at the least the people put to work from the stimulus projects will go out and spend and that spending will be a bust to the economy.

by doing stimulus projects you put people to work. People with a job tend to look more favorably about the future then those with out and since they have an income to spend, they will.

Also most people wont think about the fact that they will have to pay for the debt in the future…at least they don't think about it much, when compared to people thinking about their financial needs now.

Come back to reality, surfisto.

“can they spend without causing the normal problems associated with gov't spending?” Your answer was “No”

I am thinking theoretically, if a gov't had this revenue and was not insatiable. Then they could keep taxes low which would fuel the non-oil based sector for when the oil runs out.
So the gov't could spend when needed and stimulate demand without printing money and the negative effects associated with that.
So theoretically could you say maybe and not No?
I ask because the arguement is always that the gov't should not own any industry and let private firms do what they do best. This also might tie in to an ethics discussion I am having with methinks at the moment.

I don't know what you mean. It was an objective statement. When people consume less, aggregate demand drops. Dropping aggregate demand means people are consuming less.

“but that does not mean they are saving the money, they just have less”

Both happen, but more the former. Even at the height of the great depression, the vast majority of people were employed.

“Is this partly because gov't spending is included in GDP”

Not usually. Although monetary policy helps inflate a bubble, fiscal spending isn't typically a major contributor. It is the hope by keynesiacs, however, that government spending will move the GDP DURING A RECESSION not during a bubble.

GDP is a measure of transactions, not wealth. It is incorrect to think that every transaction creates wealth. During a bubble people are engaging in transactions that would be wealth generating IF the circumstances communicated by the signals were correct. But those signals are not correct, so those transactions are not wealth creating, as is eventually discovered with the bubble pops.

When people are free to trade and signals are mostly reflective of people's desires, then GDP, which is always an index of transactions, then also correlates with wealth creation. But there are important times when GDP correlates with wealth loss. One is during a bubble with those transactions reflect wasted effort. The other is when the government spends money, where those transactions reflect a cost of government.

“However won't the short run gov't spending cause some increase in demand where the money is spent, create false signals? So Keynesians claim victory?”

Potentially. GDP in the US went up last quarter, arguably a result of government spending. And keynesiacs do claim victory because they don't realize that the demand they are stimulating, and the GDP they are growing, is an ENTIRELY different thing than the demand and GDP of the productive economy. And worse, they come at the expense of the productive economy which must fuel their efforts. So keynesiacs claim victory for economic growth when in reality they've done exactly the opposite.

“can they spend without causing the normal problems associated with gov't spending?”

No. The high oil revenues can insulate against the early growth phase of government, but governments are characteristically insatiable, and will try to continue to grow long after the money runs out. And when the oil runs out (meaning demand for their oil steadily declines), they are left with serious social and fiscal crises.

If instead of fueling government, they allowed the money to all flow back to the oil industry and fuel it and ancillary industries, then the ancillary industries may provide a nidus for a non-oil-based productive economy. But having a whole economy dominated by a single product, let alone a single industry, is a risky affair.

I said “Isn't the cause of cutting consumption saving?”
You said “The aggregate demand drop is caused by people consuming less.”
was that meant as a postive statement?

if so….
It makes sense that people will consume less in tough times, but that does not mean they are saving the money, they just have less.

“Measures of economic activity, like GDP, reflect a false expectation of wealth creation.”
Is this partly because gov't spending is included in GDP, I mean the gov't spending does not create wealth just takes it from something that would have been more productive.
However won't the short run gov't spending cause some increase in demand where the money is spent, create false signals? So Keynesians claim victory?
Also something that may be off topic, but has been consuming my time is gov'ts that have state owned oil. Looking at Norway, Russia, Venezuela et al. if they have revenues from oil can they spend without causing the normal problems associated with gov't spending? For example a rich gov't could potentially keep taxes low because they have revenue from oil and not taxes. I can see how it would be difficult for a gov't with vast oil revenues to not keep expanding which is negative, but in theory could they spend stimulatin demand and not destroy wealth in other areas and keynesians would claim victory? I am curious about your thoughts here.

Thanks again.

Keynesiacs did not invent supply and demand analysis. Shifting demand curves is not a keynesiac invention. Nor is the PoT meant to explain it. The PoT merely says that the economy gets nothing for it–because “paradoxically” the presumed shift from demand to savings doesn't happen, since no aggregate savings develops. Keynesiacs argue the economy would be better off if instead people just kept doing business as usual.

But the economy does in reality get something from it. It does get savings, and it also gets the signals. And not least important, it gets a termination of destructive activity (see below).

The aggregate demand drop is caused by people consuming less.

“Austrian view is something to do with interest rates being low so the money is flowing into certain industries creating a false demand and then at some point we have to correct and we have a recession”

You are asking why we get recessions. They happen as many people realize that their activities are not productive, so they stop them. That could happen, say, if a giant astroid destroyed half of your country, and people suddenly realize that their interests are no longer best served by doing what they used to do.

But usually recessions occur after a realization that the signals they were responding to were falsely telling them what constituted a productive endeavor. That is a bubble.

A bubble represents a mistake–a misallocation of resources. People mistakenly thought they were laboring toward a productive end. Measures of economic activity, like GDP, reflect a false expectation of wealth creation. In reality, all of that activity is wasted–not only was it not creating wealth, but it reflects an opportunity cost as those people could have been doing something else that did create wealth. The result is that wealth declines. When people realize that, they rationally change their behaviors to amend it. The resulting decline in economic activity merely reflects the loss of wealth that has already occurred.

The Austrian view is that the keynesiacs and the monetarists falsely see the recession as the problem when in fact the recession is one of the effects of the problem. The recession is actual part of the solution–the market trying to fix the problem, once its confusion has been removed.

Then the question is what causes the problem–the problem being the misallocation of resources. That can be manifold, but typically is some government policy that interferes with the signals. You mention below market interest rates. That is both a cause and a potentiator for resource misallocation.

When a central bank lowers interest rates, it is NOT as though a helicopter dropped cash on the country (monetarist view). Instead, the central bank first gives newly created money to SOME small group. The money has almost the same value to that group as prior to its creation, since it hasn't yet been diluted. That group then buys things at full value. The value of those dollars (and of all dollars since they are interchangeable) gradually decreases as they percolate through the economy. Those who first get it are better off at the expense of those who last get it. That represents a transfer of wealth toward the central bank, without regard to productivity. That is a false signal away from productive endeavors. That false signal creates a misallocation of resources.

Low interest rates can also potentiate another misdirected signal. Eventually in a misallocation, the money must run out. It is not wealth creating, so there are not infinite funds for that activity. When that activity drowns out productive activities in the economy, the money must eventually run out, and the bubble pops. The sooner the bubble pops, the less wealth is squandered. But central banks create money and inject it into an economy allowing that activity to be temporarily prolonged (at additional expense, e.g. of inflation). Thus even more wealth is lost through prolonged misallocation, plus paying for the increased liquidity.

Not all demand is created equal. Demand can be part of wealth creation or wealth destruction. Keynesiacs don't make that distinction. That's why they are perfectly happy destroying an economy if they think it will get their unique aggregate demand curve to shift to the right.

And don't confuse this with charity or bailouts. It is true that in a recession some people may struggle with means for their own survival. The government stimulating their demand may put food on their tables. But that is an EXPENSE–it takes from the economy. It is not economic growth. However, when Keynesiacs talk about government stimulating demand, even though in reality it is the same costly activity, they falsely see it as growing the economy.

A recession is characterized by a drop in aggregate demand. But the phony–and costly–demand that the Keynesiacs shift to the right is a new different kind of demand that leaves the demand in the productive economy behind, and in fact forces it to shift further left.

“Isn't the cause of cutting consumption saving?”

I was talking about the response of businesses, which is not instantaneous. If you stop going to your favorite Saturday restaurant and instead save that money, there is first the delay before Saturday rolls along. Then there is the delay before your restaurant cuts consumption to its suppliers (and/or finds new efficiencies, new customers, switches consumption, etc). Then there is a delay as the supplier goes through the same process, and so on. During this whole delay as your decision not to spend on the restaurant percolates (as a signal) through the economy, your savings is sitting in the bank. At some later time, a business may, according to the PoT draw on that savings, but never until a transient increase in savings has occurred.

And of course in reality, as that signal percolates, some businesses will find *ways* to make up for some of the lost income OTHER than by cutting consumption or drawing from savings. So when savings does ultimately get drawn down, it is not the full savings you deposited.

And this is exceedingly important: the *ways* I marked above, ARE productivity. That IS the reconfiguration of the economy from past consumer desires to the new consumer desires. And that productivity only develops because the signals are allowed to reach them.

And the PoT is bunk because it unrealistically neglects those *ways* as alternatives to drawing from savings, even though all of those *ways* are more desirable and a greater priority to a business than the loss of savings.

Even cutting consumption is a greater priority. And the *ways* and consumption-cutting both produce signals which efficiently spread out through the economy to find productivity. That means that only a small percentage of businesses need to be able to find *ways* in order for the PoT to be false, and a new productive economy to emerge.

“It is particularly baseless in the short term, because of the delays between saving, cutting consumption, and subsequently drawing from savings.”
Isn't the cause of cutting consumption saving? Also I think that drawing from savings is cutting consumption, people consume less to not draw down their entire savings to rapidly. This affects aggregate demand.

Can we start with this and follow with more questions. Because…
“But if you don't move on, if you instead start asking questions about how realistic the assumptions are, you couldn't possibly accept it as reasonable.”

I want to move on.

Stealing is evil. Monetary inflation, since it is an act of stealing, is evil. Rising prices that reflect choices by voluntary relationships are not evil.

So rising prices may or may not be the result of an evil act.

Not all demand is created equal, and not all demand is good for the economy. The government is worse than ineffective at targeting the productive economy. Banks on the other hand, are restrained in the case of “mattress stuffing” not by reserve requirements, but by the difficulty in finding profitable investments.

The solution is not to lend that money to the government so that it can avoid all pretense of productivity altogether.
The solution is not to obscure and hinder the productive economy by propping up the nonproductive economy.
The solution is not to relieve banks of all incentive to find productive investments.

The solution is for the government to freeze, and not cloudy the water, so that the productive economy can declare itself.

And by “solution”, I am referring, in almost every case, to a solution to a problem created by the government.

More specifically, saving destroys income and doesn't even affect aggregate savings. The “paradox” is that no savings results from saving. Since to a Keynesiac the ONLY effect of savings is to destroy income, saving should not occur.

The problem with the PoT is that (1) savings does occur, and (2) much more occurs besides destroying income.

To someone who ever asked themselves what the nature of wealth creation is, the PoT is absurd. But Keynesiacs don't care about that. All they care about are drawing aggregate correlations and trying to effect change by pushing those curves around.

It is particularly baseless in the short term, because of the delays between saving, cutting consumption, and subsequently drawing from savings.

Don't be misled by it. IF people acted in a particular way in which it is physically possible for them to act, the PoT could be true. The trouble is, nobody in their right mind would think that people ever have or ever would behave like that.

I think that is the sophistry of the PoT. People don't see a logical contradiction in its description (there isn't one), and so satisfied that they've come to understand a basic principle of economics, they pat themselves on the back and move on. But if you don't move on, if you instead start asking questions about how realistic the assumptions are, you couldn't possibly accept it as reasonable.

What do you think creates that floor, the x-axis? You are right, it is a natural floor. It is a natural floor because investment tends to be infinite and savings tends to be zero as rates go to zero. That does not mean that Krugman comes along and draws a line cutting those curves off at the x-axis. It means those curves themselves are asymptotic towards the axis–it means the curves never reach zero. That means the I and S curves always intersect above zero. And that means the IS curve (plotted against GDP) stays above zero. That means that whatever quantity the L-preference plane is dropped at, it always intersects the IS curve at a point above a zero rate.

And ALL of that assumes the IS-LM model is anything close to a reasonable approximation to reality anyway. And yes, I know central banks can force a negative rate–but that is besides the point of where markets naturally clear.

Drawing X's on supply/demand curves is very qualitatively useful. But it only works as a linear approximation. Clearly as you draw those lines close to the axes, you are losing the linearity assumption and it is no longer reasonable. You can't just draw the curves willy nilly without regard to the natural restrictions imposed by zero values for price and quantity.

I think the missed opportunity was to interrogate him as to why businesses would first react to lost income by drawing from savings. Clearly that is the LAST thing a business would want to do. They would do other things, like SWITCH consumption, find new customers, and improve efficiency first, and then only as a last resort–and even after cutting consumption–would businesses draw from savings. And all of those other things increase efficiency and productivity while simultaneously allowing savings to increase.

And even IF the vast majority of businesses wound up doing the last resort–drawing from savings–this would only occur after a vast set of highly specific signals pervaded the economy in the form of all of those other things. Those signals would tend to seek out efficiencies wherever they may be. And those efficiencies are the root of the new productive economy.

And on top of this, all of that takes time to happen, which means there is at the very least a transient aggregate savings.

So yes, the paradox of thrift is absurdly unrealistic. That is, reality is more accurately modeled by assuming that the PoT is false.

As I have said before, my take on the Austrian BST is that centralized fiscal policy harmonizes market randomness into systemic events.

Loose monetary policy (easy credit):

1. postpones the failure of some businesses that otherwise would have failed in a random manner
2. stimulates the creation of businesses that otherwise would not have been created, in a shared time frame.
3. stimulates higher levels of investment than otherwise would've occurred, also in a shared time frame.

All this amounts to the creation of a bubble premature growth.

When the bubble bursts, the panic reaction of many investors causes a simultaneous reduction in consumption and risk taking (investment) which affects not only businesses which should have failed earlier, but also businesses which where otherwise in good shape.

This is not to say that fiscal manipulation is the only thing that produces synchronous reaction patterns, but easy credit under a central monetary authority is necessarily systemic and synchronizing in its effect.

Likewise, if the monetary authority attempts to contract the monetary/credit base, the effect is necessarily synchronizing in its effect.

You and the whole of the United States Government. Run – don't walk – and pick up a copy. Your analysis is wrong, but I give you full marks for trying. Keynes tried as well.