excess capital that causes these asset bubbles and the decreasing demand that threatens the economy today.

I was a businessman and I am a committed capitalist, I won't ever cry about someone making a profit. I alone here, apparently, believe that the current mixed economy that we have now, the economy as it has evolved over thousands of years is the best one. I am not looking to change the economy into a free market, which is largely imaginary nor am I interested in socialism. The capitalism that we have now has proven that it is a strong, robust system. It can be manipulated to produce almost any outcome that we want, Reaganomics proves that.

You are doing quite well. I will make a post-Keynesian out of you yet.

 

[boneyard bill]

Wealthy interests are the prevailing social order. Slavery was the prevailing social order. A classic liberal is someone who opposes the existing social order. A classic conservative is one who defends the existing social order. See, simple.

Lincoln was held broadly liberal views for his era. It is no academic flaw that the rabid Republicans of that era were referred to as the Radical Republicans. Radicals are defined as wanting change for change's sake, to the left of liberals.

You are getting bent out of shape trying to apply the words as you understand them, a conservative is all that is good and just and a liberal is everyone else who is pure evil, to historical figures. The Schlesingers are writing an academic work and they need a little more precise language than these more common definitions used today.

What are your definition of the words "conservative" and "liberal?"

I'm not asserting anything about what the definition of those words are. I'm merely pointing out how the Schlesingers said they were using the word "liberal." And I am arguing that American history cannot easily be categorized by the way they are using the term. They are essentially defining liberalism in terms of the income or wealth of the factions concerned, but these factions don't always fit into those categories very neatly. In fact, there are usually wealthy interests and low income interests involved in most American movements and in the opposition as well. This is true even today.

 

[boneyard bill]

SimpleDon writes:

Inflation is nothing more than a general increase in prices. Or the loss in purchasing power of money. They are opposite sides of the same thing.

Inflation is an increase in the money supply. It is the cause. An increase in prices is the effect of inflation. However, that is the original meaning. Since Samuelson an increase in prices has also come to be known as "inflation." And so it is necessary to distinguish "monetary" inflation from "price" inflation. The former being an increase in the money supply and the latter an increase in prices.

Samuelson seems to have done this because he identified two kinds of inflation one was "demand-pull" inflation and the other was his incoherent concept of "cost-push" inflation. (I say the concept of "cost-push" inflation is incoherent because a "cost" is simply a "price." So cost-push reduces to price-push which really doesn't make any sense).

I don't understand the term "paper demand." The terms realized and unrealized demand were common in classical economics, realized demand being the demand actually resulting in a purchase. But they aren't used today.

By "paper" demand I simply mean an increase in the money supply. If the increase in the money supply (monetary inflation) exceeds the growth in actual goods and services you will get price inflation (but not necessarily consumer price inflation. You could get a bubble. Since money is created when banks lend, loose monetary policies tend to be inflationary. They create "paper" demand, but there is no "real" demand because people don't actually have the increased goods and services to offer in exchange for what they want. They simply have more money. As the saying goes, "More money chasing the same amount of goods leads to higher prices.

Monetary policy involves money, the single most misunderstood concept in economics. Money is among other things the grease in the economy. Like the grease in a bearing you can have too little of it and you can have too much of it. The aim of monetary policy is to have the right amount of it so that it is not starving or alternatively irrationally feeding the economy. The aim of monetary policy is to meet the rational demand for money in the economy.

I have a certain reluctance even to discuss monetary policy until you read up on money and banking since it seems abundantly clear to me from previous posts that you do not understand how the system works even at the level of Econ 101. Go to the library and get a copy of Samuelson's Economics and read the chapters on money and banking. (Of course, you can also read Hayek's Theory of the Trade Cycle and get the same information and that is online. I only mention Samuelson because he's Keynesian, but on how the banks create money, they say the same thing).

Money is a medium of exchange. The actual amount of money in circulation is irrelevant (or at least it would be if we didn't have foreign trade). The US per capita money supply in dollars is way lower than the Japanese per capita money supply in yen. But Britain has far fewer pounds in circulation than the US does. The amount of money in circulation simply determines the price level. It takes a lot more yen to buy the same product than if you used dollars. It is the increase or reduction in the supply of money produces disruptions in the economy.

There is no more need for the government to try to determine the need for dollars in the US economy than for it to try to determine the need for tricycles. The law of supply and demand will take care of the problem.

So you are right, loose monetary policies can't in and of themselves create demand. We have loose monetary policies right now. We are at the zero bound, effectively zero interest rates. And yet we are short of demand.

We are short of real demand. That is, we are short of real stuff. We are not producing and hence we are not creating real demand. We are not short of paper demand. We have plenty of that, and it is creating price inflation. The CPI understates real price inflation but aside from that we have bubbles everywhere. The bond market has been going up. The stock market has been going up. Real estate has been going up. But much of our inflation has also been going overseas.

The government buying things is demand. If they buy more real things they create demand. If they deficit spend then they are creating money by deficit spending. This new base money shows up as increased private savings or the other side of savings, decreased private debt. The greatest economic impact that Reagan had was his increase in deficit spending.

OK, the buys things. The government also runs a deficit which means it has to borrow money. It pays for what it buys by taxing or borrowing. Where is this "new base money" that you're talking about? The government simply gets its money from the private sector. The govt spend more and the private sector spends less. Where is the increase in "aggregate demand?" The only way that you can get "new base money" is to print it or, in the modern equivalent, the Fed buys the US govt debt. That is called "monetizing" the debt, or monetary inflation which leads to price inflation.

Arguably the economy in the 1970's had gone too far toward stimulating demand. I wouldn't argue with that. But the Reaganomics fiscal policies that were enacted then were a serious over reaction to any shortage of capital that we might have had then. And the continuation of these policies over the last thirty years has produced the large amount of excess capital that causes these asset bubbles and the decreasing demand that threatens the economy today.

If the Reagan fiscal policies had any effect, it was that they increased "real" demand. That is, led to an increase in the supply of goods and services which is what real demand is. That's why it was called "supply-side" economics. Those policies may have been helpful. On the other hand, those deficits also meant the monetary policy had to be tighter than it otherwise would have. That meant interest were higher and lending standards tougher. And that meant it took people longer to get out of debt or secure the savings that they felt was necessary before they felt comfortable buying. This is the real way to get out of recession. Get out of debt! Build savings. Then, when you produce, you have an excess left over with which to buy more. This is how you get 'real' demand.

I was a businessman and I am a committed capitalist, I won't ever cry about someone making a profit. I alone here, apparently, believe that the current mixed economy that we have now, the economy as it has evolved over thousands of years is the best one. I am not looking to change the economy into a free market, which is largely imaginary nor am I interested in socialism. The capitalism that we have now has proven that it is a strong, robust system. It can be manipulated to produce almost any outcome that we want, Reaganomics proves that.

The last thing we need to be doing is manipulating the economy. We are manipulating it into the ground. This is not a good economy. What's worse, it is not a sustainable economy. We cannot continue to run the deficits that we have been much less the deficits that we're going to get when entitlements get really heavy. The system is going to fall apart because it is so heavily manipulated.

You are doing quite well. I will make a post-Keynesian out of you yet.

Fat chance. You don't even know what markets do so you can't appreciate them, and you certainly can't figure out when to intervene in them.

 

[ksen]

Supply does not equal demand.

Jesus, where do you get this stuff?