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Originally Posted by Baraka_Guru
I don't see your analogy working properly. I think instead it would be like shifting the bell curve after an important mid-term test to prevent most of the students from dropping out and having the class get cancelled. Of course, the prof would then need to find ways to handle the class more fairly to prevent similar problems down the road, because she does, after all, have accountability to her department and institution. And let's say this class is an important prerequisite for future classes at higher levels too. There are rather dire consequences of having this class fail, and so something is done to prevent it from happening. Something went wrong---it could have been from both inside and outside forces---and so something was done to prevent widespread failure, and for the benefit of those not just in the class, but outside as well.
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Interesting. Do you assume the Prof had no prior experience with the method of grading? If he had, and this is the first class having a problem with the curve are you suggesting that he dumb down his methods? If the class or the Prof's approach is new I agree that fine tuning may be of benefit.
My analogy is simpler. Everyone knows the test is coming, everyone knows the importance, everyone knows the material being covered by the test - no surprises. However, the only surprise is after the fact when those who put in the work get screwed.
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Neither saving nor spending have any inherent value on their own. What matters is the balance between the two and their effects on the wider economy. Governments tend to want to influence this balance based on the current economic situation and the current business cycle. A particularly poor time to encourage saving is during a trough and subsequent recovery.
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It is my view that government fails when it attempts to influence the balance of spending and savings. Why didn't Canada have a banking crisis? Canada was not trying to influence spending on home ownership to the degree that it happened in the US. Canadian banks did not take on excessive risk, they stayed true to traditional and conservative lending practices. In the US, there were all kinds of forces in play, forces the government was trying to orchestrate.
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There are three reasons for this: first, you don't even have to encourage saving during a recession/trough/recovery; people are already in that mode because of fear.
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This assumes there is a surplus of income to save. Taxation takes income from individuals, lessening the ability to save and maintaining fear rather than reducing it. But, given the desire to save in times of fear, the initial impact is on discretionary consumption. Reduction in discretionary consumption hurts the economy. Going back to the tax question, it is clear that lowering taxes can be a benefit to the economy.
Second, without encouraging spending over saving, you get a logjam. You get companies who aren't performing well enough to build back their business to previous levels before the recession.[/quote]
With higher savings, and as you stated savings does not need to be encouraged in times of fear, interest rates naturally decline with higher savings rates. In this environment highly leveraged companies will see reduced expenses, in addition they naturally respond to reduced sales by lowering other expenses - this encourages efficiency by eliminating fat. To shorten a long story, a natural recession will be relatively short and not very extreme. However, if government trys to micro-manage the recession you can expect they will get some things wrong and make conditions worse.
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Third, there are many companies who aren't even seeking more investments or loans because they don't even need them. Look at how many companies are sitting on a shitload of cash right now. They're doing this because they're uncertain about future performance, i.e., sales/revenues.
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It is small companies that fuel real economic growth. It is true S&P 500 type companies are hoarding cash, but small businesses have been frozen out of capital markets and can not get needed funds to grow.
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So, no, saving isn't a bad thing, but we don't need to encourage saving right now; we need to encourage spending.
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There is a step in between, lending. As stated above, banks need to have loanable funds. This comes from savings. Banks then need to loan those funds to businesses needing to grow. Or, as in some situations with venture capitalist - savers go direct to the companies needing money. Savings can be leveraged in the economy, I believe this leverage is more impaction than Keynesian style government fiscal spending primarily because government is more prone toward "make work" projects (i.e. paying person A to dig a hole and person B to fill the hole).
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You're thinking about one-trick solutions? No single thing will be enough, which is why you have to look at multiple things. I'm not suggesting the Bush tax cuts are going to be enough to solve the budget problems, but it's one piece of the puzzle, and it's measured with a significant number of zeros.
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When spending is controlled real economic growth will take care of the budgets and deficits. Similar to dieting, at some point you have to consume fewer calories than you take in, to lose weight. My one-trick solution is let the market make its own adjustments, government should be neutral.
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It's nothing more than an acknowledgement that cuts to health care are essentially cuts to the economy. The government as customer shouldn't be overlooked in a fragile economic recovery. Are cuts to Medicare not essentially the government reducing its spending as a customer of health care? Do you think it's a good thing for customers to cut their spending during a recovery?
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Regarding health-care individuals need to be able to measure the benefits against the costs and act accordingly. If you pay for my prescriptions, I have no incentive to lower costs. If I pay, I do have incentive. For example with high blood pressure a person can take a pill and eat like a pig or a person can eat a proper diet and not have to take a pill (I know some people have to take pills regardless but some can control blood pressure through diet and exercise). My point is that if you hide the costs, controlling the costs is going to be more difficult than it needs to be.
I do think it is good for consumers to reduce spending during a recession. I see it as part of a natural cycle. Interfering with the natural cycle will make things worse.
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If they're sitting on so much cash, give them a reason to spend it. Encourage Americans to do business with them. This has little to do with whether the tax cuts expire.
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The problem is with the entire tax code. The problem is bigger than the Bush tax cuts.