I decided to write this because I am getting extremely tired of people complaining about the crappy state of the economy. I have had multiple discussions with people (most of whom trying to convince me I'm wrong rather than listen to what I have to say) and everyone seems to be convinced not only that the economy is in a dire state on the brink of collapse, but that they have the problem nailed which is why they are voting for candidate x because x can fix it.
Now, right here I'm gonna use a lot of economic lingo thats gonna sound like nonsense to those who dont study it, but its necessary.
Looking at the definition of a recession, we see that the combination of decreases in aggregate demand or aggregate supply culminate ultimately in the GDP falling below the long run aggregate supply, or long run equilibrium as defined by full employment of the economy, in what is called a recessionary or contractionary period, aka recession. When looking at the four factors that can cause a decrease in aggregate demand, consumption, investment, government spending, and net exports, we can obviously conclude that investment has decreased a lot due to a drop in the demand for houses. In looking at the three stages of the aggregate supply curve, we see the classical range, the normal range, and the Keynesian range. So we have seen a decrease in the aggregate demand such that it has slid downward along aggregate supply curve. The question to really look at in defining an economic collapse is seeing how far down the aggregate demand has slid.
Well the classical range, being on the high end of the curve, is a period where prices can change without productivity changing. Does that sound like something America has been experiencing in the past 10 years? It can only reach this point during a time of heavy inflation. Energy prices skyrocketing, food prices going up, land prices increasing heavily? I've heard more people complaining about corporate profits than about environmentalism lately.
The second phase is the normal range where prices decrease as production increases and vice versa.
The third phase is the Keynesian range where we observe that productivity can change without prices changing. This is the range that is characteristic of a downward economic collapse.
The last time we have observed the economy enter the Keynesian range is the Great Depression. Lets talk about that for a second. There were long lines to get your ration of food for the day, people killed themselves over historic price drops, less than 50% of the people in the country had a job, you had to conserve everything or else you couldnt get by, and all of this was the norm for the people of the US.
Does that sound anything like today? No because our economy has not collapsed and is not collapsing. A recession is necessary in order for our economy to cyclically operate around long run full employment. Lets look at all the great things:
For one, who is psyched about falling gas prices? I know I am. The value of the dollar will now increase, the budget deficit (I hope) will start balancing due to cutting government programs, and we will see overall decreases in prices throughout the economy. Makes me want to go out and spend personally.
So we are seeing a movement along the short run aggregate supply curve down from the classical range into the normal range, where the economy is actually supposed to be, and a nice healthy recession to change up the state of the economy. The reason it is such a big shock to people is because due to actions by the Fed, recessions have not happened for like 70 years. When one finally does, its gonna be a lot of recessions waiting to happen at once.
I have been saying this stuff for weeks, but never really taken the time to explain in this detail. Candidate x, unless the candidate calls for eliminating the IRS and the Federal Reserve, cannot "fix" the economy because not only is there nothing wrong with it (yet) but the idea that the president could fix it is absurd because the economy will do what it does regardless of government action. Notice how the $700 billion plan was almost completely ineffective. The economy will develop on its own without our helping it.