I’ve about had it with the inane theory that the lack of aggregate demand is the primary reason why we are now mired in the worst economic slump since the Great Depression. The latest bit of idiocy on the subject was offered up by Reagan/Bush policy adviser Bruce Bartlett in a New York Times commentary today that, when laid side-by-side with some of Paul Krugman’s writing on the subject (see here, here, here) is truly disturbing because, this “lack of aggregate demand” theory courses through all policymaking debate, on both the left and on the right, in Washington and New York.
The theory posits that it is not important what level of overall demand an economy has reached or how it got there, but that, when all the wheels fall off the wagon as they did back in 2008, the imperative is for the government to somehow restore that level of demand.
Otherwise, you get another Great Depression.
It makes no difference if, back in 2005, people making $40,000 a year were buying no money down $500,000 homes and then, after the home’s value went up to $600,000 in 2006, pulling out their $100,000 in brand new home equity to put in a pool, buy a motor home, and install big screen TVs in every room of the house because, once you reach a certain level of demand and it begins to drop like a rock because everyone has become indebted up to their eyeballs, it must be restored.
At that point, it simply becomes a question of how much taxes must be cut or how much money must be borrowed or printed to accomplish that goal.
Whether that level of demand was reasonable never seems to come up and the idea that we’ve come to the end of a 30-year debt binge in all areas of public and private finances – where the accumulated debt can no longer be easily serviced, let alone taking on new debt to fuel more consumption – gets only passing notice.
There are lots more examples of this here, here, here , here, here, here, and here, this unfortunately being another example of how conventional wisdom is often wrong.