Where I expose my ignorance of elemental economics

[coloradoatheist]

And one of the biggest problems of economics is finding a way to measure the variable changed, the time period for it, and what you define as being a success.

Yes, you are correct. It is very hard to come up with ways to accurately measure the economy. But it is more important and much easier to measure the economy in exactly the same way over time. It is the difference between accuracy and precision.

Our economy maybe a 15 or a 20 trillion dollar economy, depending on how you measure it. But no matter how measure, it within reasonable limits, you know how much the economy has grown from year to year by applying the same method of measurement in all of the years.

Your complaints are all hand waving though. The proponents of supply side economics claimed that both business investment and growth would improve. This clearly hasn't happened. It is disingenuous to blame the tools, the measures of growth, for the failure of the policies. The same tools that were used in 1980 to prove the perceived failure in the previous policies.

But we make some profound statements from those when a lot of it is just art. There has been strong criticisms of how unemployment is calculated. Figuring out inflation over a long term is an art and not a science. And the measure used to decide if supply side is successful is how well do fry cooks in 1980 compare to fry cooks in X period of time. Not a good comparison.

 

[ksen]

thread 5'ed

 

[coloradoatheist]

thread 5'ed

huh?

 

[ksen]

thread 5'ed

huh?

I gave it 5 stars.

 

[SimpleDon]

Kansas's SS tax cuts did not generate the outcomes that the Governor claimed they would.
It is also interesting that much of Reagan's policy was more demand side than supply side - something Reaganauts seem to ignore.

I don't disagree with you. Reagan's policy is probably the best example of Keynesian thought actually working. Bush's W keynesian policy failed.

Absolutely no neoclassical economists will argue that Keynesian policies don't work. The combination of monetarist and supply side economics accept that Keynesian economic policies work, at least 3/4's of them.

Keynes advocated monetary policies to trim the cyclical nature of the economy, raising or lowering interest rates for example. This is the one half of the Keynesian's policies that everyone accepts.

Keynes also recommended that we employ fiscal policies in the case of extreme events like we experienced in 2008. The best of these fiscal policies are the automatic ones like unemployment insurance, SNAP, and the other programs of the safety net. Combined with the progressive income tax, we are guaranteed a large amount of stimulative deficit spending from the drop in income tax revenues and the increase in spending for the safety in a recession.

Everyone accepts that tax cuts simulate the economy. Keynesians would add the qualifier that only tax cuts for the non-rich stimulate the economy. That tax cuts for the rich don't because they will save the money or put it into non-productive investments like the stock market or buying Treasury bills to finance the budget deficits caused by their tax cuts.

The one quarter of Keynesian theory that the neoclassical and the supply side economists don't accept is that tax increases also can be used to impact the economy. It is a much better way of controlling large amounts of inflation for example, as was done during world War II, for example.

One of the ironies in this is that a Keynesian would recommend that the tax increases for the purpose of lowering inflation would fall the heaviest on the non-rich for the same reason that you would direct a simulative tax cut to the non-rich, the rich save and invest their money and their investments largely don't have any impact in the economy, except when they devise something like the home mortgage fiasco of the 2000's or the savings and loan mess of the 1980's.

Everyone is a Keynesian now. The only difference is the degree and the honesty with which they admit it. Every economists, accept for the totally unhinged like the Austrian/Libertarians, accept Keynes' primary finding, that the government has to control and to regulate a basically unstable economy.

Bush's (II) stimulus in 2008 didn't impact the economy because one half of it was tax cuts for the rich whose money has little to no impact on the economy and the fact that it was so small, 100 billion dollars, at least one order of magnitude too small compared to the problem, a two trillion dollar shortfall in spending in the economy. His last budget deficit of 1.4 trillion dollars had a much bigger impact than his stimulus package.

 

[laughing dog]

But we make some profound statements from those when a lot of it is just art. There has been strong criticisms of how unemployment is calculated.

The criticisms are based on ignorance. There are various measures of unemployment, all of which are well-defined and all of which have sound statistical sampling basis.

Figuring out inflation over a long term is an art and not a science.

That is another claim that is not based on reality. There are many various methods for determining the rate of general price increases.

 

[coloradoatheist]

The criticisms are based on ignorance. There are various measures of unemployment, all of which are well-defined and all of which have sound statistical sampling basis.

Figuring out inflation over a long term is an art and not a science.

That is another claim that is not based on reality. There are many various methods for determining the rate of general price increases.

The first one I don't have as much problem, but there has been a huge argument about the economy when we compare employment numbers to just unemployment rate numbers. And for the second one, we have argued about this before. Taking the billion/trillion transactions a year and coming up with an exact number for inflation is an art. Somebody makes a decision on what to include, where to get the information and what features are considered. All are guesses.

 

[SimpleDon]

Reagan also closed a lot of loopholes and tax payment is tax base * tax rate. The whole point of the laffer curve is that though the tax rate changes the tax base changes too. And at high rates it will because people will hide it, not earn it based on the high marginal rates. The change from 5% to 4% wouldn't change the tax base as much.

Why do you think that the laffer curve changes the tax base? If people want more money they have to work harder. If they turn down work because they have to pay more taxes for the money that they earn the work will still get done.

So it is a yes that you feel that we had many more deductions, that is loopholes, in the tax code in 1980 than we have now. Can you name the loopholes that Reagan closed that brought the tax rate cuts of about 71% minus 27%, the lowest marginal rate of the Reaganomics revolution, equals 44% reduction, down to the 4% that you claim? Did income tax loophole closing also compensate for the lost revenues from the inheritance and capital gains tax cuts too?

This line of reasoning maybe convincing to you, but I would want to see some data on it. And it seems unreasonable that they lower the marginal rates so much and then increased revenues back up again by so much. I remember reading that all of the tax loopholes together only account for about 90 billion dollars a year right now. And only about one quarter of them apply to individual taxes and that the majority of those are for charity donations and the home mortgage interest deduction. No one is going to propose eliminating those deductions.

What you are saying is that your brand of economics was sufficient in 1980 to determine that the economy was starved of investment and that the economy would benefit if we increased income inequality but it is not able to do the exact same thing today to explain why supply side economics failed to increase investment and growth. Because there are too many unknown and apparently unknowable factors and you are confused by all of them?

The issue is that the government will do a lot of policy changes that affect things.

Yes, and we know what they are a how much they affect the economy. And yet, you are reluctant to list those that you say were enacted to intentionally lower business investment and growth in the economy, what you are claiming was done.

A base tax cut is both supply and demand side policy though some tax changes are strictly one or the other.

And we know what they are and how they affect the economy. Tax cuts for the rich are supply side intended tax cuts that don't work either to boost business investment or growth in the economy. Tax cuts for the non-rich are demand side policies that do work.

This is because the modern economy is demand side driven, not supply side driven. The money that supply side economic policies redistributed from the non-rich to the rich had almost no impact on the economy of producing goods for consumption except for the fallout from asset bubbles popping. And these all hurt the economy.

But the government was veery much trying to steer a demand side recovery with the loose monetary policy. It's interesting, Reagan had a strong dollar policy. Reagan raised rates to slow down inflation while the opposite happened under Bush.

But the Fed did raise interest rates after the election of 2004. But it didn't stop the housing bubble, the worst the bubble building in the home mortgage market. Why? Because the bubble wasn't built with money created by a bank. It was fueled by a portion of the massive amount of money that was redistributed to the rich.

Raising the interest rates actually made the problem worse because it made the trances, the slices, of the mortgage backed securities and brought ever increasing amounts of money into the market for them.

No, you and dismal said that I had no understanding of basic, elemental economics that is taught in high school. I am simply presenting my understanding of the basic neoclassical economics. I am asking you to point out where I misunderstand neoclassical economics and the fundamentals of the free market.

The argument is that as price goes up, demand (whether use the word or use quantity bought at a price) goes down. So in the case of workers then as the cost of workers go up, then demand for workers goes down. The counter example is veblen goods.

I have explained this over and over. No economics or school of economics says that the demand for workers goes down if their wages go up so that they have to be laid off. Workers are hired to do work that needs to be done and that increases production. They aren't hired because they are cheaper today than yesterday.

Laying them off will decrease production. Laying them off will result in a larger loss for the employers than just paying the higher rate. The little saying that "the more a worker costs the fewer jobs that they will have," isn't based on supply and demand. It is based on the theory of marginal productivity. If this is your position then we have a whole new set of discussions to have.

I have made these points in every minimum wage thread that we have had without any of the opponents of an increase in the minimum wage addressing it.

I don't believe that you two understand neoclassical economics. Dismal's instance that the price determines both the supply and the demand, as an example. In fact, according to neoclassical economics supply and demand set the price and the price determines the quantity.

Partially yes when all factors are known, that a firm should price something where MR=MC.

MR=MC* is the theory of marginal productivity. If you are familiar with it and yet you are not using it to justify laying off productive profitable workers after a wage increase then you too must understand the weakness of the theory.

And of course, in the theory of marginal productivity the producer doesn't set the price to equal MC. It is set there by supply and demand. The firm doesn't and can't have any control over pricing in the theory. That is the only way that you can have a self-regulating free market. Duh.

* marginal revenue equals marginal costs. That is the price for the entire production and sales of a producer is equal to the marginal costs of the last possible item that can be produced. There are many problems with this theory, not the least of which is that in a modern industrial economy it would eliminate any profits. It isn't MR > MC.

To understand neoclassical economics is to understand its weaknesses and its failure to explain the economy that we have today. A failure that you freely admit in this post.

Yes, neoclassical economics says that a wage increase will result in workers having to be laid off. But it is not because the demand for labor is reduced as dismal constantly maintains. In neoclassical economics you would have to lay off workers because their wages exceed the cost of the marginal product, the very last product that the production facility can produce.

Yes and a business owner understands it as cash out becomes greater than cash in, things have to change.

Yes, if we raise the minimum wage too far too fast there could be firms pushed into losing money. As with all things moderation is the key. Or are we going back to the "why don't we raise the minimum wage to a hundred dollars an hour."

But macroeconomic policies work slowly. The proposed increase to $10.10 an hour over three years is a moderate increase to about what the minimum wage was in 1960's.

It is crazy for a profitable business to lay off workers because their wages increase. If you lay off workers you can't produce as many products as you did before the layoff. If you lay off the workers whose wages increased you will lose the entire sales volume of the laid off workers lost production. You lose all of the sales volume, including fixed cost coverage for that sales volume, making the remaining production's costs increase.

Yes and no. Your making the wrong assumption that because profits are up generally, all businesses are profitable. And that is not the case.

We make policies for the average or median firm, not for the outiters. The economy benefits from a few going out of business. Highlight this, "creative destruction" and read.

Once again you have failed to address my point. If you lay off workers you lose their production and the entire amount of money that you would have earned from the sales of the product.

 

[Bomb#20]

"True value" is a notion from classical economics. There is no evidence for the existence of any such quantity as the "true value" of any component going into production; accordingly, no such quantity plays any role in neoclassical economic theory. Along with marginalism, that's the crux of the break with classical economics.

So you don't think that neoclassical economics assumes any true value of any product in the economy that might or might not be equal to the market value, the price? What if I called it the "economic value?" Then would you agree that it is a part of neoclassical economics?

Of course not. Why on earth would you imagine that renaming it would make any difference? You sound like one of those Christians who reacted to finding out I'm an atheist with "You believe in a Supreme Being though. You just don't call him 'God', right?" There's no such thing. That's what Menger, Walras and Jevons were on about. Value is subjective. Different people can value the same thing at different levels and that doesn't make any of them wrong. This is a reality that not only anti-capitalists but also an awful lot of capitalists aren't up to speed on; it's why your summary reads like a puree of every pro-free-market argument you ever heard. Capitalists who got their understanding of capitalism from Ayn Rand are especially likely not to be up to speed.

I don't despise neoclassical economics, it is a brilliant theory. It just has little to nothing toward explaining the economy that we have today. It is the "creationist argument" of economics.

Oh, please. As some wag put it, "People respond to incentives. That is the whole of economics. The rest is commentary." Neoclassical economics is what you get when you work out the mathematics of incentive.

And like the creationist argument against natural selection and evolution its purpose is not to be explanatory but to preserve a ideology and a the status of largely useless social structures, religion and the role of gods in the case of creationists and the importance of the wealthy investor class in the case of neoclassical economics.

According to creationists the purpose of the theory of evolution is to eliminate the role of God from the natural world. When they say this it tells us more about the creationists than it tells us about evolution. It tells us the creationists are viewing the world through ideological blinders, interpreting all they hear about evolution only in terms of what it means for what's important to them: their God.

Likewise you. When you say the purpose of neoclassical economics is to preserve the status of a largely useless wealthy investor class, that tells us nothing about neoclassical economics; it only tells us that you view the world through ideological blinders, interpreting all you hear about economic theory only in terms of what it means for what's important to you: getting rid of the wealthy investor class.

Moreover, the ideas you want to replace neoclassical economics with are quite literally the "creationist argument" of economics. The opinion that the wealthy investor class is largely useless invariably relies on some particular economic activity occurring, apparently by Divine Providence, in spite of the absence of anyone who has an incentive to do it.

I will remove any reference to "true value" and use "economic value."

That would make your claim:

Let's start out with a statement of the proposition of the theory... The free market... will provide the best possible outcomes ... by assuring that all of the components going into the production are rewarded at their economic value.​

No. Neoclassical economics does not assert that the pancakes that go into employees and thereby into producing Nerf Balls are rewarded at their economic value. It asserts that those pancakes are rewarded at less than their economic value to Alice, and rewarded at their economic value to Bob, and rewarded at more than their economic value to Cindy, without any of those people being delusional about the value of a pancake. To talk of "economic value" without specifying economic value to whom is to talk gibberish.

Anything else?

"I have listed below my understanding of basic economics, Econ 101, neoclassical economics, marginalism, the dominant paradigm, mainstream economics, or as I am going to call it, since this is my thread, free market fundamentalism..."

"This is the free market position advanced by the vast majority of economists today and economic schools from the anarchist capitalistic Austrians on the far right through the neoclassical schools, fresh water, politically conservative, monetarist economics on the center right all of the way to the center left New Keynesians like Paul Krugman, although in varying degrees and with somewhat less enthusiastic and incomplete support from some..."

"Supply side economics is a part of market fundamentalism, because its base assumption is that the modern, industrial economy is supply side driven."​

You just effectively called Paul Krugman a supply-sider. (No doubt an unenthusiastic one.) Have you considered the merits of subjecting your own beliefs to critical thought?

Marshall's view of supply-side economics was that arguing over whether it's supply or demand driving price is like arguing over which blade of a pair of scissors is doing the cutting. Whatever "market fundamentalism" may be, if supply side economics is a part of market fundamentalism then market fundamentalism is not a part of neoclassical economics.

 

[laughing dog]

The first one I don't have as much problem, but there has been a huge argument about the economy when we compare employment numbers to just unemployment rate numbers.

So?

And for the second one, we have argued about this before. Taking the billion/trillion transactions a year and coming up with an exact number for inflation is an art. Somebody makes a decision on what to include, where to get the information and what features are considered. All are guesses.

Those are not guesses at all. The methodology for the CPI or the PCE deflator is well understood. They are based on precise methodologies in order to generate specific information.

 

[Cheerful Charlie]

Bomb#20

"Capitalists who got their understanding of capitalism from Ayn Rand are especially likely not to be up to speed"

A bit off topic, but....

Did you know Ayn rand hated Ronald Reagan with a passion?

http://dangerousminds.net/comments/ayn_rand_absolutely_hated_ronald_reagan


As I’ve admitted on this blog before, I was a teenage Ayn Rand fanatic. I owned all of her books, cassette tapes of her lectures and every single issue of The Objectivist, The Objectivist Newsletter and The Ayn Rand Letter. I’m not exactly proud of this fact, but what can I do? Thankfully it didn’t take me that long to outgrow this nonsense, but for good or ill, I still to this day have a pretty good working knowledge of her philosophy and life’s work. This morning it popped into my head, appropos of nothing, how much Ayn Rand railed against Ronald Reagan before she died and I recalled one particular essay from one of the final issues of The Ayn Rand Letter where she asked her readers not to support Reagan and instead to vote for Gerald Ford, who Reagan was challenging for the GOP nomination at the time (and who appointed her loyal apostle and acolyte, Alan Greenspan, to his position as Chairman of the Federal Reserve Board).


Snort, giggle!

 

[Bronzeage]

Bomb#20

"Capitalists who got their understanding of capitalism from Ayn Rand are especially likely not to be up to speed"

A bit off topic, but....

Did you know Ayn rand hated Ronald Reagan with a passion?

http://dangerousminds.net/comments/ayn_rand_absolutely_hated_ronald_reagan


As I’ve admitted on this blog before, I was a teenage Ayn Rand fanatic. I owned all of her books, cassette tapes of her lectures and every single issue of The Objectivist, The Objectivist Newsletter and The Ayn Rand Letter. I’m not exactly proud of this fact, but what can I do? Thankfully it didn’t take me that long to outgrow this nonsense, but for good or ill, I still to this day have a pretty good working knowledge of her philosophy and life’s work. This morning it popped into my head, appropos of nothing, how much Ayn Rand railed against Ronald Reagan before she died and I recalled one particular essay from one of the final issues of The Ayn Rand Letter where she asked her readers not to support Reagan and instead to vote for Gerald Ford, who Reagan was challenging for the GOP nomination at the time (and who appointed her loyal apostle and acolyte, Alan Greenspan, to his position as Chairman of the Federal Reserve Board).


Snort, giggle!

Ronald Reagan was always too liberal for Rand, who thought the Koch brothers were pinkos. Rand was an elitist atheist who believed in the divine right of property. Even though there was no God, she felt no responsibility toward the society which made it possible for her to possess property.

 

[Loren Pechtel]

Why do you think that the laffer curve changes the tax base? If people want more money they have to work harder. If they turn down work because they have to pay more taxes for the money that they earn the work will still get done.

So it is a yes that you feel that we had many more deductions, that is loopholes, in the tax code in 1980 than we have now. Can you name the loopholes that Reagan closed that brought the tax rate cuts of about 71% minus 27%, the lowest marginal rate of the Reaganomics revolution, equals 44% reduction, down to the 4% that you claim? Did income tax loophole closing also compensate for the lost revenues from the inheritance and capital gains tax cuts too?

The inheritance tax has always been a small % of total tax revenue.

As for capital gains--are you not aware that the capital gains tax is a subcase of the income tax? Most loopholes that applied to income tax also applied to capital gains.

 

[Loren Pechtel]

So?

And for the second one, we have argued about this before. Taking the billion/trillion transactions a year and coming up with an exact number for inflation is an art. Somebody makes a decision on what to include, where to get the information and what features are considered. All are guesses.

Those are not guesses at all. The methodology for the CPI or the PCE deflator is well understood. They are based on precise methodologies in order to generate specific information.

The methodologies are precise but that doesn't mean there is a good rationale for the specific precision.

 

[laughing dog]

So?
Those are not guesses at all. The methodology for the CPI or the PCE deflator is well understood. They are based on precise methodologies in order to generate specific information.

The methodologies are precise but that doesn't mean there is a good rationale for the specific precision.

Actually there are good rationales for the construction of price indices. Just because someone doesn't understand them or agree with them does not make the poor rationales.

 

[arkirk]

Bomb#20

"Capitalists who got their understanding of capitalism from Ayn Rand are especially likely not to be up to speed"

A bit off topic, but....

Did you know Ayn rand hated Ronald Reagan with a passion?

http://dangerousminds.net/comments/ayn_rand_absolutely_hated_ronald_reagan


As I’ve admitted on this blog before, I was a teenage Ayn Rand fanatic. I owned all of her books, cassette tapes of her lectures and every single issue of The Objectivist, The Objectivist Newsletter and The Ayn Rand Letter. I’m not exactly proud of this fact, but what can I do? Thankfully it didn’t take me that long to outgrow this nonsense, but for good or ill, I still to this day have a pretty good working knowledge of her philosophy and life’s work. This morning it popped into my head, appropos of nothing, how much Ayn Rand railed against Ronald Reagan before she died and I recalled one particular essay from one of the final issues of The Ayn Rand Letter where she asked her readers not to support Reagan and instead to vote for Gerald Ford, who Reagan was challenging for the GOP nomination at the time (and who appointed her loyal apostle and acolyte, Alan Greenspan, to his position as Chairman of the Federal Reserve Board).


Snort, giggle!

That settles it! Anybody who would ask people to vote for an idiot like Gerald Ford surely must have no credibility whatever.

 

[coloradoatheist]

The methodologies are precise but that doesn't mean there is a good rationale for the specific precision.

Actually there are good rationales for the construction of price indices. Just because someone doesn't understand them or agree with them does not make the poor rationales.

And it has been controversial for a long time, it was adjusted in the 90s. Economists on both sides think it mis-measures things so it can be off either way. But to say for absolutely certain that in the billion transactions we have in a year that inflation is exactly X is funny.

 

[laughing dog]

Actually there are good rationales for the construction of price indices. Just because someone doesn't understand them or agree with them does not make the poor rationales.

And it has been controversial for a long time, it was adjusted in the 90s. Economists on both sides think it mis-measures things so it can be off either way.

That is inaccurate. There is no "it" in terms of a single universally accepted price index because no one thinks that a single index can measure all the complexities of economic reality. Using one price index to description or measure inflation is analogous to using weight and only weight to measure or describe an elephant.

But to say for absolutely certain that in the billion transactions we have in a year that inflation is exactly X is funny.

No one with an ounce of knowledge about indices would ever say such a thing.

 

[coloradoatheist]

And it has been controversial for a long time, it was adjusted in the 90s. Economists on both sides think it mis-measures things so it can be off either way.

That is inaccurate. There is no "it" in terms of a single universally accepted price index because no one thinks that a single index can measure all the complexities of economic reality. Using one price index to description or measure inflation is analogous to using weight and only weight to measure or describe an elephant.

But to say for absolutely certain that in the billion transactions we have in a year that inflation is exactly X is funny.

No one with an ounce of knowledge about indices would ever say such a thing.

It's used when we saw people are better off/the same, or worse off than we were X amount of years ago. Comparing cross generations along with cross cross countries isn't that easy.

 

[laughing dog]

That is inaccurate. There is no "it" in terms of a single universally accepted price index because no one thinks that a single index can measure all the complexities of economic reality. Using one price index to description or measure inflation is analogous to using weight and only weight to measure or describe an elephant.

But to say for absolutely certain that in the billion transactions we have in a year that inflation is exactly X is funny.

No one with an ounce of knowledge about indices would ever say such a thing.

It's used when we saw people are better off/the same, or worse off than we were X amount of years ago. Comparing cross generations along with cross cross countries isn't that easy.

"Isn't easy" does not translate into "requires a guess". It is simply unreasonable to expect any single index of economic activity to answer the question "Are you better or worse off". A price index can be used to determine with the purchasing power of nominal income has changed, but even that is a rather limited indicator of well-being. It is not the fault of a tool if it is either misused or misunderstood.