Calafia Beach Pundit

As a supply-sider, consumer spending is not just one of the plain things that I pay a great deal of attention to. Spending is the by-product of production, so it is easier to know whether jobs are increasing or likely to increase, and whether people will work harder and/or more productively, than it is to learn how much people are spending. As the past due Jude Wanniski used to state, as a country we can’t spend our way to prosperity.

It’s amazing if you ask me, really, how much attention people and government authorities pay to spending, as if it were truly the key to prosperity. How do we grow the economy by spending more? Common sense lets you know that the economy can only just grow by producing more. 10/hour employee into enough food to give food to 100 people each day a whole great deal of things would happen. To start with, food would get a complete lot cheaper, and that would allow just about everyone in the world to invest additional money on things apart from food. A lot of the people used in the food-production business could devote their energies to other pursuits instead. Some could build me an office.

Others will make more food machines. Others could deal with all the amount of money I made, by investing it in new startups. Etc. They key to all these changes would be my invention, which allowed one worker to become more effective greatly. Back again to the chart above. What it shows would be that the downturn in spending has been much deeper (with the negative growth lasting longer) than in other recessions.

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But it also implies that the turnaround has been nearly as sharp as in other recessions, hence my claim that this is a V-sign. The turnaround has nothing to do with cash-for-clunkers, since that washed out of the numbers by the finish of October (i.e., some spending was accelerated, followed by some payback). On balance, or real spending increased in 5 out of the six months closing, and it increased at a 2.6% annualized rate in the four a few months following the likely end of the downturn in June.

This recovery will likely be a little different from past recoveries, however, because the downturn was precipitated by a major shock to confidence, and that subsequently resulted in a sudden pullback in spending worldwide. So, to the degree that confidence returns-and there are several signs that it’s returning, if for no other reason than that the world didn’t end as everyone feared it might-spending is actually a leading indication of improvement. Skeptics claim that fiscal stimulus is accountable for the improvement, but I’ve been highlighting evidence all year long that confidence was returning which was a very strong discussion for a recovery.

Those are big macro variables that depend for a lot more than the meager amount of stimulus that has come from Washington. Looking ahead, I start to see the economy continuing to develop by 3-4% or so. That’s not a very solid recovery given the depth of the tough economy, but it is much more than most people are forecasting. Growth is likely to be driven by increases in productivity, something that is very evident in recent months, and by the natural growth in the number of people entering the workforce.

Over very long periods, productivity tends to average about 2% a season, while the work force tends to grow about 1% a yr, so add the two together and also you get a 3% baseline for growth. But if that’s all we get, then it means that the overall economy is going to have a great deal of unused capacity and lots of unemployment. In an average recovery, productivity tends to be very strong coming out of the recession, due to strenuous efforts for businesses to spend less and wring more work out of the smaller workforce. The recovery then strengthens and extends as businesses spend money on a new place and equipment and hire more employees.

What could keep development from being solid during this recovery is poor investment. The Obama administration has shown itself to be very hostile to capital, and the chance of trillion-dollar deficits for as far as the eye can easily see makes everyone fearful of higher taxes rates on work, investment, dividends, and capital. As Art Laffer always says, if you tax something more, you are likely to get less of it.

To make the fallacy of Keynesian pump-priming apparent, take the analogy for an extreme: you can’t make an economy grow by borrowing money from the ones that are working and giving it to the people who aren’t working. I’m very inspired when I see that, after a big lurch to the left earlier this year, the politics pendulum is now swinging back to the right.