How to get the economic recovery on the right track

July 3, 2011

The economic recovery turns 2: Feel better yet?

As pointed out in the above article, the economic recovery is going nowhere good. The working class continues to suffer, while most of the economic gains over the last 2 years have gone to the wealthy. Workers’ wages and benefits now make up only 57.5% of the economy, down significantly from the 70-year norm of 64%. Meanwhile, the wealthy are mostly back on track, as most asset classes have gained back all of their losses (and then some) from the financial crisis of 2008. Stocks are up 90% from the March 2009 lows, gold is up 100%, oil and other commodities are way up. Unfortunately housing — the last asset refuge of a withering middle class — is still down and continues to fall with no rebound in sight.

The problem, at a 30,000 foot level, is the lack of economic velocity. Velocity is the rate at which money is exchanged, from buyers to sellers. When velocity is high, the economy is good — lots of people employed (sellers), lots of consumer confidence (buyers). When velocity slows, so does the economy in general. Consumers aren’t buying, so sellers can’t sell anything. If we all bought and sold each others’ farming goods, then the slowdown wouldn’t hurt that bad — we could all just consume our own farmed goods, no need to sell to another. However, our modern economy doesn’t work that way. I think only about 1-2% of the population are farmers. The rest of us do some other job, and we rely on our income in order to have money that we can exchange for necessary goods, like food, clothing, and shelter. When consumption (velocity exchange) slows down, it’s a symptom of lack of money, which is a symptom of lack of income, which is a symptom of a struggling job market. And the stats support the thesis: unemployment is very high at 9.1%, and workers wages are down a troubling 7% from their stable historic norm.

This is why a healthy job market is absolutely critical to the health of a nation’s economy, and more importantly to the well being of its people. People without jobs lack the means to acquire money, and money is necessary in order to receive a share of the nation’s food supply. Way back in human history when mass food production began — when one farmer could not only support himself but also hundreds of his fellow men — governments were created in order to manage how food was distributed throughout the society. Other members of society, now free from cultivating food themselves, could branch off into other endeavors, like science, engineering, architecture, arts, etc. Efficiency improved, society thrived, technology advanced rapidly, and the rest of it is the history of human achievement…

(btw, advanced food production, thanks in part to the abundance of large domesticated animals, was one of the fundamental reasons why Europeans came to dominate the globe, rather than Africans, Asians, or Native Americans. Read Guns, Germs, and Steel to find out why (that book ought to be required reading for every high schooler, imo…).

Nowadays, in order to partake in the nation’s food production, you must have money, which means you must have income, which means you must have a job (unless you have disposable assets to sell, which most people don’t). When people are out of work, the economy (and the nation for that matter) is failing to do what it needs to do in order to support its people and distribute the goods.

Of course, if you’re rich, and you have lots of assets at your disposal, then the struggles of the lower classes may not bother you all that much. In fact, you’ve probably suffered a great deal of ideological capture, where you believe that you deserve your wealth, that it’s yours and yours alone, and as such the govt has no right to take it from you via taxation. It’s an easy argument to make logically; however it usually leaves out the part where your claim on those assets depends in large part on the govt recognizing that they are, in fact, your assets. Unless you have your own army to defend your home and your wealth, then you depend on the govt to do that for you. When you add that salient fact into the mix, the “what’s mine is mine” argument gets a bit weaker. Perhaps, in fact, the govt does have the right to tax you. And not only that, but perhaps they have a right to tax you more than they do others, in proportion to your wealth, given that you have so much more of it that needs to be protected.

So, in my humble opinion, the extreme conservative republican viewpoint that taxes on the rich are unfairly high, is deficient of a full and complete understanding of reality. And I won’t even bother to address their argument that raising taxes on the wealthy will stunt economic growth, as that argument is so devoid of economic understanding that it resembles the sputtering nonsense of a 1 year old. Perhaps if we were to raise taxes from the current rate of 36% to 70%, then yes, that might have an effect (tho not necessarily a bad one). But rolling back the Bush tax cuts, which would raise the highest income tax bracket from 36% to 39%, will do nothing to harm the economy. It will, however, go a long way in getting the govt’s budget in order, which will do loads to improve our outlook.

Basically, the way I see it, after thinking long and hard about it, breaking it down to fundamentals, shifting back and forth from Austrian philosophy to Keynesian, trying to grasp a comprehensive understanding of how it all works, this is what I believe we need to do to fix the economy:

1. Massive govt stimulus. We must get economic velocity moving again. The private sector is failing to do this. Corporations are awash in cash, their profits are up, however they’re not willing to take the risk of adding capacity in the face of a depressed economy. Only the govt is capable of taking on that risk (since the govt is the biggest not-for-profit org in the country). The FED can’t do it — they’re currently helpless, with interest rates at the zero bound. It’s serving little good to continue pushing money to private lenders, when there’s a severe dearth of worthy borrowers for that money (since the middle class is already under back-breaking debt that they can’t pay off due to significantly diminished income). The answer to this problem is govt stimulus. We need a massive govt works program, that will employ people and raise income. And we might as well do it now, while interest on US debt is at historic lows, and while the country’s infrastructure sorely needs it (just take a drive thru NJ traffic, at any hour on any day of the week, and you will soon be convinced of the desperate need to improve its public transportation options, which are essentially non-existent).

2. Raise govt income by raising taxes on the wealthy. If the govt is going to borrow 2 or 3 trillion dollars for a massive works program, then we must reassure the bondholder community that the govt won’t default on that debt. If bondholders were to lose confidence in US credit, that would be a financial disaster for America and the world (one that we’re unwisely playing chicken with by dicking around with the debt limit). Interest rates on govt debt would soar, making it virtually impossible for the US to continue borrowing. That would be followed by drastic Greece-like austerity measures, which would in turn be followed by Greece-like protests. If it gets really bad, we might see a tumultuous and possibly violent revolution of the lower and middle classes against the rich (not unlike the revolutions of serfs and peasants against the ruling lords throughout history).

3. Regulate the hell out of the financial industry. This is a must, if we are to avoid delivering ourselves right back to financial catastrophe. There’s something like $600 trillion in unregulated swaps currently outstanding in the market. The GDP of the entire world is only $70 trillion. This is a problem that has gotten way out of control. It’s like a big nuclear bomb, hanging by a thread over all of us, getting bigger and bigger and heavier and heavier, threatening to break loose and detonate the entire global economy. This monstrosity came into being thru the unfettered financial wizadry of investment banks run amok. We need to harness these careless financiers. They are setting us up for global economic meltdown, and they don’t seem to realize it, or care. Either way, they must be stopped. They will not regulate themselves. And we can’t leave it up to the free market to do it either, because ultimately that would mean leaving it up to bankruptcy to sort out the mess — and by then, the bomb would have already exploded.

It seems at times that our economy is inescapably doomed. However, in reality, these 3 solutions would be quite easy to implement. We just need the political will to do it. Well, actually, it doesn’t even require much political will, per se. It just requires obstinate, misinformed republicans to get out of the way and let the rest of us tend to the work that needs to be done.

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