Sunday, February 09, 2014

Say’s Law Holds True - Eventually

Paul Krugman’s Jan 16th column lamented a recent re-validation of Say’s Law in regards to Europe’s recovery from America’s 2008 stock market crash.
His juicy quote was from François Hollande, the president of France: “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”
Krugman reference another site (blog) that drew the same conclusion on Say’s Law.  Here I learned Say was French, and that Say’s Law is taught as gospel at the college where Hollande went.  I couldn’t believe it:  Says Law is still taught – and not just mentioned like the old theory that the world is flat and the center of the universe – and Hollande had a college education.  Say's staying power is still being discussed, follow along with Google.

What Krugman and Francesco Saraceno, the other economist whose site is hyperlinked above, don’t get is that Say’s Law will hold true.  Supply will create a demand in the long, long run.

Supply does create demand – eventually – but it will be a sluggish, struggling economy, which by the way, we may very well be seeing lo these five and a half years from the last crash.  Current economic reports are showing Say’s Law doing its best.  A subsistence economy is all the supply siders are going to get us. 

Basically, those that have been able to hold on to a job and feel they have weather the economic recession will venture into the economy and make necessary purchases to sustain their subsistence position.  It’s not much of an economy but it is Say’s at his best.

If supply side economics was effectively valid, merchants should act like it is December all year round.  Increased inventory, employees, and hours, plus bargain   prices and sales specials would create the annual Christmas demand all year round – that is if supply created the boom in sales at the end of the year and not the demand.  The annual Christmas business boom is Keynesian demand and not Say’s Law of supply side economics. 

In the U.S., social security, welfare payments, unemployment relief, food stamps, and all the other government assistance even including Obama’s underfunded stimulus package kept the recession from becoming Great Depression II.  Times have changed since the Great Depression and the constant and automatic government payments affect the economy in ways the latest pundits fail to notice.

It’s the demand not the supply that counts.  If you have the means to produce supply, which in the current political fashion is referred to as “job creators”, you would be stupid to invest in today’s economy.  Hold your money, put it in derivatives, invest off shore as one notable presidential candidate did, but do not invest it in developing supply until the supply side economy slowly, sluggishly turns around.

As long as the U.S. and Europe stay with Say, we can expect only a subsistence economy.