Over the past year, we have seen various stimulus packages in an attempt to re-energize the economy i.e. the cash for clunkers, bank bailouts, individual tax credits, and the housing stimulus tax credit. An article I read introduces the idea of stimulating the supply of goods, not the demand. It talks about how consumers have unlimited needs and wants, so the demand for a product is always there. It is in the supply of a good, more specifically the price of a good supplied, which deters one from purchasing the product. "Supply stimulation is achieved through the transfer of productive assets from those who paid too much, to those who can put the assets to profitable use at a lower purchase price." What this means is that instead of sitting on abandoned homes and idle manufacturing plants, the assets need to be sold at a loss to someone who could create the product at a market-clearing price. "Through the creation of supply at lower prices, demand is stimulated."
Although I see the logic behind the author's reasoning, I am not fully convinced supply is the answer to solving an economic recession. According to a recent Gallup poll on consumer confidence, the demand for products has decreased dramatically from a $116 3-day rolling average in September 2008 to a $52 3-day rolling average in September 2009. That is a decrease of over 50% in spending per person on a 3-day average. Prices may be too high; agreed. But even people who have not been affected by the economic hardship are still skeptical on spending. Even if the supply has reached a market-clearing price, less people are inclined to demand products. Only at market equilibrium can supply and demand be maximized. And if one is able to produce supplies at a lower cost, then more power to them. However, it will not cure the lack of products demanded.
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