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Trickle Down, Keynesian Economics, and Say

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5/10/2014 8:56:03 PM
Posted: 2 years ago
My knowledge of economics is very limited, and as a person who will eventually be a voter and active participant in the economy, I need to expand my knowledge. So this post will not be making an argument I'm prepared to defend, it's mostly just some questions for you more knowledgeable people to answer.

So, the question is:
Can't the Trickle Down Theory work with Keynesian Economics and Say's Theory? To believe in one or the other doesn't automatically mean I don't believe Trickle Down could work, does it? And while we're at it, what are your thoughts on the legitimacy on Trickle Down Economics?

As I understand it, Keynesian Economics are about two things. 1) Circulation of money. Economies only stay healthy if money is being frequently exchanged between consumer and producer. My knowledge of Keynesian Economics is limited to things I have read out of my AP Euro textbook, which involves post WW1 recovery efforts, and Great Depression recovery efforts, both of which included a massive increase in state deficits as they attempted to get money flowing again with a great number of state-enacted programs. And, 2) a focus on demand side in economics. Basically, a healthy economy has demand influencing production. So if things aren't selling, it's because people either don't have the want for those things, or they don't have enough money for those things.

My understanding of Say's economic thoughts is that production increases demand. If you make things, people will want them. This doesn't make sense to me, because what if someone just makes a really sh*tty product? If there's no demand for it, it won't be bought, no matter how much you supply it, and thus the economy suffers.

When I learned about Trickle Down, it was associated with Say. The idea was that when you cut taxes on the rich, they'd have more money to invest in the economy, and thus produce more, which, under Say's logic, increases demand.

But I don't see why Trickle Down isn't compatible with Keynesian Economics. Let's say you cut taxes so rich people can invest more. Under Keynesian Economics, they'd use their money to increase production for what there is demand of.

That is how I see things currently. So if you actually took all the time to read that, please do enlighten me, because I think I'm missing something.
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5/25/2014 4:39:25 AM
Posted: 2 years ago
In my opinion all/most economic have some usefulness and truth to them. However, trick-down is more based dogma and keynsian is more based on reality.

As regards to cutting taxes increasing a recession there are too many people saving, so cutting taxes gives people more money to spend. However, government expenditure is more effective because if you give people tax cuts they will only spend a portion of the tax cut. Yet, if the government taxes people/borrows and spend money all the money is spent.

Also, rich people tend to save more than more people (who have to spend everything to get by) so tax cuts to the rich are even less effective than to the poor. I am just talking about a stimulus to get out of a recession. I am now economic genious but have taken some electives in college.
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5/25/2014 4:57:36 AM
Posted: 2 years ago
A few concepts you need to understand. Here's what a supply and demand graph looks like.

What's important is the quantity produced. Now you can do this one of two ways. You can shift the demand curve to the right (increasing demand), or shift the supply curve the right (increasing supply). The supply curve is shifted to the right when the cost of production is lower.

You don't increase demand through increasing supply, however you do increase the quantity of goods and services.

You'll also notice that increasing demand too much increased P (prices), leading to inflation if supply does not keep up with demand.
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5/26/2014 1:08:00 AM
Posted: 2 years ago
A few things you should keep in mind about Keynesianism:

1. More money circulating through the economy does not necessarily mean better outcomes for the people in the economy. For example, a higher percentage of our adult population works today than worked at any point from 1945-1971 and the average worker works longer hours than they did during that time, despite the recession and growing retired and disabled populations, mostly because more married women have entered the workforce. As a result, people eat out a lot more frequently than they used to and couples spend a higher average percent of household earnings on childcare. Since a lot of that eating out is fast food that's less healthy than most home cooked meals, eating out more has not helped people, but since people are paying people to cook for them instead of doing it themselves, more money is changing hands. A much higher percentage of degrees go towards child psychology, social work, education, etc., meaning a lot of parents who 40+ years ago would have stayed home with their own kids are instead going to work taking care of other people's kids while paying someone else to raise their kids for them, which is probably not their ideal outcome, but it does mean more money is changing hands. The fact that more people are working for pay and are purchasing things they used to barter for/provide for their families without exchanging money does not mean people are better off, but it does mean GDP is higher.

2. How government spends money determines how effective it is. When government spends money on corporate subsidies and bailouts, most of that money ends up going to the top earners in society. When it spends more than it receives in taxes and has to borrow money and pay it back with interest, the wealthy investors who buy up most of that debt make a profit, and again the wealthy benefit. So Keynesianism often is trickle down economics whether it's taxing the rich less or not.

3. Similar to the last point, not all government spending is created equal, even in the same area of the economy. Building a highway between two major cities will create more trade and tourism opportunities and likely pay for itself in little time. Building a bridge to a tiny island in Alaska with no major industry will cost more than the opportunities it creates. One will increase our economic wellbeing over time. The other will reduce it.

4. How much demand is good depends on how much is available to supply. When we're currently experiencing climate change, deforestation, desertification, and loss of biodiversity due to overconsumption of resources, when some of our best farmland is experiencing major droughts and loss of groundwater and topsoil due to overuse, the idea that more demand will solve problems that are being created through overconsumption is absurd.

5. Similar to the last point, when Keynesian government spending to increase demand causes society to distribute its reasources in ways that are inefficient, it can be bad for the economy. The US spends the same amount on the health care of its 18-65 year old working age population as the average European country, but we spend twice as much on people age 65-75 and 3 times as much on people 75+, making our overall health care spending twice as high per person as the average European country. Spending more of our health care resources on people who will never work again no matter what we spend on them does us no good in the long run, even if it increases GDP because more money is changing hands. In the 1950s-60s we spent a bigger percent of our budget on infrastructure and a smaller percent of our budget on retirees and the disabled than we do today, and spending on things that pay society back worked for us then, while spending on things that will never produce a return on our investment today is not helping us at all.

The biggest problem with Keynesianism, Say's, and supply side is that they all focus too much on money and not enough on resources. When people spend money in a market, they spend it on goods and services, which rewards people who find ways to produce goods and services and keeps society productive. When government spends money, if it spends it on things that will increase productivity sustainably, it will improve society's wellbeing overall (sometimes more than that same amount of money moving privately through the market). When government spends money on things that don't increase our ability to provide for people, it wastes our resources and leaves us worse off.