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Be careful when you read people talking about aggregate demand shortfalls. When you hear it, they are about to recommend expansionary fiscal or monetary policy to “reinstate” aggregate demand. But demand is not demand is not demand. Remember your micro. How do we define demand? It is both your willingness AND ABILITY to pay for something that determines your consumption patterns. So, demand can fall either because our feelings change or because we are unable to purchase things that we nonetheless like.

Some folks, who shall of course remain nameless, would have you believe that these two aspects are unimportant. If demand falls, it falls, and therefore to prevent employment from falling and prices from falling “we need to do something.” Of course, maybe the baby-sitting co-op problem illustrates a demand drop due to being spooked, but demand can fall because we are poorer. And if demand falls because we are poorer, then it makes no sense to suggest that we can stimulate aggregate demand – that is the same thing as saying that printing money and governments spending money ipso facto creates wealth. That is of course ludicrous. So much of the macro disagreement you are reading about may in fact be between those of us (like me) who understand our current aggregate demand “shortfall” to be a result of us being poorer than we used to be and those who believe we are all just spooked and hoarding our incomes.

Yes, I am leaving out some other stuff.

5 Responses to “Macroeconomics (is) for Dummies”

  1. Speedmaster says:

    >> “aggregate demand shortfalls”

    I cringe when I hear someone say that. Brings me back to my high school and undergrad Keynes indoctrination.

  2. RIT_Rich says:

    “And if demand falls because we are poorer, then it makes no sense to suggest that we can stimulate aggregate demand – that is the same thing as saying that printing money and governments spending money ipso facto creates wealth”

    But isn’t that what, at least politicians or layman, believe?

  3. Speedmaster says:

    I think many people still believe we can spend/consume our way to prosperity.

  4. Harry says:

    I just saw a clip of Gene Sperling, doing a big power point presentation; this segment was about the Yugo, no, the Volt, and Gene was doing a convoluted dance to explain how printing money and favoring debtors is a new idea. Speedmaster, WC and Gene went to Amherst together, but WC spent more time in the hard sciences building, not to mention in the field house, practicing punt returns for the Big Game with Williams.

  5. Greg says:

    I always understood the crux of the stimulus argument to be that, on short time scales, printing money does in fact create wealth, because prices don’t adjust nearly as fast as we’d like.

    Even if the intuitive aggregate demand argument is bogus in principle, we shouldn’t write off a possibly good idea because people support it for bad reasons.

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