Economics

Economic Notes

* Infrastructure spending is designed to increase productivity by enabling businesses to operate more efficiently.

Several commentators have pointed out that the most important choice you make in your life is your choice of parents. If you choose rich, well-educated parents, you have a very high probably of doing well financially, while those who have chosen poor, poorly-educated parents cannot expect to get very far financially. Hard work pays off, but not for the person doing the hard work. The workers’ hard work pays off for the shareholder who reaps the reward for many years after an initial investment, which keeps doubling in value under compound interest and dividend reinvestment.

SUMMARY: As technology advances, capital wins and labor loses. Money previously flowing to labor is rerouted to capital as automation replaces workers in production and distribution. Companies shift risk onto their employees by replacing defined benefit pensions with defined contribution retirement funds. Full time workers are replaced with temporary, part-time or contract workers. Families put in longer working hours, not less, as college students pile up mountains of debt and wages stagnate. Economic slowdowns are seen as opportunities to reroute more money to the rich, who spend little on goods and services, rather than working-class and middle-class families with high marginal propensities to consume. Contagion effects drive the economy between the extremes of rational exuberance and a downwardly spiraling economic slump. Monetary velocity and multiplier effects are strong when they need to be weak, and weak when they need to be strong. Government currently lacks the tools to adequately counter this perverse cycle in a timely manner

SUMMARY: In addition to the relentless advance of technology in promoting capital (fixed costs) at the expense of labor (variable costs), there are other significant factors interfering with a healthy money flow for our economy. A major one is “pay-to-play” politics where special interests (primarily corporations and wealthy individuals) achieve undue influence over politicians and write legislation that promotes their agendas. The result is an assortment of laws and regulations that favor the special interests over the health of the entire economy. Tax loopholes and impediments to education with bankruptcy laws that favor business investment over educational investments. A highly distorted process for determining CEO pay and a demographic challenge in the form of the baby boomer retirement bulge further undermine effective money flow for promoting economic efficiency and growth.

As discussed earlier, one long-term cause of income inequality is the natural tendency for wealth to accumulate at the top as a result of the transition from a largely variable-cost economy to a largely fixed- cost economy. This tendency directs more and more wealth to the owners of capital and relatively less wealth to workers.

In the world of microeconomics, when you spend the money, it’s gone! But when an individual spends money in the macroeconomic world, the money is not gone. It just moves on. We often make the mistake of using microeconomic analogies to prescribe macroeconomic policies. Saying “when you spend the money it’s gone” may make sense for an individual or a business, or even for a particular governmental unit, but it is not a useful analogy for setting macroeconomic policy. When you pay for your food at the grocery store, the money goes to pay store clerks, to pay growers to replenish inventory and to pay the rent, among other things. The real issue is how strong is the overall demand for goods and services relative to the productive capacity of the economy.41 Distorted money flows can lead to inflation or unemployment. Understanding money flows is the key to avoiding recessions.

SUMMARY: Our Federal Reserve system must be changed to allow the injection of money directly to consumers to reinforce demand when our economy is operating at less than full capacity. In addition to countering short-term fluctuations in our cyclical economy, many other economic problems need to be properly addressed ranging from protecting and preserving Social Security, discouraging excessive CEO pay and establishing more appropriate levels of taxation including for estate and inheritance taxes. Our founding fathers were unable to anticipate the complexity of a modern economy. Although important changes have been made such as the creation of our Federal Reserve System, additional changes need to be made to protect the independence of that system from presidents and politicians who are too caught up in their own immediate political needs and are not sufficiently knowledgeable about economics to act in the most effective manner to keep our economy on track. Consequently, the United States Constitution must be amended to provide for a separate and independent fourth branch of government tasked with establishing and maintaining prosperity.

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