Managing a contracting economy

Discussion in 'Economics & Trade' started by Robert Urbanek, Jul 25, 2020.

  1. Robert Urbanek

    Robert Urbanek Active Member

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    Both neoliberals and conservatives are hopeful that future prosperity can be taxed to make up for the huge deficits being generated to bail out the COVID economy. But what if the economy limps along for the foreseeable future?

    Does anyone have plans for a permanently contracting economy? Some options: Reductions in salaries and/or hours worked and executive compensation to keep more people employed instead of laid off. Repurposing vacant properties: Converting, for example, office or retail space into residential use or indoor agriculture.

    Given that employees may have to move often to get new jobs as old ones dry up, traditional pension plans, already shrinking, could be replaced, perhaps by an enhanced Social Security system that includes larger copayments by government.

    High job mobility may also call into question the value of a home as an investment as frequent relocation costs would eat into equity. Medicare-for-all would also seem to be a more efficient than a system in which one constantly changes health plans, often with gaps, as one constantly changes jobs.

    Economic contraction will likely deflate high housing prices but the opportunity for young families to exploit that is sometimes countered by deliberate attempts to keep vacant properties off the market. Perhaps a tax on vacant housing would discourage that.

    Ultimately, the only way to pay off some government deficits may be through high estate taxes on the accumulated wealth of the rich.

    There may be a self-correcting mechanism. As the unemployed put off becoming parents, the contracting population will create labor shortages, which will raise wages. A similar trend, fueled by high parenthood costs, may have already been in place before the pandemic hit.
     
  2. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    It's my belief that if an economy is deflating, money should be allowed to deflate (at least a little bit) along with it.

    But the current going idea prevalent amongst the majority of economists (i.e. especially in the Fed) is that you should 'expand the money supply' (print more money) in response to an economic slump to prevent any deflation from happening at all costs, and even to keep a steady inflation rate.

    The problem, as I see it, is that the deflation may only be temporary, a part of an economic cycle, and so when you use inflationary pressure tools to prevent it, that inflation will later rear its head later after the economy begins recovering and wages try to go back up (to a point where they have similar purchasing power to before).

    In fact, it's government Central Bank policy that intentionally tries to keep asset prices from falling (in money numeric terms), but this policy makes it difficult for poor people to afford houses, and artificially inflates the stock market by using printed money for government to essentially buy up a big chunk of equity in the economy. Taking from the taxpayers and giving to the rich.
    I think many economists simply do not fully understand the effects of the policies for which they advocate.
     
    Last edited: Jul 27, 2020
  3. Chrizton

    Chrizton Well-Known Member

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    Lots of communities have dealt with this and there is no universal guidebook. What worked in my city might not work in yours because your local culture, attitudes, and assets may be different. Basically it is a lot of trial and error.
     

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