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One serious economic theory states there is a 'business cycle' [1], where the economy varies between doing well and doing badly every, say, 5-10 years. Keynesia
by michaelt 4y ago
One serious economic theory states there is a 'business cycle' [1], where the economy varies between doing well and doing badly every, say, 5-10 years. Keynesian economists [2] think the government should dampen these cycles by saving up a war chest when the economy is doing well, and spending when the economy is doing badly.
After all, if there's a Great Depression and you build the Hoover Dam, you get a big discount on the construction because nobody else is building - and you get 10,000 jobs for people who would otherwise be idle.
So the idea of targeting a given amount of growth, pressing the throttle on the economy when below that and the brakes when above it, is a well established notion.
Of course, these days in practice election cycles don't match business cycles, and there ain't no way Party A is building up a war-chest so Party B can deliver tax cuts, or vice-versa. And if a sector of the economy - like house prices - is overheating, the government is as likely to cut taxes to help out buyers, as it is to raise taxes to reduce price growth and build up a war chest.
[1] https://en.wikipedia.org/wiki/Business_cycle https://en.wikipedia.org/wiki/Business_cycle
[2] https://en.wikipedia.org/wiki/Keynesian_economics https://en.wikipedia.org/wiki/Keynesian_economics
- boppo1 4y agoWell that makes a lot of sense for fiscal policy, but what about monetary policy? A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" This seems wholly and obviously short-sighted to me. Where does the theory address whether those jobs create anything worthwhile? Inflated valuation of suboptimal or unprofitable business? These are really elementary questions/conclusions to explore: Iirc Keynes said you could jumpstart an economy in the short term by paying people to dig ditches and fill them in[0] and watch a local economy pop up to support that 'industry'. What if doing so doesn't help the other primary activities and you just wind up with a ditch-digger economy? You're wasting resources on useless work. [0]The actual quote is about filling jars with money, burying them in a mine, filling it with garbage and paying people to dig them out. I'm no bitcoiner but I had a chuckle about the guy who hired people to recover his hard drive from a landfill.
- michaelt 4y ago> A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" [...] Where does the theory address whether those jobs create anything worthwhile? Economics 101 books assume every business is a medium-sized family-owned manufacturing company. If you're a medium-sized family-owned manufacturing company, your growth might be constrained by access to capital - there might be several different investments in machines you could make, any of which would pay for itself within ~5 years, but you've only got the cash to get one machine. With more access to capital you can get a second machine, and hire the people to operate it - meaning more jobs and more profit. And of course you'd steer clear of unproductive investments, short-term-ism and empire-building - you're planning to pass this business on to your children and grandchildren. You need a sustainable 10-to-20-year outlook, reliable, well-trained employees and an order book full of satisfied, profitable repeat customers. On the other hand, if your business model is 1. Use cheap loans to provide subsidised taxi journeys, 2. ???? 3. Profit - the economic theory books don't really explain that.
- boppo1 4y agoRight, I think we're on the same page here. My underlying assertion is that the overall policy impact is more prevalently phenomena like your last paragraph than the first three. Surely the policymakers have observed or predicted this and are operating on theory more sophisticated than macro 101. What is that theory?