Tuesday, March 15, 2011

Demand 101

Perhaps the right way to start off a new blog is to discuss one of the more obvious points that have been ignored in recent economic austerity measures. Namely, the issue of aggregate demand has been roundly ignored by the "clear cutter" majority who view any and all cuts to public service as the starting point for fiscal reform. Not only this, but the narrow focus on government regulation and spending has crippled the narrative of economic reporting in all major media outlets. In fact, any accumulation of wealth constitutes a game-changer in economic structure: not only the distribution, but the direction and velocity of exchange are all tied to this issue.

Aggregate demand in particular is critical to the structure of production and distribution, and then the disbursement of wages which provide a basis for - demand. As Nick Rowe points out, demand is the measure of growth (or lack thereof) in an economy:
"Quantity sold is whichever is less: quantity demanded; or quantity supplied. If there is excess supply of goods in aggregate, then realised sales of goods, and income from those realised sales, is demand-determined. And if people are unable to realise their plans to sell as many goods as they wish (if they face Clowerian quantity constraints) then their demand for goods will depend on their realised sales, which is demand-determined." - Rowe
In other words, the absolute best that an economy can do is to meet demand. Consumption spending of 100$ won't support investment spending of more than 100$, no matter how much money you throw at suppliers. Effective demand requires consumption spending, which can be accomplished in a couple of ways. More on that later.

As Michael Snyder reports with a range of statistics, the accumulation of wealth in the hands of a few has coincided with a rate of inflation far surpassing the real wage rate (see John Williams' Shadow Government Statistics for a good discussion of some of the obfuscations the government uses to curb Social Security payments and inflate perceived consumer purchasing power). Add to this the recommendations and policy implementations to the end of lowered spending, and we have a cascading recipe for economic stagnation - all from reduction of demand.

The accumulation of wealth in the hands of a few accomplishes a few things besides simply consolidating economic power. On the government side, it narrows the potential investors in political parties, which streamlines the interests that political parties are indebted to represent in a government. On the market side of things, it narrows the scope of popular consumer spending. This has a couple of consequences:
  • Consumer spending for mass-production is driven by high quantity demanded of products which go through the same production process. When this is lowered (as in a shift in wealth from the mass-consuming working class), efficiency is lowered, prices go up.
  • Savings occurs at a rate proportional to the discretionary spending of a given household. This rate goes up as we climb the social ladder - so transferring wealth to the wealthiest causes demand to retract, by expanding the rate at which money is saved and taken out of circulation.
The tax rate on the richest members of society has traditionally worked to counter these problems. By acquiring and reinvesting money that would otherwise be removed from circulation, economic growth can be maintained. Perhaps it is this inevitable conclusion that strikes each of these points from the mainstream narrative. The inevitable need for a robust tax rate on corporate profits places any analysis of demand in direct opposition to the interests of those who manage the increasingly centralized mass media. The propaganda efforts of Koch Enterprises exemplify some of the most extreme interest in opposition to this sensible policy.

Government spending, and deficit spending in particular are increasingly cited as hindrances to organic market growth. However, many of the purchases and employment that the government engages in have no market equivalencies. The privatization of interests such as homelessness, health care and welfare provision for the disenfranchised resolve into privations of the same. When the market, and investors in particular, are indicating that they have no confidence in these needs, as well as consumer spending, there is absolutely no reason to shift more investment power to this private sector - not if we still want these needs resolved, that is.

These simple laws of demand should be the writing on the wall for those directing the privation regime - the so called austere economy of today. Consumer spending, the preeminent ceiling and actuator of economic activity has to be empowered at every turn to effectively curb a recession. History is consistent: a reduction of consumer buying power is always a part and parcel of the process of a recession. Further expanding the demand deficit serves no purpose in a weakened economy.

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