The Anatomy of a Maladjusted Economy -- Credit Bubble Bulletin, by Doug Noland

PrudentBear.com ^ | 12/6/02 | Doug Noland

[Age of Reason]

I think you still need trickle down. My aging parents put siding on their house, hired interior painters and poured a large driveway in the the last couple of years. They provided substantial income to at least a dozen or so people. They could probably put a few more people to work if the government didn't tax them so much.

I've been thinking about what causes business cycles.

I suspect that like monopoly, money accumulates in the pockets of a few people, until the majority of people have little or no money to spend.

Then we have a recession.

So rather than give the winners of the last cycle more money still, the solution would be to give it to the losers of the last cycle--the below average earners, the poorer the more they should be given, because the poorer they are the faster they will spend it and get the economy jump-started.

It would be foolish for the winners to complain, becuase they own, have investments in, or are employed by the busnesses the poor people will be spending their windfalls in.

How could the winners object to a rise in retail sales and a dropping inventory that will increase production?

[A. Pole]

What's needed, is trickle up.

Trickle up economy?

[A. Pole]

As far as i'm concerned the poor can either get off their sorry butts or lay down in the street and die.

He, he. You sound like a Communist provocateur.

[marbren]

I am having trouble visualizing the future for the USA. If we took over ruling the entire planet would this be positive or negative for US citizens. (Note I don't care what the rest of the world thinks.) At some point does China tell us what to do? Would a $20K debt today be only $2K in the future because of hyperinflation? If I have no mortgage will the government tax me out of my house and why?

[garbanzo]

I suspect that like monopoly, money accumulates in the pockets of a few people, until the majority of people have little or no money to spend.

Rather than namecall, I'll point the fallacy above. It's well know as the finite pie analogy or more formally as zero-sum analysis - specifically that there's only a limited amount of money floating around and that consequentally a gain for person X is a loss for person Y so eventually a small group of people wind up with all the money and most people have nothing.

But economics is based on exchange - I give money in exchange for goods and services. The net value of the exchange is in fact positive rather than zero-sum as described above if you count the added utility of the goods and services I received in exchange for the money I gave up. This is fundamental fact underlying all economic decisions - am I better off with the money or with the good and services it can buy? I use the goods and services to build things or create new services or invest it with people who do, the whole exchange is more positive than if I simply did nothing with the money.

Which brings us to the next point - economic policy favoring consumption vs. production. Another key economic fact is that production must precede consumption. I can produce goods which aren't consumed, but I can't consume something that hasn't been produced. So an economic policy which favors consumption at the expense of production is simply doomed to failure. Taking money from the most productive to give to the least productive is favoring consumption of goods over the use of money to produce good and cannot work in the long run.

[marbren]

If it cannot work what happens?

[A. Pole]

Taking money from the most productive to give to the least productive is favoring consumption of goods over the use of money to produce good and cannot work in the long run.

I see three problems with what you are saying. First transferring resources or money from the more productive to the less productive happens and must happen all the time - for example children or very old people consume and do not produce.

Second the most productive people cannot consume all that they produce.

Third those who own the most are not necesarily very productive. Gifted speculator or usurer or even highly paid CEO might be quite destructive. There were societies in the past which collapsed because of excessive stratification of wealth.

[marbren]

What happens to people when society collapses. How close is the USA to collapse.

[garbanzo]

See Cuba, North Korea, the USSR, much of Europe, etc.

[Age of Reason]

production must precede consumption. I can produce goods which aren't consumed, but I can't consume something that hasn't been produced.

You can produce whatever you want--but if no one has the money to pay for it, then what?

Seems to me that money shopping for goods precedes wise production of anything.

Unless you intend to give your production away.

Taking money from the most productive to give to the least productive . . . .

It is no more true that people are poor in proportion to what they produce then it is true that people are wealthy in proportion to what they produce.

[marbren]

Should we take over the world?

[A. Pole]

What happens to people when society collapses. How close is the USA to collapse.

America is too strong and vibrant society to collapse. A serious crisis will force some changes to the rules of game. And being a world leader has the advantage that no outside power will be able to dictate the disadvantageous course of reforms.

[marbren]

I wonder if the DEMOCRATS have the answer?

[A. Pole]

I wonder if the DEMOCRATS have the answer?

Not at this moment. But I would bet that the smartest among them try to figure out something quickly. The party which comes first with a solution will have a lock on power for a generation.

[garbanzo]

for example children or very old people consume and do not produce.

This is interesting point. For most of human history children did produce - it's only in modern society where children are largely unproductive. However, children now are more of an investment (from a purely economic sense of course) - which is why education policy is so important. If the returns on our investment are poor - then society won't be able to sustain itself. As for the old, it's generally assumed that they've been productive for most of their lives so on the whole they have produced more than they take. However, as evidenced by forecoming problems with the social security system, both here and in Europe, there is a limit on how much wealth transfer can be made.

Second the most productive people cannot consume all that they produce.

Well that's why they sell it or invest it. People can only consume if producers produce surplus and make it available. When economic policy eliminates the surpluses of the producers nobody has anything else - nothing to consume and no capital for productive use.

Third those who own the most are not necesarily very productive.

While it's possible to bluff your way to a high salaried position, in general you're found out and your income receives a "correction". Societies collapse for a number of individual reasons - but excessive wealth stratification is usually accompanied by other problems such as a lack of free markets and political repression. It should be noted that most socialist regimes had a good deal of wealth stratifaction - the leadership had a lot of stuff but everyone else had nothing.

[ex-snook]

THIS IS THE GREAT WASHINGTON OOZE TALKING

 

"Pay no attention to the jobs economy "
"It's the war on Saddam, stupid."

"I will at this point interject some data from today’s disappointing employment report. The Goods Producing sector lost another 40,000 jobs during November, increasing eight-month losses to 332,000. That so many producing jobs have been lost in the face of (ultra-easy Credit-induced) booming auto and home sales is further evidence that something is amiss. To those that continue to trumpet the “underlying soundness of the U.S. economy,” we suggest digging "

Maybe it's time to startup the draft for jobs and sell War Bonds to pay for being the world's police dog. The country has fallen apart since President Reagan. In the sad shape he is in, he is probably better for America than anyone since. The country is going broke with trade agreement giveaways and military commitments. Russia went bust ignoring their domestic economy, we should learn.

[garbanzo]

You can produce whatever you want--but if no one has the money to pay for it, then what?

Historically, trade preceded the invention of money. People trade time and effort for money for example - people can just as well trade time and effort for goods and services. Money provides a convenient means of assessing relative value and makes trade more efficient. However, the key point is that even if people have money, if there are no goods to buy, the money is worthless. The only way there can be goods to buy is for someone to produce the goods. If you make it not worth his while to produce, nobody has any goods they buy no matter how much money they have. On the other hand, producing goods no one can buy is a waste of resources and effort - but buying goods which don't exist is a logical impossibility.

It is no more true that people are poor in proportion to what they produce then it is true that people are wealthy in proportion to what they produce.

This simply isn't true. Otherwise high skill jobs wouldn't demand high salaries. More productive workers get higher pay as they help create more goods for sale and employers want to keep them.

[A. Pole]

Societies collapse for a number of individual reasons - but excessive wealth stratification is usually accompanied by other problems such as a lack of free markets and political repression.

If there is a great disparity in wealth - the richer people can corrupt the government and as a result the market will not be free and political repression will follow. Have a look at Latin America.

It should be noted that most socialist regimes had a good deal of wealth stratifaction - the leadership had a lot of stuff but everyone else had nothing.

Uncomparably less. The proportion between those on top and bottom could be maybe 10 to 1 or in VERY RARE cases (some artists allowed to travel abroad, leading physicians or in form of hidden perks for the top aparatchics) maybe 1 to 50 at most. But never, ever something approaching the ENRON type of disparity. And we do not count the multimillioners who do not live out of their salaries.

[garbanzo]

If there is a great disparity in wealth - the richer people can corrupt the government and as a result the market will not be free and political repression will follow. Have a look at Latin America.

The problem is in identifying cause and effect - in virtually all cases, the political system is corrupt long before the extreme disparities in wealth. What most Latin American countries have had since their inception was in effect an oligarchy - not a liberal democratic capitalist system - on occasion the oligarchs change but the usual thing is to preserve the power of the oligarchs whoever they might be a given point in time.

[A. Pole]

The problem is in identifying cause and effect - in virtually all cases, the political system is corrupt long before the extreme disparities in wealth.

This is a chicken egg question. Either way the huge wealth disparity gives those on top the means and incentive to manipulate political system. Emerging global class of owners might be virtuous or virtuous to the same degree across the borders.

What most Latin American countries have had since their inception was in effect an oligarchy - not a liberal democratic capitalist system - on occasion the oligarchs change but the usual thing is to preserve the power of the oligarchs whoever they might be a given point in time.

Can a republic survive extreme unequality? At the beginning of Rome - the majority of population were independent farmers interlocked into close knit extended families and clans. At the end of Roman Republic the people were much more atomised and stratified. Later Rome to survive had to import foreigners since native Romans lost will to reproduce.