Liberals’ Demand Economics Don’t Work

Written by Bob Ewoldt in Economics, Politics

Ronald Reagan once said, “It isn’t so much that liberals are ignorant. It’s just that they know so many things that aren’t so.” One of those things, recently, that liberals are increasingly espousing is demand economics. I’m hearing it more and more, from MSNBC liberals: “We have a demand problem, not a spending problem.” Why are liberals wrong about demand-side economics?

Obama signing stimulus

The Claim

Here’s the situation as a liberal might explain it:

In an economy that has 10% unemployed people, the government ought to provide an income for the unemployed. By doing so, those unemployed people will necessarily go out and spend all of that money, creating a demand for goods in the economy. A business owner in that economy benefits from that demand (he sells goods to the unemployed), and in turn has profits that go up, and in turn hires another person to help in his business, removing someone from the unemployment rolls.

The business owner also orders more supplies, which creates demands for more raw goods, which in turn employs more people at other companies. At every point in the economic food chain, more goods and people are in demand, and employment increases, the economy improves, and revenues to the government increase.

So, any money that might have been borrowed in order to pay the initial unemployment benefits is gained through economic growth, and the debt is easily paid off, thereby justifying the initial debt.

The middle class emerges once again. The unemployment rate nationally is reduced dramatically. Tax receipts spike. The deficit drops. Everyone wins.

In other words, the government, by borrowing money, can create enough demand to jump-start an economy, and by jump-starting the economy we can pay off debt.

There are several problems with this economic theory:

Demand-side economics only take into account short-term goals.
Demand-side economics cannot be sustained.
Demand-side economics don’t work well when accumulated debt it already holding down the economy.
Demand-side economics doesn’t take into consideration other forms of demand.

Why Demand-Side Economics Don’t Work

First, demand-side economics only take into account the short-term. There is a trade-off to borrowing money. When you borrow $250,000 in order to buy a house, sure you inject $250,000 into the economy. However, with that comes some trade-offs. First, you’re locked into those monthly payments for 15 to 30 years. Second, you end up paying $379,443 for the house, not $250,000, depending on your term and interest rate. Third, you might find yourself unable to move if you can’t later sell the house.

Similarly, in a national economy, if we borrow $1 trillion to “stimulate” the economy, we’re locking ourselves into those debt payments for the long-term (see discussion of debt and the economy below). We are also paying a LOT more money for that $1 trillion in the future, which decreases future demand (if you paid for your house in cash, you would spend the $129,443 in interest savings on other things in the intervening 30 years). Finally, by increasing our debt, we will find ourselves unable to other things in the future, if we are paying an increasing amount of money on debt payments. Today, the U.S. is paying between $360 billion and $460 billion per year in debt interest payments, and that is while interest rates are an average of 2.2%. If interest rates rise, as they are expected to do, our interest payments will skyrocket. For every 0.25% rise in interest rates, our interest payments on our national debt will increase $41 billion.

The second problem with demand-side economics is that they cannot be sustained. Stimulus packages, as we’ve seen, don’t always work as we expect that they will. The $787 billion stimulus of 2009 did very little to boost the economy (though liberals will say that it kept us out of a depression), and certainly hasn’t caused enough of a boost to the economy where we can pay back the $787 billion in debt. In fact, I can’t think of any scenario in history where a stimulus has been done, and the debt has been paid back. I’m open to anyone pointing out if I’m wrong on this point. However, it seems to me that when we borrow money for stimulus, we continue to pay interest on that debt ad infinitum.

The third problem with demand-side economics is that it doesn’t work well when accumulated debt is already holding down the economy. In theory, economic stimulus might create demand in an economy, as Keynesians/liberals claim. However, I think it’s more appropriate this way: “economic stimulus might create demand in an economy that’s not weighed down by debt.” A study was done by two Harvard professors, Carmen Reinhart and Kenneth Rogoff, that found that when a nation’s debt reaches 90% of its annual GDP, the economic growth is, on average, 1% lower than when its debt was under 80% of GDP. In other words, a high level of national debt makes it very hard to create economic growth. Many countries in Europe have seen this in the last few years. Japan has had this problem for the better part of 20 years.

The comparison to a family budget doesn’t work very well in this category; but the comparison to a large company may work pretty well. If you have a large company, it could be to your advantage to borrow some money in order to make an investment in equipment or in a marketing campaign, to gain market share or to introduce a new line of products, for example. Many financial advisors will say it’s risky to borrow in order to do these types of things, but we’ll say our hypothetical company will do it anyways. When you have a small amount of debt, this can work splendidly. If your gamble doesn’t pay off, then you can pay for the loan out of profits for the next few years until the loan is paid off. However, if you’ve continually borrowed and borrowed, each time on the “next big idea,” then you will reach a point when your “next big idea” doesn’t pay off, and you cannot make the loan payments, and you default on the loan. Then you’re forced, as a company, to liquidate part or all of the business to pay off the loan, at which point other loans may be called, and your company goes under. Similarly, borrowing money when you’re debt-to-GDP ratio as a nation is at 20% is a much different gamble than when your debt-to-GDP ratio is over 100% (as our is now). Your risk as a nation is higher, and if your gamble doesn’t pay off (as in the 2009 stimulus plan), then you’re stuck with an increased debt that you really cannot afford.

The fourth problem with a demand-side economic model for government is that it doesn’t take into account other (and perhaps better) types of demand. When the government spends money, it’s deciding where that money goes, necessarily making a choice as to what is the best sort of “demand.” In the case of the Obama administration, it decided that the following were the best types of demand to create:

Increasing food stamp payments
Construction projects – high speed rail, highway improvements, public housing projects, renewable energy investments
Increases in Pell grants
More teachers
Aid to balance state education budgets
Payroll tax credit
Increasing the number of weeks of jobless benefits (unemployment)
Aid to states for Medicaid spending

Cynically, I think that most of the stimulus spending went to sectors where there was a political motivation to spend money, not where there was an economic motivation to spend money (state government, construction, education). This is the fundamental problem with government-supplied demand-side economic policies: it doesn’t send capital where its use would have the greatest economic effect; it sends capital to where its use has the greatest political effect, often to the detriment of the economy.

An Alternative Economic Solution

Liberals do have a point when it comes to demand. Demand for goods and services is a driver of economic growth. However, pushing money into areas in which it otherwise (in a free market) would not be used is an inefficient use of capital. Capital will, in a free market, find its most efficient path to create economic growth, while the government does not. If, instead of confiscating capital from the private sector in the form of taxes or debt, the government were to leave capital in the hands of the private sector, current and future demand would be created, in the most efficient way possible.

In the initial example above, if the government were to refrain from increasing taxes to fund their stimulus (I’ll deal with borrowing below), then the private sector has that much money with which to create demand in their own ways. For example, if the business owner doesn’t have to pay taxes to pay for the stimulus package, then he might have enough money with which to hire an extra employee, or to start a new product line, or to finance an expansion of his business to another community. Instead of the government dictating where the demand is created, the individuals, businesses and communities are instead creating the demand that boosts the economy.

But what about the government borrowing to fund the stimulus? What could possibly be wrong with that? Borrowing, while creating an immediate demand, decreases future demand. Not only does the government have to pay back the stimulus money at some point, but it also has to pay it back with interest. Our $787 billion stimulus in 2009 will cost us $17.3 billion each year, every year, until we pay back the money, which we are unlikely to do (given our track record of paying back our debt). That $17.3 billion is demand that is removed from our economy every year. That decreases our annual GDP by 0.1% each year, which is not insignificant, given that our annual GDP growth is about 1.3% in this sluggish economy.

Bottom line: Government borrowing to fund stimulus packages may temporarily increase economic output (though not necessarily, as we saw in the 2009 stimulus), but actually decrease economic output over the long run. High government debt also decreases economic output, though to what extent is still yet unknown.

Discussion question: Why do you think liberals fall for the demand-side (Keynesian) economic theory?

18 Comments - Leave a comment!

Dooglives

Let’s look at your list of “problems” with the “liberal” theory you described one by one:

“1. Demand-side economics only take into account short-term goals.”

This is incorrect and obviously so, in an economic reality where private sector demand is severely lacking. As you pointed out, a stimulus starts a chain of events which lead to economic growth in the private sector. It increases demand. It jumpstarts the economy. Now, why would that be only a short term proposition? It wouldn’t be. You see, when the economy improves and unemployment declines, more people are being paid to work in the private sector and are no longer on the public dole. Tax receipts rise. Money returns to the treasury. It becomes self-sustaining. It’s a booster shot. We saw this clearly with the initial stimulus package. Of course, you point out how it didn’t ultimately fix the economy long term, which is true. This issue has been explained numerous times and only the willfully ignorant fail to acknowledge it. The initial stimulus package UNDERESTIMATED the size of the economic collapse and was therefore way too small. Additionally, it was watered down significantly by the GOP, insisting on more tax cuts (shocking, I know) as part of the package. Tax cuts in that economic situation gave very little bang-for-the-buck. So the already weak package was made even weaker. You claim “liberals” say the stimulus did, in fact, prevent a depression. Well, ECONOMISTS, say that. I guess economists from around the globe are all a bunch of liberals. This point bleeds nicely into your second “problem:”

“2. Demand-side economics cannot be sustained.”

Except it doesn’t have to be sustained. A proper stimulus package serves as the first domino to fall in a process which leads to economic recovery. There is no “sustaining” it. It begins a long term process and that’s the end of it.

“3. Demand-side economics don’t work well when accumulated debt it already holding down the economy.”

Except what is actually “holding down the economy” is a lack of private sector demand.

“4. Demand-side economics doesn’t take into consideration other forms of demand.”

It takes into consideration lack of demand most holding down the economy.

You continue by throwing around an endless series of numbers, most of which are inaccurate. I need not address those. Instead, it would be much simpler to just tackle your “alternative economic solution,” which is laughable in numerous ways. Let’s begin with the following:

“However, pushing money into areas in which it otherwise (in a free market) would not be used is an inefficient use of capital.”

Let’s unpack this, shall we? A proper stimulus expenditure would include extending/increasing unemployment benefits. Now, the unemployed person is strapped for cash. In that I hope we can agree. Therefore, every dime they receive in unemployment benefits goes to paying their day-to-day living expenses. If day-to-day living expenses isn’t an area where capital “would be used” normally, then I’m the bloody Pope. The same can be said for food stamps. Is food not a normal place for money to be spent? Really? One need only extrapolate this throughout the stimulus package to find the same results. It’s idiotic to say otherwise. Next:

“Capital will, in a free market, find its most efficient path to create economic growth, while the government does not.”

And his evidence for this bumper sticker? Nowhere to be found. It’s nothing more than a faith-based assertion. I wonder, if this is true, why nations with government run health care systems have better results at a fraction of the cost than we do, with our private health care system? Weird, eh? Moving on to the most laughable assertion:

“For example, if the business owner doesn’t have to pay taxes to pay for the stimulus package, then he might have enough money with which to hire an extra employee, or to start a new product line, or to finance an expansion of his business to another community.”

The person who wrote these words may as well wear a sign with the word “ignorant” painted on it. It’s beyond laughable. Let’s begin with the idea that more money in the hands of the business owner is stimulative because he could use it to hire another employee. This assumes all business owners are either A) morons, or b) the most charitable people on earth. The fact is, an owner ONLY HIRES ENOUGH EMPLOYEES TO FILL THE DEMAND FOR HIS OR HER PRODUCT OR SERVICE. They aren’t a bunch of Santa Clauses, who bestow the gift of jobs on people out of the kindness of their hearts. Our economy lacks demand. We have too many unemployed/underemployed people who don’t have money to spend on products and services. So the owner, regardless of how much extra money you throw into his accounts, HAS NO INCENTIVE TO HIRE ANYONE. Why? Because he already has the exact number of people he needs to fill the current demand level. You know what makes him hire? INCREASE DEMAND. How do you do that? A government stimulus package, of course! The same logic applies to the idea that this hypothetical owner will start a new product line (with no customer base!), or expand his business! Why would he expand or start a new line if there is a lack of demand in the economy, which means a lack of potential customers with money to spend???? Is he an idiot?

Let’s finish with the “bottom line:”

“Government borrowing to fund stimulus packages may temporarily increase economic output (though not necessarily, as we saw in the 2009 stimulus), but actually decrease economic output over the long run.”

Except history has shown this is not true. WWII saw the largest government spending program relative to GDP in the nations history. Where did it lead? A Golden Era of economic growth lasting several decades, which created to the largest, most robust middle class in human history. Previous to that, FDR’s stimulus programs reversed the great depression. Meanwhile, the plan advocated above has been implemented throughout Europe, with disastrous results. You see, it’s very simple:

1. Giving money to business owners doesn’t spur growth in any meaningful way, when the issue is a lack of demand
2. Cutting spending, when there is a demand problem only succeeds in decreasing demand even further. Why? Well, it’s common sense. If unemployment insurance money gets spent immediately in the community, it obviously creates demand. Therefore, take that same unemployed person and CUT his or her benefits. What does that do to demand in his or her community? Need I explain it further?
- https://brevis.me Robert Ewoldt
  
  You are obviously not a business owner, because if you were, you would understand business better. When Apple launched the iPod or iPad, was there an existing demand? No. Because no one had made such a product before. When Microsoft created Windows, was there a demand for it? No. They created demand for their product by taking a risk and creating a new product line. This is what business owners do every day. They take calculated risks, and when their products create demand, they earn a profit. When a business owner takes a loan out, he does it not out of charity or out of idiocy, but in order to turn a profit. And profit is a high motivator to spend the money wisely. Business owners create new demand by taking risk.
  
  Government, however, without the motivation of profit, spends money without regard to what is actually good for the economy (and really without regard to what’s in demand, too), as I said in the post. It rather focuses on the political profits of capital, which is not necessarily the most efficient use of capital.
  - Dooglives
    
    Holy crap, are you serious? A new product is created based on what the creator believes to be a need. An EXISTING demand, as yet unmet. But let’s not confuse the issue by comparing groundbreaking INNOVATIONS with simple demand. Also, let’s not pretend Ipods and Ipads were introduced to the market during a massive recession.
    
    The example cited concerns a much more common demand problem, not the rare kind you are speaking of. Here is the post in its entirety:
    
    “A restaurant owner only hires enough workers to meet the demand. Let’s say he needs 10 workers to deal with his 100 customers per night. 10% of the population in his town are unemployed and cannot afford to shop at his restaurant. Give them adequate unemployment benefits or a job and suddenly he sees a rise in customer base. He then has to hire another two workers to cover demand. He orders more food and supplies to cover the increased demand. The companies who provide food and supplies see increased demand also. They hire more people. More truck drivers are needed. Etc. These new hires now spend money in their own communities, at the local supermarket, movie theater, restaurants, clothing stores. All of these businesses see an increase in demand and have to hire more people. Eventually the employment rate rises. These newly employed people are now working in the private sector, due to the increased demand for products and services. The middle class emerges once again. The unemployment rate nationally is reduced dramatically. Tax receipts spike. The deficit drops.Lower unemployment and higher tax revenue lead to lower debt.Conversely, take that same restaurant. Now, take the 10% in the town who are unemployed and reduce their unemployment benefits or put forth austerity measures which force even more layoffs and pay cuts. That restaurant LOSES customers. The owner has to reduce his work force in response to this drop in demand for his product. Now he has 8 workers. That’s two less workers spending money in the town. Those other business in the town now see a drop in demand, also. So, THEY lay off employees, too. It becomes a death spiral.”
    
    Are you telling me the hypothetical restaurant owner in this example, if given a tax break, will use that extra money to hire an extra employee, even though he hasn’t added additional customers? No added demand? If he needs 10 employees to cover his demand, why would he hire an 11th??? He wouldn’t. Unless he’s a moron. Why would he use that money to expand? If he isn’t seeing a rise in the demand for his product? He wouldn’t. Let’s pretend he comes up with a new recipe which blows away the competition. An “innovation.” Let’s say his demand rises. Then he will hire more employees, of course. Except it is a neutral additional in relation to the economy as a whole. Why? Because the consumer class is cash-poor right now. There are too many unemployed people. Too many underemployed people. Too many people without access to credit. So his new customers, created by his wonderful new recipe, simply came from the limited demand pool and LEFT a different restaurant, to eat at his restaurant. Get it? It doesn’t add to the overall economy. It’s not growth. We need to jumpstart the economy by getting our underutilized workforce up to speed. Then actual GROWTH can happen.
    
    “Government, however, without the motivation of profit, spends money without regard to what is actually good for the economy”
    
    More unproven, faith-based assertions. This is why our country is circling the drain, faith-based political opinions; facts be damned.
  - Dooglives
    
    As far as my “not being a business owner,” this is true… except the products I produce have been bought by millions of people around the globe. I wouldn’t be surprised to find that YOU’VE thrown some money my way, without even realizing it.
    - https://brevis.me Robert Ewoldt
      
      Who finances your pictures? Do they know the demand for the picture before they pay you to make it? Before they sign a contract for distribution? Do they ever make an investment that doesn’t pay off?
      - Dooglives
        
        Like ALL businesses, they make assessments. Some work out, some don’t. Overall, one of the healthiest, most reliable profit-making industries is the one I’m in. Let’s apply this to the hypothetical restaurant owner. Does he KNOW his expansion will result in profit? Did Apple KNOW the Ipod would be a huge hit? No. It’s speculation. And NONE of this has anything to do with the situation we are talking about.
      - https://brevis.me Robert Ewoldt
        
        It has everything to do with what we’re talking about. The restaurant owner, as a millionaire (supposedly), could make an “assessment” and decide to make an investment in a new location, thereby creating demand and, along with the rest of his capitalist buddies, creates economic growth.
      - Dooglives
        
        Again: The point is this: the restaurant owner has no incentive to expand, or add employees, because of the depressed economy. And as I already pointed out, if he does somehow come up with a fantastic new innovation, it won’t lead to macroeconomic growth. Instead it will simply take customers from another business. There’s only so much money in circulation at the moment. We need more.
      - https://brevis.me Robert Ewoldt
        
        Actually, the restaurant owner DOES have an incentive to expand/hire in a depressed economy. It’s called profit, and it’s a great incentive.
        
        And you don’t know that his innovation will only take customers from other businesses. That’s only speculation on your part (or, as you say, a “faith-based” assertion). It’s based on a faulty view of economics that there is only so much of the pie, and anyone’s success is at the expense of another.
      - Dooglives
        
        This is embarrassing. It’s like you live in a fairy tale. Is there NOT a depressed economy? Is there NOT high unemployment? Do you live in a dream world where the consumer class is doing fine, has extra money lying around, just waiting for that great new innovation to come along, so they can buy it? By your logic, it makes no difference if you introduce a new product during an economic boom or during The Great Depression. It’s childishly naive. It’s not speculation to say that when there is a depressed economy, due to a lack of proper demand, high unemployment, high household debt, a housing crisis etc, that the consumer class is struggling to get by and don’t have disposable cash just lying around. You know who has that disposable cash? Wall Street banks. They are sitting on it. Why? NO INCENTIVE TO INVEST IN PRODUCTS OR SERVICES BECAUSE THE LACK OF DEMAND.
        
        It’s amazing how common sense goes out the window when an ideology is involved.
        
        Simple question (I’ve asked this before on twitter and you refuse to answer): Which injects more into the economy, giving an unemployed person an unemployment check to pay for his day-to-day expenses? Or giving a millionaire an equivalent tax cut? The answer is as obvious as 2+2=4, yet your blind allegiance to ideology won’t let you see it.
      - Dooglives
        
        Reminder: you’re getting sidetracked. The point is this: the restaurant owner has no incentive to expand, or add employees, because of the depressed economy. And as I already pointed out, if he does somehow come up with a fantastic new innovation, it won’t lead to macroeconomic growth. Instead it will simply take customers from another business. There’s only so much money in circulation at the moment. We need more.
Dooglives

You need a refresher course on how our free market system works.
Our free market economy in its simplest terms relies on the U.S. government using taxpayer dollars to help corporations (not the general public), and only serves the public to the extent that it keeps them afloat; allowing them to act as good consumers, which (to the capitalist) is their most important function. The goal is to keep them purchasing; or to keep them borrowing, in order to keep purchasing. The government uses taxpayer money for corporate imperialism abroad, which serves corporate interests and UNDERMINES the general U.S. population. The system survives by striking a firm balance, which keeps the taxpayer living on the margins, with just enough income to continue spending; but not earning TOO much, which will eat into corporate profits. After all, cheap labor is easy to find in third world countries, so why pay Americans? The answer is simply because they HAVE to pay them SOMETHING, or else they can’t PURCHASE goods any longer. What happened during the Bush administration is greedy Capitalists threw the balance into the trash and let greed take over. Rampant, irresponsible risk-taking and outright fraud in the housing markets created an unsustainable bubble, which collapsed the world economy. The “consumer” was hit too hard, which destroyed this delicate balance and resulted in the general public losing the ability to purchase or even borrow money to purchase. Simply put, the Capitalists “cashed in their chips.” The subsequent “bailouts” merely borrowed from the CHILDREN of the “consumers,” who can no longer pay the bill themselves. This has happened numerous times in our history. Let’s look back at a similar crisis, long forgotten:The Depression of the Spring of 1837: The causes were complex, but they revolved around rampant speculation in real estate. Serious investors and mere speculators had begun to contemplate and then fantasize wildly about the opportunities that new railroads and canals like the recently completed Erie canal would open up in the west, particularly in the Mississippi River Valley. They bought up land in towns that did not exist, except in their imaginations. They bought into potential railroads that carried phantom passengers from one imaginary town to another. This speculative fever rose and spiraled out of control. The result was the catastrophic collapse, in April and May 1837, of 343 of the nations 850 banks.Sound familiar? These types of “bubbles” are inevitable under a system which allows corporate money to influence government policy, which in turn systematically removes regulation and social safety nets. A base level of protection must be introduced, which keeps employment high and money flowing from the bottom up at all times.THE CYCLE LOOKS SOMETHING LIKE THIS:
less government regulation and oversight of markets leads to exploitation of the working class, reduced wages and benefits, out-sourced jobs to 3rd world countries which causes a spike in corporate growth, but this growth is concentrated into the coffers of the wealthy classes and the nations wealth distribution becomes increasingly unbalanced in favor of the wealthiest as real, inflation-adjusted wages and benefits stagnate and in most cases drop for the masses (aka – the consumer class) while the spike in corporate growth masks the fact that the masses are struggling until the system reaches a point of no return when the masses (aka – the consumer class) have spent all their money and have maxed-out their borrowing capabilities, which had them living beyond their means, until they reach the end game and stop purchasing anything besides bare essentials, while cutting back on spending even for those essentials like food and health care, and also begin to default on loans (credit cards, mortgages, car loans, student loans) which combined, leads to a recession, which causes those corporations to cut jobs, wages and benefits even further, which exacerbates the problems for the working class (aka – the consumer class), causing an official death spiral, which forces the government to step in and “save” capitalism with massive deficit spending on infrastructure, public works as well as renewed emphasis on social safety nets and regulation of the markets which gets the masses (aka – the consumer class) back to work again earning money which enables them to return to functioning consumers yet again, which leads to a revitalized economy across the board as incomes and wealth rise across all income levels until the wealthy corporate class uses their wealth and access advantage to once again push for less government regulation and oversight of the markets which repeats the above listed cycleTo stop this cycle, we need a robust public safety net which guarantees an avoidance of the “death spiral” as described above. We continue to run through cycles which end up requiring ENORMOUS tax-payer financed “stimulus” spending. My concept has us instead paying a constant stream of small tax-payer financed “stimulus” spending. It’s all about long-term sustainability. Pick you poison. The eventual monster stimulus, when hell has broken loose, or a constant stream of smaller stimulus, geared toward avoid the collapses?The smaller stimulus plan additionally helps more people. It’s geared toward helping the masses. The large stimulus which is inevitable and truly cyclical under our current paradigm, helps the wealthy. As we have seen, even in times of substantial growth, Main street saw little of it. Yet Main street pays the bill when the collapse occurs. If Main street is going to pay the bill, maybe they should see some return from that investment.How did this system develop, you ask? In order to see where neo-liberal economic policies are taking us here in the United States, it may be helpful to look at what effect these policies have had abroad. Take Central and South America, for instance. The United States has long instituted neo-liberal economics in the southern hemisphere through imperial economic institutions like the IMF and the World Bank along with cynically titled “free-trade” agreements, all basically being offshoots of the U.S. Treasury Department and therefore de facto arms of the U.S. government. Born of massive repression, usually at the hands of U.S.-backed dictators, these policies entered into an environment replete with an abundance of natural resources as well as a strong labor force, but also in a vacuum of overwhelming poverty leftover from the centuries of colonial exploitation. Certainly neo-liberal policies, which were sold under the banner of “alleviating poverty,” would show some favorable results toward reducing poverty and hunger. The reality, however, is the polar opposite. Those countries that followed the economic “rules” imposed by the IMF and World Bank (a.k.a the Treasury Department), found themselves with an enormous increase in poverty and national debt, lower wages, longer work days, less benefits (if any benefits at all) and a complete lack of organized labor representation. These nations fell so deeply into debt that many had to “cheat” on the IMF and World Bank “rules” in order to merely pay the interest on their ever-growing debts. It wasn’t all bad, however, as the small wealthy elite within these societies made out like bandits, while production and profit for U.S. multinational corporations went through the roof. Dissent against the tenets of pro-U.S. neo-liberal economic policies was often met with severe violence and repression. Conversely, economies that had thrown off the shackles of neo-liberalism have shown more growth than at any time while under the wing of the United States. Venezuela is a prime example of this.What can this teach us about where we are headed here in the states? Well, first we have to look at where these neo-liberal policies began. Post WWII was the golden era for overall economic growth in the United States. Real income grew equally between the different class levels, resulting in the largest and most financially healthy middle class in the history of the world. The labor movement was largely responsible for this, as well as the obvious advantages afforded the United States by being relatively unscathed by the ravages of WWII. Neo-liberal economic policy began in earnest with the “Reagan Revolution,” but was preceded, importantly, by the systematic undermining of the organized labor movement, which reached a critical point-of-no-return in the early 1970’s. Reagan quickly enacted economic policies based on “trickle-down” neo-liberal economic policies that were supposed to “raise all boats” through elevated corporate growth. Because the United States began the experiment with neo-liberalism from a much healthier economic place than our friends in the southern hemisphere, it has taken much longer to see the brutal, polarizing effects of the policy; but they are clearly present. The divide between the haves and have-nots has widened to such a degree, as we haven’t seen since the gilded ages of the late 19th century. The middle class, once enormously widespread and prosperous, has all but vanished. Our government has become the best democracy money can buy and has gotten to the point where our “representatives” regularly and egregiously put the welfare of the corporate world ahead of the needs of the overwhelming majority of the population. Where has our experiment with neo-liberal economics led us over the past 25 years? Keep in mind that corporate growth has reached all-time highs during this period, but to what end?
- https://brevis.me Robert Ewoldt
  
  Your conspiracy version of capitalism is a great place to leave this conversation. I’ll let you have the last word.
  - Dooglives
    
    What you call a “conspiracy theory” is nothing more than an explanation of how capitalism works and has worked. That’s what capitalism IS, in practice.
Dooglives

Read this, it’s an excellent analysis: http://tinyurl.com/9w9oygo
grant robertson

I find it hilarious that your blog is titled “brevis.”
- https://brevis.me Robert Ewoldt
  
  Yeah, me too. The original intent was posts of less than 500 words, but it turns out that, with the material that I write about, posts of less than 500 words barely allow for a thesis, often times.
Anonymous

Ahh, so when individuals in an economy would rather save than spend,
some support robbing them through currency debauchery, thereby causing
all kinds of economic calamities.

Expanding the supply of money confers no benefit. All it does is rob purchasing power
from the money unit and the individuals that hold them. Those whom create the money, and the early
receivers do benefit, but it is at the expense of those whom either
receive the money late, or those whom get none at all. Fiat money, credit expansion and fractional reserve banking have failed time and time again.

How many times will currency debauchery be tried, and result in the failure it always has? How does someone coming into your house and robbing your property benefit your little economy? You would have to replace those things that were robbed, and the insurance company would absorb the loss, etc, etc. Bastiat destroyed the broken window fallacy many moons ago, yet individuals still wish to parrot this nonsense saying currency debauchery, indebtedness, and money inflation will somehow benefit the economy.

We do not have a free market economy, nor is there free market capitalism. Whomever believes that is delusional. A free market economy would be free of force and coercion from the state, corporations and other individuals. What takes place would be individuals own the means of production. In a free market, property rights would be respected. I don’t know where individuals come up with some nonsensical proposition that a free market would mean individuals have a right to rob and pillage someone’s property and disrespect it as such. This is simply untrue.

A great disrespect for property comes about through fiat money. Money didn’t come about through government, but rather individuals in the market place. Only through force such as legal tender laws did funny money come about. All throughout history, individuals whom had no respect for property, tried to gain control of the money supply. First through debauchery, then through criminalizing other currency, and even confiscating it.

How is it the government robs individuals through not only taxation, but robs them in general to give corporations money? Suppose a corporation named PhoneComs123 sold a horrid phone, and offered terrible service. You wished never to purchase another product from that company. You and many others do not spend any more money on the corporation, and it eventually goes bankrupt. You, and others voiced your dissatisfaction with your money unit, and through it put the company out of business. Along comes a politician, whom through the central bank prints money in order to shower this company with subsidies against the will of an individual. They have therefore forced you to invest in said company against your will. Taxation is politically damaging, therefore politicians like to rely on expanding the money supply and increasing the debt to fund their desires.

The causes of the depression in 1837-1844 are not complex. It was due to artificially manipulating interest rates, money printing, and credit expansion. The individual states even set reserve requirements. The same thing happened in 1792 where The Bank of the United States expanded credit, and through William Duer, Hamilton and the likes caused a wave of land speculation, which ultimately ended up in a bust.

This is why central banks and governments hate commodity money. It puts a check on individuals, whether they be politicians, or bankers from trying to debauch the currency. Doog was talking of wealth disparity, The monetary system helps create wealth disparity, and your solution would create more of it. There can be no sustained sustainability from inflation which is money printing. Take this for instance: “paying a constant stream of small tax-payer financed “stimulus” spending. It’s all about long-term sustainability.” This is precisely the problem. Government, and the special interest corporations, and central banks that surround them create the problems, and you are looking to them to fix the problems they’ve created? Where is this stimulus money to come from? So instead of individuals saving, instead money must be either taken from them, therefore taken from the productive economy, or printed, which robs individuals of purchasing power.

The business cycle is not caused by the free market, or a lack of regulations. The best regulator is the individual. Not some bureaucrat or politician that writes regulations in favor of a special interest corporation, and against their competitor, therefore driving them out of business, and resulting in less competition which results in higher prices, and no incentive for better quality as the consumers voice is removed.

The only way things can take place is through savings and capital accumulation, not printing money, debauching the currency, manipulation of the market, interest and so on as the latter will lead to boom and bust cycles. The recent economic crisis was due to the expansion of credit, artificial interest rates, fractional reserve banking and removing market forces thereby creating moral hazard, overconsumption and led to malinvestment. Fannie, Freddie, countrywide, and the banks got this cheap money how? How were they encouraged to engage in the disastrous policies of banking and lending? Politicians on both sides encouraged this. It was over a long period of time. Look at FDIC insurance as well. There is over a 100,000 dollar gift that banks can risk of depositors money.

Fractional reserve banking mismatches assets and liabilities. It is a failure in it’s inception, and is fraudulent as there is no way losses can be covered. Credit is expanded, which leads to malinvestment, along with misallocation of resources. Through this cheap money, bubbles are inflated, prices are bid up and a bubble is created. When the bust occurs after all the overconsumption, individuals are barred from redeeming their money when they rush the bank. The government allows this, take Cyprus as an example, and this occurred during the great depression as well. This prevents individuals from going about their business, paying salaries and so on.

To make it a bit easier. There is free bank A, who maintains 100% reserves of all deposits. The only way free bank is allowed to touch a depositors money is through express consent of the depositor, otherwise they would be guilty of theft and fraud. The only other money the bank could earn is through storage fee’s, and fee’s for other services they provide, or money they earn etc. That is the only money that can be invested. Debit cards can still be issued, as the media of exchange (normally gold, etc.) would be debited from the account, and transferred to the recipient. Suppose the bank made reckless investments with that of the banks earned capital. Individuals, whether they be bakers, farmers, store owners, employee’s etc. rush the bank. All of their deposits were maintained, therefore their economies can continue to function, while the bank is able to fail as it should from poor business decisions. The baker still can go on about their business, as well as everyone else in the economy.

Bank B is the current fractional reserve bank. They are only required to keep 10% (the reserve rates vary and are very low) of depositors money on hand. They take the other 90% and make reckless investments. Individuals rush the bank, there is only 10% of deposits on hand, and even then individuals are prevented from getting their money. The bakers can not bake, nor pay their employee’s. The farmer has no available money for fuel, and so on goes the list of problems.

Take a look at bank A, and bank B. Now multiply this in the thousands and see what happens. What happens is a repeat of many historical events. With free banking and 100% reserves, the bank can only risk what it has earned. With fractional reserves, the bank can risk it’s depositors money, which normally is malinvested. With 100% reserves, the bad debt is able to be liquidated, while individuals are able to redeem their deposits, and the economy is still able to function.

The problem is not with the free market. The free market free of outside force and coercion is the solution. With a free market, there is sound money, regulated by individuals, not politicians or central banks. That is why gold has thousands of years of history to back it up. First it was a commodity with a recognized value, and it then became a medium of exchange. Fiat money was and is brought about through force, confiscation, and legal tender laws which protect it’s monopoly status. It is always inflationary, leads to wealth disparity, and helps cause booms and busts.

The answer is not more regulations. And the there is a myth that deregulation is occurring. If you look at the pages of the federal register, and the past administrations entries, there are thousands upon thousands of new entries added every year. So that myth is bunk. The best regulator is the consumer, with their voice being their medium of exchange. Removing the consumers voice from the process through subsidies, grants or regulations written in favor of them shields a corporation from the consumers regulation, and removes market forces almost entirely. Public private partnerships transfer risk from the corporation to the taxpayer. No company can force an individual to purchase their product, nor invest in their company. The only way this can happen is through force, which comes about through the politician. Yet there is a call for more political action to prevent what they are causing in the first place?? Rather illogical.