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We do know how to increase aggregate demand. The formula:

  D = C + I + G + NE

  D = Demand
  C = Consumer spending on private goods and services
  I = Business investment in capital goods
  G = Government expenditures on public goods & services
  NE = Net exports (Exports - Imports)

Right now there is a huge economic opportunity to increase G due to historically low interest rates (cheap to raise debt) and stagnant wages (cheap labor). The economics are clear, but the way forward through fiscal policy roadblocks is not.

Read for more details: https://sites.google.com/site/kocherlakota009/home/policy/th...

Doesn't have to be G. Couldn't business treat labor as a capital good, increasing I? (ala Henry Ford paying his workers more to reduce turnover... with the side benefit of them becoming wealthy enough to buy the cars, increasing C.)

No, because employees can leave at any time.

There was a time when labor was treated as a capital good, and it ended with the Emancipation Proclamation.

Only if G isn't already overspent. In the US and several counties G is well over budget and has been for a long time. This combined with large liabilities coming down the pipeline and G should not be something we look to solve the issue.

Infrastructure spending in the US is backlogged for decades. Hard to argue we're overspending on that when we see a major bridge collapse disaster every 5 years.

Bring that schedule forward through issuing more debt at record-low interest rates, and bang, you've solved several problems at once. People have jobs, they spend money, that helps the economy, and we get the infrastructure out of it as well.

You'll even get some of that inflation that's been missing during the QE period, while all the fed economists looked at their macro textbooks in utter confusion.

For the reason you mention, there would be substantial upside from increased infrastructure spending & the timing is pretty close to optimal.

What's interesting is that through greasing the wheels of the economy via infrastructure investments (e.g. better broadband, connected/wired roadways, upgraded utilities and transportation hubs) you would see productivity gains which, over time, would further diminish the value of labor.

Have always been interested in how long-term goals of social/economic policy should influence short-term decision making, but there aren't any easy answers.

That is just a misallocation of funds, not a lack of budget. I think the federal government can find a way to fix bridges with a 4 Trillion dollar budget.

So where would you reallocate from?

Calling it '4 trillion' is technically correct but I find that taking out the passthru social programs (SS, medicare, medicaid) leaves you with the real number of what's available to allocate differently. Hard to say that we could pay for something out of SS benefits while still collecting FICA tax, and if you want to eliminate the program entirely that's a different discussion.

> In the US and several counties G is well over budget and has been for a long time.

I don't agree. G has been reduced considerably recently. Under Bill Clinton, G was higher and the U.S. ran a budget surplus.

It's an old tactic: Cut taxes (now to historically low levels) and then say the country can't afford to pay for anything. The solution is to increase taxes. The U.S. economy is the largest in history (for the U.S. or any nation); the nation can afford more G than it ever could before.

All the money is concentrated in the hands of a few, but as long as they pay their share the federal budget, at least, shouldn't be a problem.

G is overspent. That does not necessarily mean the idea is wrong, however. What's missing is political will and trust.

The trust issue is like this: If we expand government to get the economy moving, then once demand picks up, we have to shrink the government back down. Do I trust Congress to do that? Absolutely not.

You are not getting very far with this equation. Returns on investment are mostly defined by the C/I relation (government spending can go on either side) (and yes, that is on average, and nominal), and this is the one that needs fixing.

Yeah because a government that spends hundreds of billions on genocide is exactly the entity we want to spend more.

Good fucking grief, HN is full of naïve idealists.

I completely agree, this is a consumer economy that has been actively killing off consumer power and wondering why growth/demand is over.

When a company like Nabisco closes in Chicago and opens in Mexico for instance, yes the company saves money but Chicago loses millions and possibly billions in consumer power in the community. This is never factored in, loss of consuming power for a community/city.

There has been a slow drain winding down of consumer purchasing capability as you mentioned since the 70's. Eventually you use it all up and everything stagnates.

Wage stagnation has played a huge role, it has gotten much worse since 2000, even people moving up are finding it harder to buy as incomes have fallen while inflation/costs rise dramatically to make up for lack of consumer power [1].

Since 2000, the middle class has been shrinking for a decidedly more alarming reason: Incomes have fallen.

1968 was the peak in purchasing power for lower to middle class. This graph shows a lack of wage increases at the bottom and minimum wage[2]. That has also delayed trickle up wage increases above. This has also caused people to load up on debt to make up for their lack of purchasing power, furthering the problem.

Too much money is locked up in capital and investments that never re-enter the economy. This is bad for the rich and poor, locked up capital stays under lockdown during downturns. Lower and middle class have to spend during downturns. Recessions are worse when so much capital is locked up. This is leading to a 'lost generation' of consumers that can't consume or buy what they need or add to corporate profits from consuming [3].

[1] http://www.nytimes.com/interactive/2015/01/25/upshot/shrinki...

[2] http://money.cnn.com/interactive/economy/minimum-wage-since-...

[3] https://www.youtube.com/watch?v=oeCfq-9l_b8 (:30 in)

"I completely agree, this is a consumer economy that has been actively killing off consumer power and wondering why growth/demand is over."

Thanks. I point out this occasionally. I don't claim to have an solution. But I think I've described the problem correctly. We have insane amounts of productive capacity compared to previous generations but that doesn't push up the standard of living by much.

Too much political economic talk starts with a desired solution and tries to justify it. That isn't working.

The original article looks at this from a finance perspective. Finance is supposed to be a service function, like water supply. It's not supposed to be in charge. Especially in a capital glut.

Keep the same wage and shorten the working day instead. Gives people more time with family and to enjoy life in general.

Let machines pick up the slack.

Sounds good in theory but the Internet and globalization show us that the rewards accrue to the most driven/funded competitor, with the reward essentially being a monopoly for the "market leader." So for a lot of businesses, that wouldn't work, especially when people choose to work long hours for high pay, which is common in finance.

> Sounds good in theory but the Internet and globalization show us that the rewards accrue to the most driven/funded competitor, with the reward essentially being a monopoly for the "market leader."

Ah, the lovely "dog eats dog" story… We're humans, though, we should do better than that.

Now in practice, the winner is the one who wield the bigger guns. Meaning, the US will put its army where the oil is, though not before having talked of weapons of mass destructions, a dictator, terrorists, or whatever.

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Globalization or not, machines are eating our work. A good thing if you ask me: we don't want more work, we want less. People who ask for work don't give a shit about spending all day doing a thankless job. What they really want is dignity (there is shame in unemployment) and money.

Now the lucky few that love their jobs… more power to them. The rest of us would rather work 3 days a week instead of 5 if it didn't mean losing so much of their income.

> for a lot of businesses, that wouldn't work, especially when people choose to work long hours for high pay, which is common in finance.

In finance, long hours are not exactly voluntary, they're expected. Moreover, you don't get the high pay right away, you have to "pay your dues" first —as if you owed you employer for the privilege of being hired.

Paying your dues is just the finance industry version of the "apprentice" phase in the traditional "novice, apprentice, journeyman, master" trade progression that has persisted in various forms for centuries now.

Apprenticeship is no reason to work insane hours, no matter the trade.

In French, "paying one's dues" spells "faire ses preuves", meaning, prove one's worth. That way no one is tricked into believing they owe anything to their employer. Sure, it's only an idiomatic phrasing, we don't think of the debt any more. Yet I'm sure it wasn't so at first, and I'm sure the idea lingers.

Like the Japanese saying "sumimasen" (forgive me, excuse me) to say "thank you" in some circumstances.

Let's stop holding society hostage to "the economy", a relatively recent way of doing things for humans.

"the economy" predates human history. The ones who fight the best for resources gets them. We have only recently become more civilized where we don't have to literally fight for resources. But as long as there is human desire for status over other humans, there will be haves and have nots.

You are being overly reductionist. You are conflating "the economy" with economics. "The economy", the noun is very recent. Treating economic activity as an abstract system without its sociopolitical context, tacitly assuming that its telos is to grow and grow, this is all very new. Aristotle spoke of economy. Pundits today talk about the Economy. Job creators. Growth. It is a cargo cult.

Cooperation shapes and drives biology just as much as competition does. Civilization did not give us prosocial tendencies. The founding myth of civil government is exactly that. A myth. It is historical revisionism. It is reductionist. It is a mutilated view of people. Hobbes was wrong.

> But as long as there is human desire for status over other humans, there will be haves and have nots.

Honestly i am so tired of conversations that appeal to human nature as some immutable, invariant, unassailable truth. This isn't an argument, this is an assertion. Speak for yourself. If you desire status over other people, admit it. I find your characterization of the billions rest of us crude.

gravity existed long before we 'discovered' it. Trade and "the economy" existed long before we 'discovered' it too.

The economy is just as much about Cooperation as Competition. That's why we call it Free Trade.

> If you desire status over other people, admit it.

No, it's an observation of human behavior. When I see a large scale change in human behavior, I will change my opinion. What purpose do you debate on an internet forum that doesn't boil down to 'status seeking'. Think of all the the things we do all day that are essentially motivated by 'status seeking'.

The economy is not a thing that exists without society. Using it to refer to a specific object is at best a metaphorical shorthand for real phenomena or a dangerous fetishism. "Economy" is an ancient concept, perhaps one of the oldest human concepts. "The economy" is new. The way we use words changes, the way we use words is related to the way we understand the world. I really don't care what specifically you think the term "the economy" refers to in this context: I'm talking about the word, not the referent. I made an observation about a shift in the way we understand economy. Here: http://www.npr.org/sections/money/2014/02/28/283477546/the-i...

> No, it's an observation of human behavior. When I see a large scale change in human behavior, I will change my opinion. What purpose do you debate on an internet forum that doesn't boil down to 'status seeking'. Think of all the the things we do all day that are essentially motivated by 'status seeking'.

Um, do you honestly think i gain any status at all whatsoever with anyone because i argue on the Internet? Like, you have no idea what else could possibly be the result of conversation?

i don't think you have as deep an insight into human behavior as you think you do. You still haven't supported the assertion. Either your definition of status seeking renders the statement banal and vacuous, or incorrect. I'd like to hear what your definition is and your justification. What you see in human behavior isn't good enough: we see the same raw reality. We interpret it in different ways. Acting like your interpretation is just obvious doesn't cut it, especially when we're talking about the intentions of human beings. It is quite impossible to directly observe intention. It can only be interpreted from behavior.

> But as long as there is human desire for status over other humans, there will be haves and have nots.

Oh, don't worry. We can fix that.

For a while the lack of wages could be compensated with cheap consumer credits. I guess that's maxed out too.

I strongly believe that forcing wages up (within reason) would increase economic output. We certainly don't need to push more money to the top people like most republican candidates want to do. The money would "trickle up" because people would actually buy things and entrepreneurs could take advantage of that purchasing power.

Well there have been the studies showing that for every dollar given to the top quarter of society, the economy gets 75 cents of so. Where as for every dollar given to the bottom quarter the economy gets back 2, maybe 3 dollars.

So there is some argument for giving the bottom / poorest of people a simple basic income.

"For a while the lack of wages could be compensated with cheap consumer credits. I guess that's maxed out too."

Yes. Rising house prices powered the boom up to 2008. It was called the "wealth effect", but it was just inflation. That didn't end well.

Great post, I agree. It's also interesting that the constant increase in demand leads to continuous and increasing destruction of the environment and consumption of natural resources. Perhaps less demand will be better in the long run. Can we reach a new healthier equilibrium without escelating social unrest?

Not necessarily. Aggregate demand grows the economy as a whole, and as it grows, more funding is available for innovations that solve today's problems in incredible ways.

Case in point: video rental. Netflix removed the necessity of physical stores, therefore less plastic being used to make boxes and vhs tapes and so on.

There is also a culture factor. The economy and the environment get along best when people live near the things they want. I live in a small city surrounded by nature and so many of our products can be locally sourced, sustainably.

This interesting! Never thought of it this way. Is there any kind of research showing that electric power to run the servers and hardware (which gets old and must be replaced) has a lower impact than boxes and vhs tapes?

There is a glut of capital and a deficiency of demand from US workers due to weak spending power. Was not the obvious solution posed by Keynes?

Did not Keynes work quite well after Roosevelt's partialy successful timid attempts at it were forced into enormous government demand by WWII?

Disagree on the land point - land in/near cities is immensely more valuable due to network effects, and land use restrictions create artificial scarcity there.

The solution is fairly straightforward: give people money so that the machines can work. Basically, buying power coming from labor is an arbitrary historical accident - mostly coming from the whole Protestant work ethic scene. If buying power instead comes from being a person, then the machines can make more material goods for us.

I would not say it's a new thing historically, this is why it's been important to have strong (decently large, and broadly spread throughout the economy and geographically) middle class. And that middle class has been squeezed. Poor people don't buy much stuff, and there aren't that many rich people.

"We have no clue how to handle this."

We know exactly how to handle this: war.

Correction, "We know one way to deal with this: War. But we know this isn't a smart idea, so we would like to find and use another option instead."

Great depression was also about overproduction. Too much stuff, too few buyers.

My dad lived through the Great Depression. I remember that he talked about people carefully saving thread, not because thread was so expensive (or money so scarce), but because no new thread was being made, because the factories had shut down because the companies went broke. So I'm not sure I buy your interpretation.

This is a marxist-style crisis of capitalism, in essence:

a) business hires workers to make goods to satisfy demand

b) business overproduces to make sure they meet all the demand

c) business has 6-12 months of inventory, lays off workers

d) business can no longer sell inventory since workers don't have money, can't afford holding costs, dies

e) liquidator sells off glut of inventory, lowering prices and preventing new firms from entering the market

f) no new inventory is created since firms are dead

g) shortage arises, driving prices sky high

It's a bit like a wave oscillating in a container.

I'm interested in this; what stuff specifically was made too much of?

Like boots and shoes and clothes and pots?

Those are all directly applicable items of need - as opposed to headphones and phones and laptops and (name electronic product)...

So what items were a glut in ~1930 that would have contributed to this?

My skepticism tells me it was financial speculation, and not physical goods that had more an impact.

And even if I were correct, which I do not know, I'm amazed that there was enough thought in the space to create such a depression.

The phrase "money is the root of all evil" only exists for a reason...

"The phrase "money is the root of all evil" only exists for a reason..." And all this time I thought it was "love of money"