Posted by
BECOLBY on Saturday, February 14, 2009 7:08:08 AM
So what is the real difference between the Republicans and the Democrats when it concerns how to get the economy going again? All bickering about pork aside, there is a real difference between the two parties when it comes to how to “prime” the economic pump.
First a quick lesson on basic economics. The economy consists of two types of units, producers and consumers. Producers produce products and the consumers consume those products. Simple enough? There is one final part of this equation that makes it all work. How do the producers produce these products and how do the consumers earn the money they use to consume these products? Well the consumers supply the labor used to produce the products and in doing so they earn the money used to consume the products. It makes for a closed loop or what is known as the economic cycle.
So if the economy is in a recession, then production and consumption are down. The question is how to get them going full speed again. Do you give money to the producers to help increase production? This will cause an imbalance in the supply and demand ratio. An increase in supply will cause a lowering of prices. A lowering of prices will cause an increase in consumption. Add to that an increase in production will create an increased need for labor (more jobs) and an increase in consumer wealth. All in all a good thing.
So what happens if you give the consumers more wealth? This gives the consumer more consuming power, and IF they increase their consumption, that will cause an imbalance in the supply and demand ratio also. However it will cause an increase in demand that will cause an increase in prices. This increase in prices will cause the producers to increase production and once again all is good.
So kiddies, did you notice the two major differences in where the money is interjected into the cycle?
First, if the money is given to the consumers, they may just hang onto it or they may pay down existing debt. You see consumers are not concerned with cash flow. They have no payrolls to pay; they only have to worry about monthly debt. So there is the first flaw in the Democratic idea. If the money is given to the producers they will use it to increase production and thus increase cash flow. There is little incentive for producers to hoard money. You need to use money to make money.
The second problem is that by increasing consumption, you increase prices. By increasing production you lower prices. These changes in prices will eventually be balanced out by the invisible hand of the free market system, but at least for a short time, the Democratic idea will raise prices. Add to this that the US will more than likely have to increase the money supply, we are heading for inflation again. Can you say President Carter?
So I ask again, why am I the only one noticing this?