Tyler Cowen possesses a intuitive grasp of economic concepts which may sometimes elude the rest of Us. He has a series of Posts which take some translation for those of Us who must endure with less education and brilliance. Here is a Post on general substitutability of Product, where people has alternate levels of desire for Product. Prices are set by this competition of desires for Product, which in aggregate should make the process simple. It is far from that! People have different patterns of desires, have different levels of Product fulfillment, and their own desires for Product differ from factors of their own Income, level of previous gratification, their channeled buying patterns of purchase and repurchase, and their own level of debt. Traditional economic theory has always suggested that aggregate purchase patterns cancel out these effects, as there is always alternate Product desire. We are finding this not to be the case, and find little example where it has ever proven true.
The above discussion becomes pertinent when discussing the methodology of handling the current financial and economic crises. The first has incited the second, though Tyler thinks it is a continuing shock propelling the economic crisis, while I have some doubts that it is still the problem. The initial financial shock was the inability to get continuing funds from failing financial institutions, not exactly the levels of debt; something which had an impact on the later economic crisis and on the financial crisis, but in varying level and scope. The real drive behind the economic crisis remains the altered desire of Consumers for Product, faced as they are with both huge debt and lack of viable Credit. The fact which is reality, though most economists would deny it, consists of the reduction of desire for all and any Product not necessarily committed to the maintenance of their current lifestyle. Here is the real drive behind the economic crisis today, and the one which economists find most hard to amend.
Scott Sumner’s easy money will not be the Solution, what with Tyler’s statement that there was a profound loss of money velocity. Neither deal with the real lack of desire for Product, which is the underlying force behind the economic crisis. This is why I called for a serious reduction of the levels of personal Income tax yesterday; an attempt to get unfettered funds into the hands of the Consumer. The reason I use the term ‘unfettered’ is simply to say that there is already too much Consumption debt, and too much financial paper out there; the basic reason for the alteration of Consumer preference which We face. I called for the increase in business taxes to start to eliminate all those Middleman Paper Profits which have inflicted huge Product Costs, and all of the snarl of the financial crisis. Readers can find huge numbers of Business and Economic critics of this position, but it may well prove the only real Solution to both crises. lgl