Picking a path to recovery

Millions of Americans struggle with surviving. If they're unemployed, they're contending with the lower standard of living, and likely suffering longer. The poor--whose ranks grow-- can't assemble the resources to do much economically; they can't invest. Instead some 60% of Americans are surviving paycheck-to-paycheck.

Jobs are the core of our nation's economy. Piles of paper can be pushed around, and huge sums of aid distributed, but if people aren't working, the whole engine slows. Not in perceptible ways at first, mind you, but eventually the lack of jobs reflects back on our society as a whole.

Unregulated hyper capitalism has run its course. We've seen the nasty consequences: the wealthy have grown wealthier, the middle classes have shrunk, victims of the decline of manufacturing due to off-shoring and imports. On an inflation-adjusted basis workforce pay hasn't improved for decades despite productivity rises.

The American economy is built on its middle class. In a vibrant economy, middle class workers invest into their companies' stock through IRAs and other mass distribution vehicles. Long-term returns on the stock market are far superior to any other investment class, including government bonds, To sustain growth, we'll need a middle America with improved earning power and that takes jobs.

Where to turn if the middle class has shrunk? Servicing the needs of the wealthy. It'd be easier for rich Americans to spend and invest more than it would be to subsist on a service economy. We still need a way to restore America, and one way out invokes getting the rich to spend.

We can't tax our way out. George H.W. Bush (the Elder) in office from 1989 to 1993, offers an example of why not to tax.

Bush had raised taxes on yachts, believing the rich could pay for their luxurious lifestyle by paying more in taxes on the yachts. So the yacht tax became law and many yacht buyers decided to buy their yachts from outside the US.

As the demand for yachts left American shores, so too did many of the yacht-building revenue. Because the rich had likely jetted off to places like the French Riviera to buy their comparatively cheaper European-made yachts, they weren't around in New England...to spend money.

Yachts purchased outside New England would likely stay in Europe or the Caribbean. Many new yachts might not even make the trip up to New England. Therefore piers would empty, denying yacht clubs docking and membership dues, and their employees--mostly middle class--would have to find other work.

In New England, millions are employed by the yacht industry, in those occupations that maintain, build, and service the yachts. At the time, a majority of these employees were solidly middle class.While only a few sold the yachts, many others worked in small businesses tied to the yachts.

The point isn't that imposing a tax was bad in principle. The principle that the rich should pay more is inherently fair. It's the lack of forethought about the impact of taxes on those who aren't rich that makes taxing the rich dangerous. In other words, taxes meant to help the middle classes can hurt them dearly, in ways unforeseen.

The American population looked at the yacht tax as an example of a bad tax, one the shouldn't have been imposed not because it targeted the rich but because it ended up hurting the middle class.As it turns out, some huge number of jobs were indirectly tied to the yachting industry. The whole New England economy sank with the tax. After losing his 1992 re-eection bid, Bush later admitted to his mistake; the yacht industry recovered when the tax was repealed.

The real point here is that the middle classes need to get the rich spending freely, here, on things made in America in order for average Americans to prosper. For the middle class, economic benefits often come in the ways the wealthy spend their money. Taxation could never do the job of re-allocating wealth as well as the free enterprise system. People tend to work harder for themselves, and spend more wisely than government. Plus, the more dependent people grow on government subsidies and the longer they are on them, the less independent economically they will be.


Wal-mart here. Ford there. Take your pick, America.

At lower levels, in stores like Wal-mart, huge sums are spent but they don't seem to be contributing to domestic economic growth. In this regard employing millions more might not bring a recovery.

In talking to the employees at Wal-mart, one gets a sense that they're the opposite of what Henry Ford had envisaged for America, which was more than affordable cars for the masses--it was masses of potential buyers.

Ford was adamant about selling his cars for a price of one year of an average worker's salary. He knew the best chance for success at selling his cars laid not in a few rich people, but a middle class. And no doubt Ford was better off in the days when the middle class was thriving.

Comparing Wal-mart and Ford, you can see two disparate models. One business offers lowest prices, which in many product lines is tantamount to selling imports from China. Rightfully, Wal-mart prides itself on its distribution model--it's an example of low-cost efficiency. If you wanted to distribute products--sell things--you could take Wal-mart's model.

Or you could take Ford's business model. Ford's company might not benefit directly when he spends more on his employees. But he does build a market for his cars. Employee loyalty and all that.

I happened to talk to a Wal-mart employee wearing a white butcher's apron in the retailer's meat department a while back. When I asked for her recommendation on what to buy, she told me, in no uncertain terms, that she didn't know what was the best herself because she couldn't afford it.

Turns out, she wasn't a butcher at all, but rather a store employee who just happened to work in the meat department. The universal butcher's outfit--the white apron--was merely window-dressing, marketing smoke'n'mirrors intended to add realism to the shopping experience.

Wla-mart's corporate scheme devalues employees. As explained in the documentary, "The High Cost Of Doing Business...", Wal-mart decimates indigenous retailers, including Mom'n'Pop stores which can't compete on the basis of price alone. Studies show that 10-20% of Wal-mart's retail competition will fold within two years after Wal-mart enters a community. This kind of marker over-reach might delight Chinese stock-holders, but it ends up hurting companies that treat their employees better.

Ford's genius was that he saw the potential in the American workforce not only to be consumers, but to create a better standard of living for themselves.

Trends: spending limits and unemployment

Over seventy percent of the American economy is based on consumer spending. Yet our ability to predict future behaviors based on quantitative analysis alone is quite weak. The limitations of statistic become clear in times like now: when we want to figure out why things aren't happening economically.

Rather than treat economics as a numerical science, it should be considered more organic, a living and breathing, more touchy-feeling thing built around sentiments and relationships not just between people and their money but people and other people.

Studying purchasing behaviors can't be so effective without a baseline understanding of why consumers make the decisions they do. And few consumers can articulate their situations financially well enough, but somehow most do change their shopping habits when they are forced to, allowing economists to see the impact of various trends on consumers spending.

Joblessness and a lack of access to credit are two of the key trends emerging in America. The job markets are directly impacted by trade policy, and the huge flow of imports belies an underlying structural problem. Over time, when a trade deficit runs as long as it does, there must be a corresponding financial outflow somewhere.

In the case of trade, banks of the exporters are flush with dollars. The more dollars they accumulate, the less attractive they become. So many foreign banks have reduced their exposure to the dollar. Another viable way to reduce their dollar horde is to invest it in American businesses. This is what's known as "I"--investment--in the formula to calculate production. The second component is "G"--government spending, which is the amount of money governments spend.

It's easier to channel investment than it is to redistribute wealth through taxation and "G"--read: directed out of Washington, likely to benefit those companies with the most political influence.

Now our GDP now has grown not because consumers spend but because of government spending. Consumer spending has been flat until very recently. In order to create more economic activity, we need to encourage consumers to spend. Yet as our government debt shows, over the long-term borrowing can't continue. Consumers are tapped out, but unlike government can't print up the money they want, then lend it back to themselves through the Federal Reserve.

As is the case with personal "consumers" (a loaded term in that only the people's spending capacity is measured), the amount of debt is subject to limits. In the government's case, the change begins when the cost of borrowing goes up prohibitively. While federal deficits aren't so bad as to overburden the budget now, by the end of the decade, carrying so much accumulated debt will mean the US government can't spend enough to stimulate growth.

So it will come down to us, the lowly consumer, to save the American economy. And if we can't continuously borrow, it will be up to us to save, which entails spending less than we make. Then and only then can we create a sustainable recovery.

So the concept of a jobless recovery doesn't hold. Our country needs its people to be working. Now the poor can't stimulate an economy, so increased spending will have to come from the rich. Taxes are a far less efficient method of injecting money into the economy.

I'm not one of these people opposed to taxes on principle. To the contrary, I believe Americans need to pay taxes they owe in exchange for what they have or will derive in benefit from their tax spending.

As cruel as it sounds, inflation has been stymied by the massive levels of unemployment. Take ten to twenty percent of the workforce out of the economy and you can forestall a lot of inflation, which can be expressed as demand in excess of available goods. Now, the response to inflation may be equally unfavorable to the middle class, on a par with what we saw in the early eighties, with double digit interest rates meant to keep money from being spent.

Maybe inflation is more than just a quantitative expression of overspending. After all, it's not the supply of money growing--yes, ours has done that--that creates inflation. If all this new money were not spent, it needn't cause all prices to go up. We'd probably rather have a wealthy class spending more than too many people out there spending too much.

With growing unemployment, the question is now how long Americans will be out of work, and if we can have a jobless recovery. There are really only a few ways back to sustainable growth, and it's important the economists agree that government can do little to help without creating inflation down the road, considering the size of its current borrowing and impending obligations, estimated at over $70 trillion for Social Security and Medicare. Short of taxing people, the government can only borrow. At some point the cost of carrying so much debt will make additional borrowing that much harder.

Trade

I'm also ambivalent about putting up barriers to trade. But I've increasingly grown to believe that trade policy is disproportionately impacting middle class Americans. The wealthy, on the other hand, seem to becoming even wealthier. Rather than looking at the as a source of taxation, I thing they need to be encourage to buy things. And those things really need to be domestically made.

Yes, plenty of middle class jobs depend on imports. The Maserati salespeople and the mechanics that serve those vehicles probably aren't rich. So imports do create jobs, but not in all categories. Importing top-end foreign-made products isn't in itself bad. We produce plenty of luxury items here in the United States that end up being exported. As a matter of fact, the US excels at top-end production. Even here in backwoods Indiana we have extremely talented craftsmen custom-designing engines from scratch! The American workforce is quite skilled and can easily compete with the world's best.

Yet our government seems incapable of turning these resources into export-driving opportunities. Perhaps we leave too much of the financing of new business opportunities to the private sector. Perhaps it's wise not to put too much faith into government policies, but then again other nations do support their business' competitive advantage, so why can't we?

Now we'll need to tread carefully, to avoid other countries retaliating at what they see as an unfair advantage for our exporters. We'll also need to be creative in finding ways to get our money back from foreigners. Visitors to U.S. shores spend freely; I do see growing intrusions by TSA, particularly in the form of body scanners now being adopted. No one wants harassment at the border simply because of their race or ethnicity. As popular as the War on Terror might be with some domestically, police state tactics are really the anathema of open trade and tourism policies. If the worst that an absence of body scanning can do is a shoe- or crotch-bomber every 5 or so years, maybe that's a price we can live with.

Still, no one wants a trade war. If we were to slap tariffs on luxury imports, we'd likely face retaliation on ours. And to complicate matters, if we were to reduce Chinese exports, the Chinese could retaliate by selling off US government debt, driving up the costs of borrowing. (Maybe doing that might help impose some fiscal discipline on Washington, as they clearly can't impose it on themselves.)

Maybe there is a zero sum game at work, but I like to think we can have globalization that benefits all. Looking at trade statistics, the world in general has benefitted greatly by trade; living standards have increased for many though poverty persists.

Trade isn't the only way to enhance economies, and it alone can't eliminate poverty. As we see in extractive industries like energy companies destroying mountains in Appalachia or the tar sands in Alberta, unrestricted trade can cause severe damage to ecosystems and indigenous peoples. So free trade needs to be tempered by fairness, where the long-term impacts are considered and crass opportunism by multinational corporations curtailed by regulations and firm enforcement (which are all too-often lacking in many localities.)

Rather than look purely at the numbers, economics needs to look at the qualitative impacts of new trade patterns, and try to reduce unemployment created by trade, ideally by moving displaced workers into.

Placed at the center of the intent of any study of the American economy should be the betterment of the American economy. Everything else is meant to pursue grant money or commercial revenue, like Coke versus Pepsi. Improving the quality of life for Americans may invite bias but we need to place America first in understanding and analyzing how changes in the world economy affect us. To let these changes consume our middle class is a tragic and ultimately avoidable path towards self-destruction.

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