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economics questions(13 posts)

economics questionsDougSloan
Oct 6, 2003 6:29 AM
It's been a long time since college economics, and I had a communist (yes, really) for a professor.

It appears to be self-evident that the economy of any country requires spending, or transactions, for it to thrive. At logical extreme, if everyone stayed home, spent no money, didn't pay their bills, etc., the GNP would be near zero and the economy would bust.

However, is all spending the same? Does it make a difference who is spending, on what, where the money ends up, how it's taxed, etc.? If NASA spends a dollar, is it the same as me spending a dollar? I can understand that net dollars leaving the country could be harmful, at least short term, but isn't that potentially a long term benefit if it creates new markets?

Fundamental question: "Is all spending created equal?"

Next question: Is spending the ultimate measure of the economy, or is it really productivity? How much wealth is being created per person? Is there a difference?


Also, what kind of spending are you doing?Kristin
Oct 6, 2003 6:46 AM
I think there is also a diffence in whether your spending cash or building debt...and what type of debt. The level of high-interest, consumer debt being accrued is frightening to me. It seems like a house of cards. Then again, I don't know much about the economy. But is consumer borrowing--for depreciable items other than car or house--ever good long term? For the individual or the economy collectively? Pehaps I should rephrase that. There are times that borrowing for depreciable items makes sense, and you so do it even when you could pay cash. So lets call it, "spending outside your means." I'm talking about buying that new sofa at 19.2% because you CAN'T afford it otherwise.

I guess I benefit from the current consumer debt situation. If there weren't for the number of people spending unwisely, the banks would never offer incentive cards. I have a free credit card that my bank actually pays me to use. I get 1% cash back and don't care a balance on it.

Sorry Doug. I hyjacked your post kinda. We now return to normal programming...
Oct 6, 2003 7:09 AM
I'm sure that matters long term, mainly if people can't pay it back or if they are so burdened with debt that they can't spend money on anything else.

Judging from my personal experience in my college/law school days, I didn't mind it so much then because I always assumed that I'd be making more and more money in the start of my career, so the payback would come in terms a much smaller piece of my pie. That turned out to be true, but then you can't plan on that scenario continually, and you need to stay lucky to avoid a problem. Now, I borrow for house and cars, but that's it. American Express (paid off every month) or cash for everthing.

Also, borrowing now is almost "free" in some senses. I refinanced a car at 3.2%, which is probably right at inflation. It barely adds anything to the principal payment.

Borrowing for something that appreciates or stimulates the economy, whether for the country or personally, could be good. If I don't have a job or a suit to interview, and I borrow for a suit and then land a job, obviously that was good. If the government issues bonds to build something that stimulates the economy, then that is good.

Borrowing at 6% to build a $40 million apartment complex where you get a 10% return on investment, plus accrual of equity and appreciation is good, assuming you keep rents up.

What isn't good, I think, is borrowing generally with no connection between the borrowed amounts and the expected returns. Borrowing, whether national debt or personally just because you can't support your lifestyle spending is probably not wise.

So, no, I definitely don't think all borrowing is equal.

I promise I won't hijack your post.53T
Oct 6, 2003 7:29 AM
No, I don't belive all spending is the same, but it is very close. You ask the question near the end of your post: "How much wealth is being created...?" This is of course, the central question.

We do not do enough is school or is public discourse to explain the concept of wealth creation, and it is NOT an easy concept to grasp. When I buy $50K of lumber and a $100K house lot, build the house and sell it for $400K, I have created some wealth. I haven't simply traded goods and services at fair market value, I have majically created more real value that the sum of the parts, including the labor.

(As an aside, CEO's get in trouble when they confuse wealth creation with the fair price of labor. Wealth creation is the propoerty of the investors, and has nothing to do with the CEO's labor spent creating that wealth.)

The same thing happens when you build and sell cars, stereos, etc. But what happens when you clean carpets? You invest on equipment, you spend money on supplies and the helper's salary, and you charge a fee. You even charge enough to put some in your pocket, sometimes you pocket more than the fair market value of your labor (now you are middle-class!). Is this wealth creation, or is this simply a transfer of wealth from the carpet owner to you? Here a real debate can be conducted. Perhaps an undergrad seminar. It is clear that this carpet cleaning fee counts in the Gross Domestic Product calculations. The guy who dirtied the carpets may have made his money manufacturing airplanes, and certainly that money was counted toward GDP, now it is being counted again.

There are many who have preached that the US has to adapt to a service economy. Others argue that there is no such thing, that without manufacturing there is no wealth creation and therefore no sustainable CAPITALIST economy.

As far as NASA goes, anything touched by government is a wealth transfer program. I'm a conservative, so I have to say that. ;)
All spending is sort of equal,TJeanloz
Oct 6, 2003 8:02 AM
GDP = C + I + G + NX

Where C is consumer spending, I is investment, G is government spending and NX is net exports. So, in a sense, the spending works out the same.

However, it is generally assumed that a Government can't spend money as efficiently as a Consumer. The consensus is that if the government spent $100 and a consumer spent $100, the consumer would get more for their money. The result being that if you have the choice between the Government buying something for a consumer, or a consumer buying it for themselves, you would be better off giving the consumer the money than the good.
HA! I was worrying the same question this weekend.OldEdScott
Oct 6, 2003 8:06 AM
My thought was: This is a gigantic zero-sum game, within the nation's borders/citizenry. People complain about government spending, but vitually every dollar the government spends in America ends up in the hands of an American company or an American citizen (or THROUGH an American company to an American citizen.)

Like the corporate profits WE bietch about. Eventually, those dollars go back to Americans.

I think the disagreements we have involve where money PAUSES. We're arguing over temporary situations.
Of course, you are a communist53T
Oct 6, 2003 11:39 AM
ANyone who believes that the US economy is a zero sum game would naturally have no intrest wealth creation, since there would be no such thing.

Spending by the government is what people complain about, but what hurts us is taxing by the government. As we know, a huge fraction of federal tax goes directly to tranfer payments, i.e. poor people. That's what pisses of working people.
And poor people's money gets spent, immediately.OldEdScott
Oct 6, 2003 11:59 AM
It doesn't even pause! The government just facilitates their spending. It goes where all other money goes, to businesses/other people. To YOU, presumably, if you're in the investor class. What's the big deal? Let the good times roll. As long as poor people don't receive enough money to become investots themselves, they are naught but REAL FAST conduits.
Good Point (nm)53T
Oct 6, 2003 12:57 PM
but where does money "sit"?DougSloan
Oct 6, 2003 3:09 PM
If I get money and stick it in the bank, the bank uses it to loan to other people, right? Bill Gates' money he "parks" at Microsoft employs thousands of people and provides a product for about 99% of the country. So, unless you are hoarding cash and stuffing it under the mattress, when is money really out of circulation?

It doesn'tTJeanloz
Oct 6, 2003 3:41 PM
Money has what is aptly called a velocity - how fast it gets churned. Even money sitting in a mattress acts to change velocity - because by taking it out of circulation, there is less money going around to make all the transactions. This gets to be an issue when you consider the billions and billions of dollars stuffed in coffee cans in $100 bills in third world countries. There is a huge amount of US currency in the world market that will never be spent in the US - it was effectively just pulled out of circulation.

The more efficient the economy, the higher the velocity of money. The US has a very big velocity. Low interest rates, and some other monetary policies have served to make it go fast. The bottom line is that money never goes out of circulation, and even money that does make its way out, effects the circulating money.
your prof would say there is a difference.dr hoo
Oct 6, 2003 8:22 AM
Marxists put the REAL economy squarely in the province of capital... the means of production. Any spending that increases the means of production is good. Any reduction in the means of production is bad. Spending on commodities is rather neutral.

In terms of GDP, all spending is pretty much equal. In terms of FUTURE GDP, the type of spending matters much more. If 50% of GDP was on ice cream, that would have some rather negative effects down the (rocky) road.

I do think that GDP is probably the best macro measure of the economy AS A WHOLE we have.
1% for peace...53T
Oct 6, 2003 11:35 AM
...and 50% for ice cream! Ben and Jerry would be estatic.