Isn't investing in bonds putting money to work in the economy? And how does the government really stimulate demand? Nobody demanded an IPhone before it existed. Good products stimulate demand.
production creates demand. Not because people want to buy it, but because the act of production gives you something to trade.
The people who build iPhones (Apple employees) produce something valuable (iPhones). Everyone else has to produce something to trade for an iPhone - a bushel of wheat, a written work, a clean window, a haircut, a night of entertainment.
The act of production and trade is what creates wealth and economic growth.
People get lost and separated from this basic understanding because if you create and give everyone money, then everyone can go and trade the money with Apple employees for an iPhone. But this is not long term sustainable, and you actually cheated the Apple employees because the money they are getting is worth slightly less than when they set out to build phones. And it's clear that the extra money has not made the world as rich as it would have been from people actually producing something else to trade. This is patently true even though the mythical gdp number went up, giving the illusion of an increase in wealth.
> production creates demand. Not because people want to buy it, but because the act of production gives you something to trade
What are you describing is called Say's Law. There's various ways it can be false, and the US economy experienced lots of them.
An example of how production does not create demand: people can save money for the future. A person who wants to save more will produce more (work harder) and reduce their spending. If everyone does this simultaneously, we get a glut: supply exceeds demand, and real production will fall.
Note the simple remedy: give everyone money, everyone can increase their savings, and resume their old level of demand. Here money did increase real output. And (even in your example) everyone got money, so the Apple employees were not cheated. Lost real income from iPhone sales is compensated by the additional money they received.
Of course I know it is Say's Law. My purpose here is to post it for people to understand the principle.
Giving everyone money does not work. You can only increase the size of the economy and wealth of the people within by producing more. That much is self evident, yet people have been bamboozled by muddied thinking that aggregate demand is all. I don't try and convince the hardened Keynesian thinker with Krugman in their favourites, but merely to explain to people who instinctively know that current macro thinking is broken, but haven't worked out why.
I'm not sure where you're going with that. Ok, so we become wealthier if we produce more. The next question is, how do we shape public policy so that our economy produces more?
If you tug on that rope, you find that supply is connected to demand, and demand is connected to things like the money supply. So choosing the correct money supply can increase real output.
I think you're arguing against a strawman, something like "if you give everyone money then we'll all be richer because we have more money." But nobody's saying that.
Here is the mechanism that will fully elaborate brc's point.
Elderly consume more than they produce. The young produce more than they consume to save for retirement.
A lowering of interest temporarily induces additional borrowings which will be invested in capital in the short run. Inefficient companies that were going to go bankrupt and release their physical capital for more efficient use, will be kept alive, staving off job losses.
In the long run, low interest reduce elderly's income on their savings. Reducing elder's income reduces demand for the goods the young produce. Since the young cannot produce at a loss, they produce less and have less income to save with. The causes reduced savings, which in turn means reduced investment, and thus even less spending, less income, which means deflation. This deflation is further enhanced from the increased supply caused by the increased investment in capital when interest was first lowered. And if you keep lending to companies at near zero interest rate with money from nowhere, increasing inefficiency in capital means lower yields in stock markets general, also lowering income in the long run, and lower job growth.
The Fisher equation[1]: Nominal interest rate = Real interest rate + Inflation.
The initial thrust of lowering interest will boost the economy temporarily. Keep down nominal interest rate long enough, and the economists will get the deflation they so dread.
Now you know why the EU and the U.S. has trouble with lack of inflation "even though" interest rate is so low for the past so many years.
The whole point of Keynesian theory is that, in times of economic contraction ('a glut' in the old money), you should borrow from the future and buy things - any things - now.
You could make the argument that buying worthwhile things - like dams or power stations - makes this true. But for two things : if it's worth building a dam for positive return, you should do it at any time, as soon as you can. The second is that governments do not spend money on buying good things. In 2008/9 they spent money buying and crushing old cars, which is about as close to paying people to dig holes and fill them in as you can get.
The believers in 'aggregate demand is all' absolutely do believe that giving people money makes us all richer. They may not say it like that, but that's what they mean.
Bonds are government debt. When you buy a bond, you are giving the government your money now in order to receive a return on that money later, with the expectation that the government will do something useful with the money in the meantime. So if the government is allocating its budget well, then yes, purchasing bonds is a good thing. If it is not, you are making a bad loan to someone who may not be able to pay you back in the future.
Government stimulates demand by investing in sectors that have huge up-front costs but large positive social externalities over time because the lifespan of a gov is much greater than that of an individual or corporation. It invests in infrastructure - the national grid, highways, roads, prisons, the post office, mortgage lending, insurance - most importantly though, wars, education, and healthcare. Many of these industries have become increasingly privatized over the past 30 years. This is not inherently bad, but it changes the profit time horizon and shifts incentives away from long-term investment towards short-term profit maximization.
iPhone would not exist without the development of the internet during the cold war on gov grants, the affordability and draw of public UC Berkley where Jobs and Wozniaki met, people alive and well-fed enough to buy it, etc. You can't point to a single innovation without looking at the entire fabric of the society that produced it. Gov spending has huge impact on social fabric. iPhone is also only one half of equation. If no one has the disposable income to buy one, it doesn't matter how good it is.
> iPhone would not exist without the development of the internet during the cold war on gov grant
Isn't that a bit of a broken-window fallacy, though? We can see that the iPhone exists, and we can see that it exists in part as a result of the State grants which funded the development of the Internet, but we can't see what that money might have funded had it not been spent on those grants. We have no way of knowing what the original earners of those dollars might have chosen to invest them in, and what the world would now look like had they been free to do so.
We do know from history that while socialist economies like the USSR and its satellites did indeed tend to improve their economies measurably over their pre-socialist levels, freer governments tended to improve their economies to an even greater degree, leading to exponential quality-of-life differences over the decades. The average Russian was better off in 1989 than he would have been in 1913, as was the average American, but that average American was so much better off than the very best-off Russians that Boris Yeltsin was converted simply by seeing a Houston grocery store[1].
I love the Internet deeply, and I'm glad that government grants financed the research which led to it, but I wonder what else I might have had if those grants had been spent otherwise, just as a Russian in 1989 was no doubt glad for what he had — and amazed when he saw what he could have had.
People who actually believe that wouldn't say "politicians", they'd use some other euphemism, because they believe in some abstract trustworthy organization that's always being hampered by those damn politicians.
Statists love their euphemisms:
“investment” instead of “government spending”
“shared sacrifices” instead of "wealth redistribution"
"government officials" instead of "un-elected bureaucrat"
and lastly,
"public sector" instead of "The State".
My irony detector has just exploded. Can you direct me to a completely-unregulated minarchist free-for-all market where I can buy one that merely poisons me and everyone in a hundred-mile radius? Because at least it would actually work.
The poisonous version was cheaper to make than the non-poisonous one, last I heard. So the company decided to go with poisonous ones in order to meet Q4 financial goals.
I didn't claim my language was "straightforward", any term we use will carry bias. That's how political language works.
"Investment" automatically biases you to think that said spending must have a net-good result. Calling it "Government spending" predisposes you to think about the price of said action.
Biased language is always annoying to the other side. When I hear the liberal euphemisms I groan as strongly as I suspect most liberals groan to my dysphemisms.
If you said libertarians love their dysphemisms I wouldn't hold it against you.
Hah. Someone should write a bot that evaluates trite simplistic aphorisms (regardless of sarcastic or whatever) and replies with something like "real life is more complex" or something of that ilk.
> And how does the government really stimulate demand?
Building things (roads, spaceships, bridges, etc), funding things (medical research, education, etc) and other obvious things. Low interest rates make longer term projects much more viable.
