Monday, February 28, 2011

Home Economics

So we did the math here in our household and figured out exactly how much Governor Teabagger is going to cost us with his plan to balance his giveaways to the rich and powerful on the back of the middle class.

Wow.

This will necessitate a certain number of serious lifestyle changes, yes it will. We’re still better off than many in this new age of Social Darwinism, but that’s not saying a whole lot now, is it?

The problem with this is not just that it is going to make our lives less comfortable. Really, the problem is that it is going to make a whole lot of people’s lives less comfortable, even those whose paychecks have not been unilaterally slashed by a guy who spends $70,000 a year out of state funds for a chef.

Supply-Side economics do not work in a Demand-Side economy.

Back in the Gilded Age that Governor Teabagger and his cronies are trying to hard to recreate, most economic activity was conducted between producers, at what we would likely call the wholesale level today. Only a small amount of the overall economy was driven by consumers. Imagine a pyramid labeled “Economic Activity.” Only the tip would say “Consumer.” The rest all says “Producer.”

For example, there was a lot of steel manufactured in the late 19th century in America. Most of it went into things like ships, railroad tracks, locomotives, machine tools, and other things that were not likely to be purchased by the likes of you and me. They’d be purchased by other manufacturers and industries.

In this kind of economy, the trick to prosperity is to maintain production. So you adjust your policies accordingly. You want high tariffs, to protect domestic manufacturers. You want low inflation, which favors creditors and keeps prices stable. You want low wages, since they are an expense and a drain on producers (though not as low as the Gilded Age manufacturers pushed them, which made it impossible to support a family of four by working 80 hours/week – that just leads to well justified hostility from workers that will, in the end, depress productivity). Having a society with a few obscenely wealthy manufacturers and a population deeply enmeshed in poverty is a social problem but not an economic one, since most of the prosperity is driven by the few anyway. You want to arrange your tax policies to benefit the manufacturers.

And if times get bad, you want to do whatever you can to ensure that productivity does not lag. Put money into the hands of producers, since that’s where most of the economic activity lies, and you will shortly return to prosperity. In other words, take care of the Supply Side of the equation, and the rest will take care of itself.

This is what the Teabaggers want us to return to.

The problem is that we don’t live in that economy anymore. We haven’t for nearly a century.

Sometime in the 1920s, as the end result of decades of shifting economic trends, the United States went from being a Producer Economy to being a Consumer Economy.

In this economy, the pyramid looks a lot different. Only a thin band at the bottom is labeled “Producer.” The bulk of the Economic Activity – the majority of the pyramid – is labeled “Consumer.” Most economic activity in this type of economy is driven by consumption, not production – by the Demand Side, not the Supply Side.

In this economy, most of the steel goes into things like automobiles, washing machines and other things that you and I would buy. Producers buy steel too, but the balance has shifted.

In this sort of economy, the trick to prosperity is to maintain consumption. You want low tariffs, to keep the cost of goods low. You want inflation, which favors debtors and encourages people to buy things on credit. You want high wages, since those get used by their recipients to buy things and drive the economy forward. Your society should strive to have a fairly even income distribution, because the more customers you have the better your demand will be. Prosperity is driven by the comfortable many, not the obscenely wealthy few, and if the many are in poverty they won’t drive anything anywhere. You want to arrange your tax policies to help the people in the middle and at the bottom, not the people at the top, since there are more of them and there are only so many consumer goods the wealthy can buy.

Prosperity in a Demand Side economy rests on maintaining demand, not supply. You can produce all you want, but if nobody can consume it your stuff will just sit there and rot.

So when times get bad you want to do whatever you can to keep consumption up and put money into the hands of consumers. Take care of the Demand Side of the equation, and the rest will take care of itself.

Note that this switch happened in the 1920s. This tells you two things.

First, it tells you why the Great Depression lasted as long as it did. Hoover and, at first, Roosevelt, tried the old remedies that had worked in previous economic downturns – boosting the Supply Side. And they didn’t work. In fact, they made things worse. It’s only when Roosevelt gets serious about putting money into the hands of consumers that the Depression starts to ease, and every time he tried to back off from that (1937/38, anyone?) it would return. When the war came and all sorts of money found its way into consumers, that’s when the Depression ended.

And second, it tells you why Governor Teabagger’s policies are not going to work very well.

Because faced with this income reduction, we will do what responsible people do and cut our expenses.

Which means the businesses that depend on our patronage – and the patronage of others like us – will see their income fall, perhaps to the point of driving them out of business, perhaps not.

Which means the state will derive even less income from taxes than they were doing.

Which means the cycle gets to start all over again.

Even for the private sector business leaders who are so eager to cut my wages now.

I am petty enough that I will enjoy that last part of it, at least.

But that’s really not what I’m here for, and I would think it wouldn’t be what my government is here for. Apparently I’m wrong about that.

It’s going to be a long few years.

1 comment:

beatricemdfr said...

Your society should strive to have a fairly even income distribution, because the more customers you have the better your demand will be. Prosperity is driven by the comfortable many, not the obscenely wealthy few, and if the many are in poverty they won’t drive anything anywhere.

Well said!
And to think that the US of A is supposed to pull the rest of the world out of this mess!