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Understanding this economy: My View
As I recall from my macroeconomics classes, the business cycle is defined as an upswing followed by a downswing. At the peak of the upswing the economic problem is inflation due to a hot economy. The endogenous factor is full employment and I forget what money supply does. But for now the money supply is not in play.
At the low peak of the business cycle the economic problem is recession and endogenously the problem is unemployment. This economic pattern is not foreign except that a longer than usual expansion has allowed us to be SPOILED. That is, as Americans we’ve done it again.
We’ve allowed a
special cause (longer than usual upswing) to become the system – in our minds.
That is, party hardy, as if the business cycle and all that economic
theory was just academic foolishness.
The foolishness said when aggregate demand was greater than aggregate supply i.e., beyond equilibrium, you worked overtime. Overtime was to meet peak periods of demand. However, if overtime has become the NORM, then what
The prudent manager would say eliminate waste. The need to work overtime before demand is sufficiently beyond equilibrium is evidence of inefficiencies that should be rooted out. BUT, if one were to throw theory out the window and presume the good times will last forever i.e., the pie has gotten bigger when it hasn’t, that manager would build more capacity. OOPS
Simply put, excess
capacity is waste built due to either inattention to the business cycle or
attention to projections that did not materialize. More capacity is built when the pie has gotten bigger or your
share of the pie has gotten bigger. The
old precursor to watch was GNP. When
Gross National Product increased an increase in real output was deemed to be
warranted. Did GNP increase in
1998, 1999 or 2000
recently, the United States used Gross National Product as its main measure of
national output, while the other industrialized countries mostly used Gross
Domestic Product. Since 1992, however, the United States has adopted the
standards of the other countries, and now treats GDP as the main measure.
by definition, Gross Domestic Product is the market value of production for
final use, and there are just four categories of final use, we can say that GDP
is the sum of the four components:
is a diagram that shows how GDP and consumption, investment, net exports and
government purchases have changed over the last 35 years:
Gross domestic product
(GDP) is one of the most widely used indicators of economic prosperity, and it
includes the total output of goods and services for final use produced by labor
and capital located in the United States. Net domestic product (NDP) adjusts GDP
for the consumption of capital goods and infrastructure, but neither measure
accounts for changes in stocks of natural resources or in the aesthetic value of
the environment. While it may be conceptually preferable in the context of
sustainable development to use NDP as an indicator of economic prosperity, the
movement of the two series is virtually identical. Either indicator shows that
aggregate domestic output has more than doubled since 1970, after adjusting for
inflation.1 At the same time, it is important to note that these traditional
measures of economic output do not adequately represent related environmental
and societal variables that are important to sustainable development. Some
economic transactions included in GDP may reflect environmental and social costs
(e.g., costs associated with protection against crime or with recovery efforts
following natural disasters), rather than contributions to the Nation’s
1 This series is adjusted for inflation using chained 1992 dollars.
so what is this: Whether you use
gross or net, recessions occur during times of real GDP growth. Why
business cycle is inelastic to GNP, GDP and believe it or not to interest rates.
In the long run, the economy, absent government tampering, is driven by
consumer and investor confidence. It
just so happens, I believe, the business cycle is also dependent on consumer and
investor confidence. As consumers
and investors spend, their expenditures drive real demand.
Aggregate demand follows real demand and aggregate supply trails - to
complement aggregate demand. ALL
components of this economic stability is inelastic to moral suasion.
In general Republican Administrations do not use government
expenditures to influence the economy. Rather,
they use taxation in the form of tax relief.
What does tax relief do to the drivers: consumer and investor spending?
In the aggregate, not much. The
mass spenders do not net enough from the tax relief to substantially influence
the flow of money. The top 5% of
those benefiting from such relief tend to invest that relief and thus do not
In my opinion, taxation used as fiscal policy has no effect on the business cycle. That’s just politics.
More to come..