Paradox times 2

Referring to the Jerry Seinfeld quote below, how is the economy any different?

Think back to the Paradox of Thrift mentioned in the 7/14/13 post on "Effective Demand" .....
The paradox implies that more saving will actually hurt the economy, causing national income to fall, and ensuring that households (in the aggregate) will earn less and thus, save less. The intent to save more (i.e., consume less, pay off debt, etc.) means that aggregate saving falls so people, in general, end up saving less, thus the paradox.

It's the same story with austerity programs. The intent to reduce the deficit (by raising taxes, lowering government spending, or a combination of both) will reduce aggregate demand/spending and hurt the economy by causing national income (and output) to fall. Since deficits automatically rise during recessions*, policies to reduce deficits and debt will actually cause the deficit to rise.  Same paradox!

* see post above

Jerry Seinfeld

"We're all just kinda going along with this 'paper has value' scam."
                                     
                                                                                 -- Jerry Seinfeld

Embedding has been disabled for this video but I highly recommend that you watch 

the preview above, and then follow the link below for the full video.  

The Seinfeld quote above is at 4:01.

http://comediansincarsgettingcoffee.com/seth-meyers-really

Krugman and Unemployment

Excellent presentation on how unemployment is measured.  Link is from the Krugman blog.

There Is No “True” Unemployment Rate

Effective demand

If your answer was "b" to the last post, you're correct!  Answers a, c, and e are equivalent, and all will equal more saving.  More saving (less spending) will hurt the economy.  If you're not sure why, just google the "Paradox of Thift" concept, and see the "aside" below.

Keynes is well-known for the belief that spending drives an economy, and is the reason for my use of his quote in the 7/7/13 post below.  Any type of spending --- household, business, government, or foreign --- will all work, though certain types of spending might have a larger ultimate effect.

Though Keynes is often credited with advocating government spending, in fact, he proposed that private sector spending (mostly household + business) was/is preferable for reducing unemployment.  The point is that, in his opinion, spending (i.e., effective demand) is what moves the economy the most.

An aside:
Do keep in mind that I'm talking about the entire economy from a macro perspective, not whether a household should or shouldn't have saving and debt-reduction goals.  Saving is indeed good for an individual household, but if all households decide to save more, the economy will suffer as a result. 

Multiple Choice

In your opinion, which of the following will boost the U.S. economy the most?

a.  saving
b.  spending
c.  buying stock
d.  foreign travel
e.  debt reduction

Keynes

Recall the famous John Maynard Keynes quote from The General Theory of Employment, Interest, and Money that refers to unemployment, "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again ... there need be no more unemployment [emphasis is mine] and ... the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.  It would indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."                          

                               

                                                                            Source:  Google Images

Unemployment, U.S. vs. Europe

Sometimes, a picture is worth a thousand words, and other times, numbers are. Consider the following:

                         
      Unemployment rate                              U.S.                    Europe


              4/2010                                        9.9%                    10.1%

              4/2011                                        9.0%                    10.2%

              4/2012                                        8.1%                    11.4%

              4/2013                                        7.5%                    12.2%

                                                                                           Source:  BLS data