"Heavily tax the rich, that'll solve everything".

glennmagusharvey

Uh, if you're investing it in bonds or stocks that would be your bonus, dude.

BonSequitur

Well, the trickle-downists would argue that most cases, what is in the best interest of the rich people who just got a tax break will lead to more employment. They might not directly pay their workers more, but they'll invest more and spend more which would heat up the economy, etc. So the benefits are driven by that elusive deity, rational self-interest. This isn't really the case, of course.

CommandoDude

In reality. Investment is driven by DEMAND not supply. People will invest when there is a demand for a product. If they don't have the money then they get a loan. Having tons of supply does not drive the market.

Of course, there is very little demand in America because the middle class can't afford to spend.

Chagen

....Actually, I see what you mean. Giving tons on money to companies (through tax breaks) wouldn't do anything--why make tons of supply (and therefore hire more people) when there's no one to buy? That would just be a waste of resources, encouraging companies to just sit on their asses....

Anyway, there's no real way to increase demand besides people just wanting to buy more stuff. So I guess we must simply tough out rough economic times?

glennmagusharvey

If you can make lower- and middle-class people wealthier, they'd be more inclined to buy stuff and actually help get the economy going.

For lower-class people, this is most likely going to be necessary goods.  Such as buying more food, clothing, stationery and school supplies, and such.

For the middle-class, you have the above PLUS more discretionary spending on entertainment and luxury items, like games, vacations, restaurant patronage, and specialty goods.

Chagen

But how does one do that without screwing over business (since they make the supply to satisfy the demand) or causing inflation?

BonSequitur

How would tax reform that makes the poor and middle class consumers have more cash screw over business, in and of itself? It would be good for business as there would be more demand.

And, if inflation is getting to be a problem, then you don't need to heat up the economy any further and the inflationary pressure can be corrected with monetary policy.

glennmagusharvey

> But how does one do that without screwing over business (since they make
the supply to satisfy the demand) or causing inflation?

That's the trillion-dollar question.

I think it's better to prevent economic catastrophes in the first place than to try to fix them.  Fixing them is far costlier than preventing them, both in terms of dollar amounts spent (if you think trillion-dollar budgets are big, think about how much money the entire U.S. economy would have made if it didn't grind to a screeching halt during the past four years), and in terms of the health of the overall economy (such as, as you note, it's a bad idea to just print money and give it to people).

You need to figure out how to make people forgo short-term gains that will lead to long-term losses.  Here's one example: Many of the subprime mortgages were written by loan officers who were paid bonuses for each mortgage they could get.  What's this incentive structure?  Pretend you're one of those loan writers.  Won't you try to get as many customers as possible?  I mean, the more customers you get, the more mortgages you write, the more money you make!  So you keep going, writing loans for riskier and riskier customers with less and less stable financial circumstances, basically running on the assumption that ever-rising property values will ensure that even if things go wrong, you'll still get your money back.

How would we fix that?  You could say, well, let's make a rule saying that loan-writers can't get paid bonuses for writing more loans.  Well, who's going to enforce this rule?

You can't exactly trust a loaning company to do it themselves--after all, the more customers they have, the more interest rolls in, the more money they make.  Can you trust their competitors?  Well, if everyone's already doing it, they'll all just turn blind eyes to each other ("if you don't call me out, I won't call you out either").  Now, sure, they're going to run afoul of this stupidity at some point, and you know it's going to happen, but just letting them fail is not an option either since many other individuals and companies invest in these companies, and there's basically a complex web of people giving each other their money and trusting that they'll be repaid in the future, preferably with interest.  If you just let them crash and burn, they're gonna take the whole economy with them.

So you need some sort of neutral third party that has the authority to say, "Okay, we have a rule here: Don't do this."  And what do we call a society's rulemaking and rule-enforcing entity?  We call that government.

There's nothing special about "government".  It's just a term for people getting together to decide what the rules are, and how the rules are going to be enforced.

Of course, catastrophe prevention is itself not a very intuitive thing.  See, we as humans don't like to deal with problems.  We like to put things off until we absolutely have to.  This means that there is inevitably going to be some short-sightedness going on.  And it sometimes makes me wonder if we need one hearty crisis every generation to kick our asses and remind us not to take things like our lifestyles and institutions for granted...

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Now, let's get back to reality: In the meantime, while we have a problem on our hands to be fixed...yeah, lemme think about that for a bit.