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Demand Side Economics?

April 19, 2010

in her speech at Princeton — which she originally wanted to title “It’s the aggregate demand, stupid” — Romer makes very clear that one of the things the administration is having to fight against is the political system’s willingness to simply accept high unemployment and let horrible become the new normal.


Basically, there are two sides to this debate: One is that the meltdown either exposed or created an economy where the level of unemployment is simply much higher. That is to say, it’s not just the recession pushing unemployment up, but the new reality of a post-high consumption, post-housing boom, or post-something else America.

Romer’s view is different: “This rise in long-term unemployment is readily explained by the prolonged collapse in aggregate demand.” She sees five factors pushing down demand: Tight credit markets, state and local budget problems, burnt-out consumers, subdued foreign demand, and the Federal Reserve’s inability to stimulate the economy by further cutting interest rates.

The neat thing about a demand-side explanation is that policy can help. Demand, after all, is another way of saying “someone spending money to buy things.” The economy doesn’t much notice if that someone is a household, a business, or the government, So if households and businesses are too weak to play that role right now, the government can, and should, step in and create the demand that will get the economy moving again.

Basically we are talking Keynesian economics here, but as much as most people want to deny it government spending can stimulate an economy. Michael Medved will tell you that government spending is worthless because it doesn’t produce anything. Well that’s just utter BS. If a water district builds a new hydroelectric damn hundreds of people are employed both directly and indirectly. Surveyors have to go out and locate the proper place for it. Concrete needs to be produced, as does steel, trucks are needed to haul them Workers are needed to pour the concrete. Generators need to be built which require machined parts. Miles of copper wire are needed so copper needs to be mined and smelted and then drawn into wire, etc. etc. The same applies when roads or schools are built. That all puts money into the economy. It isn’t as perfectly efficient as the market, but right now the market isn’t working real well. If it was we wouldn’t have 9.7% unemployment.

That isn’t to say that I am a Keynesian. I’m not, but that’s because it isn’t the most efficient economic method, and because in general I don’t believe in government intervention in markets because of that inefficiency not because it doesn’t work at all.

Republicans turning against Fox News?
I am. O’Reilly, Hannity and Glenn Beck are all idiots. So are the hosts of Fox and Friends. Megyn Kelly is OK, as are Hemmer and Martha MacCallum, and Brett Baeir, but they don’t make up for the others.

NY Times discovers why Obamacare can’t work.

Healthy people, in effect, began to subsidize people who needed more health care. The healthier customers soon discovered that the high premiums were not worth it and dropped out of the plans. The pool of insured people shrank to the point where many of them had high health care needs. Without healthier people to spread the risk, their premiums skyrocketed, a phenomenon known in the trade as the “adverse selection death spiral.”


One Comment leave one →
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