Tuesday, December 14, 2010

Being a Supply and Demand Side Economist

Yglesias answers one reason why there is so much talk of consumption rather than production during recessions: our productive capacity has not diminished since 2008 while consumption has. Consumer spending may be a touch higher this holiday season that the last two years, but not much and it's well behind spending in 2007.

 But exclusively focusing on just "getting people to spend more" is not going to get the job done. It's not 10% of everyone who is unemployed: it's 30% of particular demographics and 2-5% of other demographics. Sending money to the demographics that aren't as hard hit isn't going to do as much as efforts to get that other 30% trained, moved, hired, or otherwise [back] into the system. As much as I may like lowering income taxes, I really doubt that changing the marginal income tax rate is going to be the main driving force getting us out of the recession. (Though here is yet another short piece on the effects of taxes on "quirky" rational behavior.)

That's where supply side, productive policies still have an essential role. Even though consumption has taken a hit, it's investment that moves the most during recessions and this is no exception. Firms are showing record profits without investing in more workers, more facilities, more anything. The money is sitting there and needs to move. This isn't about high-mindedly reminding people to avoid debt. This is cash hoarding. Aggressive monetary policy would encourage firms to invest those funds, creating jobs and moving us forward again. Lowering employer-side taxes would encourage hiring. Others have gone on in more detail (Mankiw on employee-side payroll taxes)

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