Re: Refuting supply-side economics

From: Some Guy (bc76_at_midmaine.com)
Date: 09/22/04 

Date: 22 Sep 2004 14:09:49 -0700

>
> "crowding out" is an inappropriate term. Hummel has uttered no falsehood
> in his presentation. But the real characteristic that prevents this
> "crowing out" is that money can be created at will by the government and
> the Fed (the two can be looked at somewhat synonymously). But Mr.
> Hummel does not do justice to the "if government preempts labor and
> material". As the Fed raises interest rates the attraction of bonds
> will increase and money will move from capital investment/speculation
> into bonds. One might call this a "crowding out", but it seems a
> misnomer.

I don't think 'crowding out' is a bad term, neither is 'pricing out'.

'Capital' includes real capital ( stuff ) and financial capital (
money ). Financial capital is the most widespread vehicle for the
movement of real capital between investments. When an investor
invests financial capital in some project, the money buys real things
which are put to use in the project. The money stays in the financial
system, but the real capital stays put. It is what is really
'invested'.

Money has no use outside of it's buying power. Because of this, it
practically always ends up back in the financial system no matter how
it is spent. But the buying power of money depends on how much real
capital is available per dollar in existance.

Given a constant money supply, a decrease in available real capital
caused by investing it in projects is inflationary in general. Only
when the investment eventually enables production of other real
capital is that decrease in real capital paid back - but not
neccessarily in the form of the same kinds of real capital that was
originally invested.

For instance: Investing land in milk production decreases the supply
of land in relation to other commodities like money. This is
inflationary with respect to land prices. But after some time, milk
production increases which pushes the price of milk down with respect
to other commodities like money. If someone invests in a cheeze
factory, then the investment of milk is inflationary wrt milk prices,
but the production of cheeze is deflationary wrt cheeze.

The inflation is up-front. The deflation comes when and if production
ramps up.

If the government buys half the cement that is produced by existing
production equipment in a year then it has an effect on the price.
Any other investment project requiring cement that would not be
profitable at the new higher price of cement will have been 'priced
out' of existance. By increasing the price of cement by using so
much of it, the govenment has reduced the profitability of cement
requiring investments but increased the profitability of cement
producing investments. Those cement producing investments then
compete with other projects for the resources needed to produce cement
pricing some out.

Of course any investment that is not able to provide a better return
than treasury securities is 'crowded out'. But 'pricing out' also
happens when inflationary government spending makes projects that
might have been more profitable than treasury securities, less
profitable. Of course investing in the means to produce the
resources the government wants to buy becomes more attractive.

If the military found it could make radar invisible coatings for the
navy ships out of dried milk, and started soaking up half the milk
production for that purpose, then the prices of milk and cheeze, and
eventually land would rise, with cheeze producers possibly going out
of business.

Existing clearcuts might not be replanted with trees, and instead used
to grow hay for dairy cows.
The rise in wood prices might eventually be passed on to consumers
through a rise in paper, furniture, or heating costs. However leather
and meat prices might fall.
McDonalds might have to absorb a half-cent added cost for each
cheezeburger it sold for the more expensive cheeze, but if the price
of the patty fell by 2 cents, then it would be doing well. Although
maybe the added price of land would have priced wheat farms out of the
land market ( or caused them to convert to dairy farms ),and made the
buns more expensive...

It's hard to trace the effect of government spending and it's
impossible to know what resources would have been invested in had they
not been crowded or priced out.

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