Monday, March 23, 2009

On Reviewing the Realities of Reaganomics' Supply Side Strategies and Their Effects on the Current American Economic Recession

Questions mount on a daily basis in the media and among the American public with regard to the efficacy of President Obama's economic stimulus plan. News reports circulate, underlining the mismanagement of the stimulus funds as exorbitant amounts are funneled into the accounts of already absurdly wealthy executives. There seems to be no end to the constant stream of failing businesses closing their doors as they cease their commercial operations. Each month, it seems, unemployment rises to new highs as those businesses which do continue to pursue their commercial enterprises feel the need to lay off more workers in order to cut costs as they attempt to keep their bottom lines within viably acceptable profit margins. Meanwhile, the national debt soars to new heights, so astronomical as to be incomprehensible to the average citizen.

As the economic crisis deepens, it spreads to more industries, and threatens to consume every last thread of the fiber we call the contemporary global economy. President Obama hitched his economic policies, and suggested solutions designed to remedy the current economic collapse, to those initiated by George W. Bush's failed attempts to stave off economic woe at the end of his second term. Obama, together with the Democratic Party controlled Congress, only slightly watered down Bush's approach, with a kind of kinder, gentler version of Bush's policies. Obama suggests that to do nothing would be irresponsible. But, just as "Doubleya" rushed into action against Iraq militarily without conducting a national discussion to determine both consensus and obtain as many views for solutions as possible, Obama has also rushed into action to stem and reverse the economic meltdown the world currently faces with his stimulus without the benefit of, not only a national consensus but in this instance, an international consensus since the economic catastrophe and its rectification are global in nature and effect.

What, indeed, are those policies which are currently being used to counter the economic ruin facing the world's burgeoning global economy, you might ask. Let's have a look at the policies and procedures endemic to the stimulus packages employed by Bush and Obama.

The stimulus employed by Bush was to infuse capital into the business sector. There were two major calamities impending at the time Bush acted. One precipice upon which the Bush Administration teetered revealed itself as the lending industry - banks (and other lenders) had over extended credit with regard to home loans (as well as credit cards, but that won't really hit for a few months yet), therefore these lending institutions were forced to consolidate, rid themselves of bad debt holdings, go out of business, and/or restrict the availability of new loans (in every avenue of lending), the value of real estate and homes plummeted, thus the sale of new homes and previously owned homes almost came to a complete standstill, and builders found no market for newly created housing and no lenders willing to finance construction. The second economic precipice revealed itself as being the automotive industry (although the country will soon discover it extends to every facet and branch of the retail sales industry).

Bush's response was to adhere to the principles of Reaganomics, otherwise known as Supply Side Economics. Allow me to provide a brief review of the economic theory foundational to this line of thinking.

Essentially, the idea behind Supply Side Economics lies in two faith-based tenets which continue to be bandied about today as if they arise from observable facts. The first is that the marketplace will always correct itself naturally, and thus, not only does not need to be regulated, but to actually impose regulations on the marketplace would result in adverse effects on the "natural" corrections the marketplace would otherwise institute. The second faith-based tenet lies in the "Trickle Down Theory" which suggests that the most advantageous system to promote Capitalism is to reduce taxes on corporations and super wealthy individuals in conjunction with encouraging excessive investment (both private through the stock market and public through governmental subsidies and funding for research and development) in corporations and the super wealthy. The expected benefit, according to those people who advanced and who continue to advance this theory is that those who hire workers will be left with money in their accounts with which to continue to employ those workers and, in fact, increase the number of workers hired as well as increase the income of the working public.

Let's look at these two tenets of Supply Side Economics individually.

The marketplace certainly does react to the changing conditions upon which commerce operates. There are a number of indicators which elicit adjustments in the marketplace. For instance, if too much of a particular commodity or product is present in the marketplace, two things tend to occur, the price of that item is temporarily reduced and the item's manufacturers or developers tend to reduce production for a while to reduce the supply. Once the supply is reduced, the demand is expected to increase, warranting a commensurate increase in the price of that item. Now, if too little of a product or commodity is present in the marketplace, the suppliers or manufacturers will raise prices because the item is in demand. The increase in demand increases the value of the item. It is expected that the suppliers or manufacturers of the item will then increase production of the item to meet the demand. At that point, according to theory, the price should be reduced to reflect the reduced demand.

However, the way things actually work, as any consumer can tell us, is that once the price for something goes up, it rarely comes down once the marketplace returns to a state of equilibrium. The result is what we call inflation. Inflation occurs when the prices for a number of products and services increase and remain at the newly established higher level. Normally, the consequence of inflated prices becoming established as new median prices will cause increases in the earnings and income for individuals in the workforce of that industry. However, it is also almost a maxim that the amount of wage increase never equals the amount of price increase during inflation. For example, one will generally see a 2% rise in income being accompanied by a 4% or 5% rise in the cost of living index.

The "natural" correction just described yields an unfair and inequitable advantage to businesses in a commensurate detriment to the workers. First, the prices of products increase faster than the income of workers. Second, because there are more consumers for products and services than there are workers yields a disproportionate advantage to the business entities as seen in increased business profits in geometric proportion. Just imagine a product produced by a business. That business might have one hundred employees, but sells its product or service to one million consumers. If the workers get a 2% yearly raise, multiplied by 100 employees, the cost of business can be computed as 2% multiplied by 100 people or 200% total. However, if the product price is increased by just 4%, the actual increase in profits to the business can be computed as 4% multiplied by 1,000,000 consumers of the product, or 4,000,000%. This explains one way in which the rich are always getting richer at the expense of the poor and middle class, who are always getting poorer by comparison in the degree to which the rich get richer.

Another manner exemplary of how supply and demand work hand-in-hand with the so-called "naturally correcting marketplace" occurs with regard to workers and wages. In many, if not most, industries and career fields, workers receive an annual raise in their rate of pay. What employers do after their workforce receives an annual pay increase is raise the price on the product or service that employer provides to the public. The interesting observation from this example reveals to us that, while the workers in that industry received an increase in their income, there is no guarantee that the consumers of the product or service have received a commensurate increase in income. So, the cost of living for the broad mass of consumers increases even though the earnings of the broad mass of consumers may have stagnated, or increased to a lesser degree than the cost of that good or service merits.

In that latter example, we see the seeds of runaway inflation. We also see that the effect is not caused by a natural adjustment in the marketplace, but a forced adjustment made by employers (sellers in the marketplace) which is disproportionate to the actual conditions in the marketplace. The example I’ll use here is baseball tickets. If the cost of doing business for a baseball team increases, say 5%, the size of the increase will have to be disproportionate to the earning power of the average worker. I say this because baseball players make at minimum in the hundreds of thousands of dollars on up to tens of millions of dollars. However, the average guy taking his family to a game or two a year will face prices for seats, parking and concessions which will grow exorbitantly higher than that workers salary will grow (assuming that consumer earns between tens of thousands to hundreds of thousands of dollars). This exhibits yet another manner in which the marketplace correction disproportionately favors businesses to the commensurate disadvantage of the consumer.

There exists yet another factor which constantly affects the marketplace and it can be seen in the ever-growing population. Rising population totals create a greater demand for products and services. Theoretically, the presence of more people (indicating the presence of more consumers) and the consequent increase in demand for products and services should result in an increase in the workforce (or number of employees hired by businesses) so that businesses can meet the increased demand for their products and services. However, what we actually have seen over the last several decades is that rather than increasing the number of employees, businesses employ: new technologies to increase production, new methods of business operation to increase employee production, or just plain impose greater demands on the employees already employed to increase their production. Again, this is evidence of how the marketplace does not really adjust itself proportionally, equitably or "naturally" to changes in the marketplace.

Now, let's divert our attention to the "Trickle Down Theory" tenet of Supply Side Economics.

Those who promote the "Trickle Down Theory" want us to believe that government taxation on businesses imposes an impediment on those businesses for hiring employees and that government investment in the forms of subsidies and grants for new research are also necessary to assure that businesses will not only be able to hire and continually employ a consistently growing workforce, but also so those companies will be able to remain competitive on the world market. The final result of this governmental favoritism and/or protectionism for its corporations lies in the idea that out of the ever-increasing profits corporations inevitably will garner, workers will benefit not only because they will continue to have their jobs and that the size of the workforce will continue to grow proportionally to the size of overall population growth (given that that overall population growth represents the ever-increasing size of consumers and hence demand for products and services), but also because workers will see ever-increasing wages due to the ever-increasing profitability of the employers.

The first objection I feel compelled to raise is that the reasons given actually contradict the first premise, that the marketplace will always adjust itself naturally. If the marketplace will adjust naturally, then the government will never need to take action to protect or advance the profitability of those corporations existing within its borders. To suggest the government must take these actions of favoritism is to contradict the premise that the market will adjust itself naturally, and exposes the whole system of belief as a sham and as being the "voodoo economics" which it was called when first introduced.

The second most obvious objection to this theory resides in the idea that production, and hence profits, can be ever-increasing. We live in a finite world, with a finite amount of natural resources, and with a finite population size that the planet can ultimately sustain. That being true, we cannot sustain infinite increases in profits, markets shares, product production or consumers for the products and services.

The third objection to "Trickle Down" reveals itself in the disproportionate amount of wealth being spread between the upper class, the middle class, and the poverty class. I'll detail that below.

The "trickle," in actuality, is a negative number for the poverty class. Nothing trickles down to those suffering from poverty, not jobs, not an increase in social services, not an increase in money for those social services the government extends. Sure, those receiving food stamps get a small increase in their allotments from time to time. The maximum benefit for food stamps for a single recipient in 2007 was $160 per month. In 2008, the maximum benefit for a single recipient was $176 per month (a $16 dollar increase per month). In 2009, the maximum benefit for a single recipient will soon grow to $200 per month (a $24 per month increase). The percentages sound like a lot of money (10% in 2008 and almost 14% in 2009). However, when one stops to realize the food stamps benefits actually dole out at the following rates for a 30 day month: $5.33 per day in 2007, $5.87 in 2008 and soon will rise to $6.67 in 2009, one can clearly see how these benefits don't come anywhere near keeping pace with inflation and the rising costs of all food items. (This is just one example of how "Trickle Down" never does, and never will, keep pace with inflation's ever-rising cost of living for the poor.)

The middle class generally see regular, but modest, increases in their incomes. However, as previously noted, those increases in income never approach the cost of products and services as they also increase due to inflation as corporations seek to keep their "market shares" and "profitability indices" exhibiting "upward trends." Again, "Trickle Down" does not keep pace with inflation, resulting in a net deficit quality of living to the middle class. Now, factor in that in the current economic climate, massive numbers of formerly middle class workers are losing their jobs (and homes), and one can clearly see that "Trickle Down" is just a euphemism for consolidating all wealth into the hands and accounts of the largest corporations and the super wealthy.

The fourth objection arises from a current view of the current economic situation. If either the "Trickle Down Theory," or the naturally correcting marketplace, really worked, we would not be in the mess in which we presently find ourselves.

One may ask, “Why don't the ‘Trickle Down Theory’ and the naturally correcting marketplace maintain economic equilibrium?”

Marx and Engels suggested in 1848 in their book, Das Kapital, that the essential thrust of Capitalism was to engender greed which resulted in the "dog eat dog" and "survival of the fittest" competitive strategies endemic to Capitalism. Most proponents of Capitalism would argue that the system they offered in its place, Communism, failed, disproving their theories. I believe we must re-think that assumption. Just because the system they created to replace Capitalism failed does not mean they were wrong about the essential attributes of Capitalism. The more one looks at the continuing history of Capitalism, the more one sees the critiques of Capitalism Marx and Engels enumerated have a basis in fact with regard to the way Capitalism manifests itself in practical application.

One can go back to the Panic of 1837 for an early example of how a speculative fever led to a bubble bursting on May 10, 1837 which was followed by a five year depression, the failure of many banks and record high unemployment figures at the time. Nearly 100 years later, another speculative fever led to the stock market crash in 1929 and another protracted depression. In 1987, yet another speculative fever led to a significant market drop, the demise of the Savings and Loan industry and a significant recession. Any honest look at the current market has to yield yet again, the same conclusion, a speculative fever in the market led to collapses in the lending sector, which has spread to nearly every industry since, the closing of many banks and the consolidation of others, and at the least a severe recession which still possesses the potential to result in a protracted depression. I've only just skimmed the surface of the historical record here, and one could easily add many more examples, but in the name of brevity, I'll stop there. The speculative fevers described in each economic collapse mentioned above was not just the result of the greed Marx and Engels predicted, the continuing, cyclical manifestations of the speculative fever/greed syndrome proves Marx and Engels’ point, the arising of greed is an endemic problem with which Capitalism will always be infested.

The problem with Supply Side Economics is the continual investiture of funds, tax breaks, and government grants into the hands of the wealthiest corporations and individuals in the nation. Just as power corrupts and absolute power corrupts absolutely, wealth and privilege induce greed and super wealth and excessive privilege induce excessively supreme greed. There is no getting around this foible in human psychology. At some point, humanity must come to grips with the idea that we are who we are, and we must find ways to protect ourselves from the basest and most basic, pervasive and endemic qualities within human nature.

I want to go on record here as actively and adamantly advancing the premise that Demand Side Economics will provide the only way out of the economic crisis currently afflicting the global economy. Let me explain why.

When Supply Side Economics finds commerce in the present situation, a cycle of futility ensues. Corporations find their profits are not only failing to increase, deficits overtake profits. In order to maintain profitability, the corporations cut the workforce (lay people off). With a reduced workforce, there are fewer consumers who have the purchasing power to consume corporate products and services. Thus, corporate profits take another hit. Consequently, more people are laid off. This cycle is repeatable and will continue to repeat itself, constantly scaling down not only the size of the workforce and the amount of products produced, but it also exaggerates the discrepancy of lifestyle between the wealthy and everyone else. The middle class is eroded and most of those within its ranks are rendered poor, joining the ranks of the poverty class. This cycle is unavoidable as long as Supply Side Economics is pursued (and Supply Side Economics are what Obama is pursuing with his version of the stimulus package - change you can count on, indeed, what a farce).

However, Demand Side Economics reveals a whole different cycle. If funds and tax breaks are invested in the broad mass, the consumer class (including the poor), vast numbers of individuals discover they possess a considerable amount of discretionary income with which to purchase products. As more and more people purchase more and more products, the profits and profitability of corporations increase. In addition, the demand for products and services increase. In this scenario, two conditions arise. Corporations' profits increase, meaning they are financially able to hire more people, and the increased demand for products and services forces the corporations to hire more people in order to increase production to meet the demand.

Now, token amounts of money given to the consumer class will not be sufficient to incite the consumer to purchase products. The $500 Obama wants to give individual taxpayers and $1000 to families does not provide enough of a stimulus to the economy. The stimulus needed is for individuals and families to find themselves with sufficient discretionary funds to make major purchases. $1000 will not assist in the purchase of a car or a house. In fact, $500 and $1000 will be eaten up by the increased cost of living we are all facing. Just $10 per week for an individual (the equivalent of a one-time $500 stimulus to an individual doesn't even equal $10 per week for 52 weeks) will only cover the increased expense at the market for groceries.

In reality, for any stimulus to effectively incite a cycle of spending/profits increases/hiring which is what is required at the moment, that stimulus would probably have to be more like $10,000 to $20,000 for every individual (the poor included) and $20,000 to $40,000 for a family. No funds should be extended to "save" failing banks and other lending institutions. I agree that the government must purchase all the debt of a bank which fails, and the government must be willing to restructure the bad loans which caused the banks to fail, in a humanitarian manner intended to assist homebuyers and other debtors to keep what they have and offer them a way to pay back the debts in a reasonable and prudent fashion.

It is also true that the government will have to invest in government funded projects which will translate into jobs. However, the jobs should be created in industries which will survive long into the future.

Investing in jobs for road repair when it is clear that Climate Change will have to render the automobile industry extinct in the next 10 to 20 years is not a prudent or wise decision. Investing in the creation of climate friendly, rapid transit based on magnetic and solar and wind generated electric power systems will be creating jobs and industries and methods of transporting our public in ways which will last for several decades into the future, maybe even the entire millennium.

Investing in saving GM and Ford when those companies will not be able to exist long into the future anyway does not make sense as a prudent investment. Investing in companies who will create clean sources of power and investing in assisting those companies to create assembly lines so that their products can be made immediately affordable to the public does make sense at the same time as it will create jobs which will be sustainable for many decades to come.

Saving banks from failure does not make sense. The time period which the government is able to save the banks, and auto producers, for several hundred million dollars, only means 3 to 6 more months of solvency. That's absurd.

However, moving our economies away from debt does make sense. This is the time to learn to pay as we go, as individuals, as corporations and businesses, and, indeed, as nations too, in the long run. If the last 200 years of debt as a way of life, and the constant failures in the economy, both on individual and national levels, doesn't teach us that debt is never a sustainable basis for any economy, then we will doom ourselves to repeating this catastrophe again and again in the future. Getting un-addicted to debt is the surest way to creating not only a road to recovery for our present economy, but also a path to a sustainable economy in the future. Everyone on the planet aspires to affluence. What that means varies from person to person and culture to culture. However, once we all learn to see affluence in sustainable terms, it will be possible, with the eradication of debt as a way of life and the eradication of wealth and poverty together, to create a system which will afford a sensible, ecologically friendly and sustainable affluence into the future. I am not talking about socialism or Communism or Capitalism or any other ism. I am suggesting that the Star Trek vision, one in which all are equally affluent and equally able to pursue our dreams and aspirations, without excess and without destroying the environment is a goal for which we can aim, should seek, and can hope to attain.

No comments: