From: kbanaian@bernard.pitzer.claremont.edu (King Banaian)
Newsgroups: alt.politics.clinton,alt.politics.democrats.d,alt.politics.elections,ba.politics,co.politics,ne.politics,nj.politics,or.politics,ny.politics,talk.politics.misc
Subject: Re: income vs. consumption (was Re: VOTE, BABY, VOTE!)
Date: 18 Nov 92 01:12:21 GMT
Distribution: usa
Organization: Pitzer College

In article <1992Nov17.222644.6184@cbfsb.cb.att.com> mbb@cbnewsb.cb.att.com (martin.brilliant) writes:

>> You commit a fundamental flaw here in believing that all entrepreneurs can 
>> reach funds in the stock market....
>
>I believe what?  I believe that those entrepreneurs who reach funds in
>the stock market are not screaming for it.  I believe that those who
>depend on the banks are not grabbing for it even at low interest
>rates.  I believe those publicly visible indicators are consistent
>with the parts of the investment market that are less visible.
>
We have a credit crunch, not a liquidity trap.  In a liquidity trap, no one 
wants to borrow.  In a credit crunch no one wants to lend.  Do you think you 
could borrow money to finance a new widget factory right now?


>But I don't believe all entrepreneurs get their money in the stock
>market.  In fact, I believe that none of them do - the stock exchange
>is a secondary market.  But what goes on in the stock market not only
>facilitates the primary market for securities traded there, but serves
>as an indicator of what goes on in the larger market.
>
>> ....  Only a small fraction can.  For those who 
>> must rely on the banks, we have a real problem.  It's not at all clear, 
>> however, that banks aren't lending because they have too little savings.
>
>I think you agree with me there.  I suggested that banks aren't
>lending because nobody they think is a good risk wants to borrow.  So
>they aren't eager to pay high interest rates to encourage savings.
>
>>>> Possibly: The Federal Reserve has a great deal of influence over
>>>> interest rates ...  It's quite possible that interest rates are 
>>>> artificially low ....
>>>
>>>The purpose of lowering interest rates as public policy is to
>>>encourage business borrowing.  ... [ you can't ]...  That is what
>>>economists mean when they say "you can't push on a string."
>> 
>> I can't tell you how refreshing it is to an economist to hear *that* phrase 
>> again!  The problem here is that the Fed really can't control all interest 
>> rates, just one.  If the market thinks monetary policy is inflationary, they 
>> adjust all the other interest rates to compensate, and you get no reduction 
>> for your troubles.  The pushing on a string argument is that firms don't 
>> want to borrow regardless of the interest rate.  I don't see that as the 
>> problem:  what you say about the stock market is my evidence.
>
>Could we clarify that?  What I said about the stock market is that it
>points to a surplus of savings with respect to investment.  What I said
>about interest rates points to the same thing.  Where is the evidence,
>if any, that points in the other direction?
>
>The only interest rates that are high are consumer interest rates.
>All that says is that consumers are short of money, and they want
>more, but they're not very good risks.  All other rates are low.
>
The spread between the cost of funds and the prime rate is fairly high now:  
look at how banks have profited recently.  Banks are sinking their money 
into T-bills because then they don't have to hold loan losses required by 
the government.  The problem is not with the firms:  they'd love to invest 
if they could get the loans.  They're not.  Don't look at the rates so 
much:  It matters little if I can't get a loan.

>
>> Look, guys, 17 million new workers entered the workforce since 1980, even 
>> after the recession.....
>
>That was since 1980.  We had a boom of sorts in the 80's.  But is the
>workforce larger now than it was two years ago?
>
>> ....  We had to equip them with capital ....
>
>Do you know how much? 

Real Capital Stock, in 1982 dollars, was 3.138 trillion in 1980 and 3.960 in 
1989.  I can't lay my hands on 1990 data.  I don't know where it went in the 
terms you asked.  That's still more than enough to handle the increase in 
the labor force.

>You said the Japanese and the Saudis have plenty of
>dollars saved, and then in the next paragraph you disagree with the
>statement that there is a surplus of savings (actually, what I
>consider to be the same thing, a deficit of investment demand due to a
>deficit of consumer demand).

Your theory is that all investment is driven ex post by increases in 
consumption expenditures.  Do I have that right?  Do you wish to tell me 
that nobody invests to improve productivity?  To produce new types of 
products?

My point was that the savings effects are not terribly important here;  the 
investment effects are critical.

> the trickle-down theory comes from people who stand to
>benefit personally by its implementation.  

"Trickle down", dear readers, was first used by William Grieder in the 
infamous interview with the traitorous Stockman in the Atlantic, August 
1981.  The term was invented by a journalist to skewer the Reaganites, but 
that's another story...


>> ....  The thing 
>> to bear in mind is that it's not the deficit that's the problem;  it's 
>> government spending.
>
>That's another topic.  We were not talking about either the deficit or
>government spending.  We were talking about whether taxes should be
>levied in such a way as to encourage saving in preference to spending
>on the part of individual taxpayers.  Can we stay on track?

Not so, my friend.  From the days of Ricardo we know that taxes and deficits 
get you approximately the same result in the market place.  The thing that 
drives it all is government spending.  If the government spends more, I know 
I have to save to pay the bill someday (unless I wish to fob it off on your 
children).  Take away all the spending and the argument of how to tax is 
moot.
>
>Why unfortunately?  We need good economists.  Are you a good one?  Or
>is economics, by its very nature, dismal science?

I won't judge my own talents.  I don't think we're dismal, by the way, 
except that we keep reminding people that there's no free lunch -- but you 
obviously knew that.

K. Banaian
Don't stop thinking about 1996!
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