A Few Points On The Economy And Our Failing Economic Model.

Share Button

A commenter at IGF posted this:

One of my great frustrations in the debate regarding economics is the complete avoidance of some basic understanding of what it is. Economic activity is simply money changing hands. When money doesn’t change hands, the economy falters. When it does, it flourishes. It is hard to avoid value judgments about how it changes hands. (taxes, government spending) There is nothing wrong with money pooling into fewer hands at the top provided those hands invest it, create jobs, and increase economic activity. But that isn’t happening. And if those further down the scale have fewer discretionary dollars, the economy slows.

This is a basic reality. Now, is it preferable for individuals to keep more of what they earn to spend how they choose? Absolutely. But then we have a problem if they choose not to spend it. And I see no reason why they would choose to invest to make products no one can buy.

So cutting taxes sounds wonderful, but only on the proviso that the money continues to circulate. And it usually does that in high confidence times. This is why tort reform, slashing taxes, and cutting public payrolls sound great but have dire consequences unless the other half the equation holds.

Henry Ford famously doubled his workers salaries voluntarily “so they could afford the product they made” and it changed the economy locally. Things boomed without a government lifting a finger. Starving workers is great initially to the bottom line, but when people have fewer dollars to spend, just like the 2008 crisis, economic activity slows to a trickle and may even shut down entirely.

So all the talk about a business-friendly environment is great. But if there is no worker-friendly environment as well, no one will be able to buy the fabulous stuff they are making. Business people aren’t stupid, they don’t make stuff that people can’t or won’t buy.

And so here we are. Again.

Don… Yep.

In the current government / business paradigm we’re living under, the sacred tenant of policy is to make the investment community the top dog. As Larry Kudlow likes to say “Profits are King”.

Problem is, profit are going toward building more paper profits because it’s a much cheaper way to make profit than to actually spend the money on business and infrastructure.

Prime examples – The industrial spill in West Virginia and the recent rail car derailment in North Dakota. Now, had the companies invested in upgrading to safer technologies in each cases, they would have not only created more jobs, but also probably averted the disasters, or at least lessened the scope of them.

Why are both using older than dirt technologies? Because, even though both companies are very profitable, improving each would eat into profits, making the stocks a little less attractive and cut into profits.

Also, do you know why the Target credit card heist was so huge? Because the banks here in the US, who are certainly not hurting for profits, won’t spend the capital to move to newer, much more secure, credit card technologies that every other first world country now uses. Why… Because doing that, even though it would also create new jobs, would eat into their profits.

And the general public? Well, the boom years of the 80’s, 90’s and naughts were not a product of higher and better pay… Those booms were purchased on credit… Credit cards and home equity loans that is. The Great Recession took that away. The economy is recovering slowly because banks are not issuing credit quite as crazily as they did ten years ago. Of course, that also means that if something else happens that tanks this current anemic economic recovery, because the majority of the employed are barely scraping by, and there is much less credit leeway being offered, there is much less wiggle room for anyone to survive financially. Basically, we are running on an economic model that is poised to collapse rivaling the Great Depression.

Something has to change. And though many Dems don’t really have much to offer as far as economic structural vision goes, the path the Republicans want to not just continue on, but follow right off the proverbial cliff, is a road to disaster.