Nick Rowe Is Puzzled by the War on Demand...
NR:
Worthwhile Canadian Initiative: The War on Demand, and the short-side rule.: Paul Krugman thinks the War on Demand is strange. I think it's weird. But I've got a different take on what's happening.
Let's start with some very basic theory. It takes two to trade. A buyer and a seller. If the buyer is willing and the seller is willing, there's a trade. If the buyer is not willing there's no trade. If the seller is not willing there's no trade. Quantity actually bought and sold is whichever is less: quantity demanded; or quantity supplied. Q=min{Qd,Qs}. That's the short side rule. The short side of the market determines the quantity traded.
Most people figure this out.
Now look around. Not just here and today, but anywhere, at any time. (OK, maybe not Cuba or North Korea.) Everywhere you look you see people trying to sell more. If you want to buy something, and are willing to hand over the money, you can nearly always buy it. The seller is almost always able and willing to sell you one. Very willing. Would you like to buy two? The short side of the market is nearly always the demand side.... If you increase quantity supplied, without increasing quantity demanded, nothing will happen. But if you increase quantity demanded, even if you don't increase quantity supplied, the quantity bought and sold will increase.... The policy conclusion is that we should almost always increase demand, at least a bit. It will almost always make us better off....
[W]hat's really strange is that we could ever get people to believe that demand is not the problem. For decades my job has been to teach students that, despite the evidence of their senses, and contrary to their hearsay of the heretical teachings of the Keynesian Cross, aggregate output is basically supply-determined. Which it is. Basically. Though short-run fluctuations in demand can and will cause short run fluctuations in aggregate output around an average level that is determined by the supply-side.
And, for once, the memories of their parents are actually supporting me in my job. Look what happened in the 1970's, when demand increased. Printing too much money and increasing demand really did cause inflation. It really didn't make us all richer. It didn't reduce unemployment. Now, just for once, we have to switch gears. These times are not normal. Just for once, the demand side really is the problem. Just for once, the overly obvious truth your senses are telling you really is the truth. Just for once, your parents' experience of the 1970's doesn't apply. Just for once, it really is OK to have a drink, even though you are a recovering alcoholic.
