Aggregate Demand

The New York Times editorial pages were interesting today. Thomas Friedman told us that the problem with the economy is aggregate demand. He also told us that technology has led to a loss of jobs -- outsourcing is now just standard daily practice not one of shipping jobs elsewhere. Most jobs are really not jobs because "the world is flat". Not sure what all this means except the part about insufficient aggregate demand and a hint of Ludditism. Tyler Cowen attempts to make a case for a tax increase to go along with spending cuts. His argument is that unless taxes are increased spending will continue and future taxes will be higher. He uses James Buchanan's argument for a balanced budget to buttress his agrument for both tax increases and spending cuts. But, what Buchanan argues is that unless constrained, say by a balanced budget requirement, politicians will simply continue spending and increasing the size of government. This has nothing to do with the argument to increases taxes and cut spending now; it is not a balanced budget constraint that Cowen is talking about but merely an Obama program of increasing the size of government. Irving Kristol's commentary is as confusing as Friedman's but he also supports the Keynesian aggregate demand is the problem argument.

So why isn't the insufficient aggregate demand thesis correct? There is no doubt that the economy is in the doldrums due to a lack of investment by business and a lack of consumption on the part of households. But, that does not mean the government can solve this by increasing spending. A dollar of spending is not fungible -- government spending is completely different than investment or even consumption. Moreover, government spending takes money from investment and consumption and reduces these further. The problem with the economy today fits nicely into Higgs' uncertain regime thesis. Businesses don't know what is coming. Why hire someone now if in the future that someone means higher taxes, higher health costs, etc? Why expand your buainess now if you will fact more regulations -- say like Dodd/Frank or Sarbanes/Oxley. The economy will not recover until that uncertainty is resolved in a way that will reward entrepreneurs for risk taking.

The NYT editorial pages are great -- they make me examine how the writers can possibly believe what they write. Yesterday'sd ecitorial by Krugman was classic. He wandered around and finally stated his constant refrain -- we need a lot more government spending right now.

We used to argue in textbooks that economists did not disagree as much as the general public might think. But, this is totally wrong. I have never experienced a period where there was such a strong and divergent set of views about the economy. In a future blog, I will pursue this idea further.