Where have all the Consumers Gone?

We talk about this often. As a matter of fact, it was just yesterday we were talking about the failure of Reaganomics or so called “Trickle Down” economics. (More aptly called VooDoo economics by the first President George Bush.)

kc, on July 7, 2010 at 10:37 pm Said: Edit Comment

thanks–would it be accurate to say that trickle down doesn’t work well because the rich already have consumer goods so they could save it.??

Reply

Well, supposedly the residual goes into investments which go to create well paying jobs which the rest of us get. However, that link is weak link. Especially with so many corporations moving their capital investments out of the country or having major operations elsewhere. In order for it to create jobs, the money has to stay put in the community and there’s no guarantee it will. Also, a lot of profits these days are just arbitrage profits that create no value. If you don’t direct the dollars to long term investment the money can go anywhere.

Robert Reich has a great blog post up today that gives you some perspective on what happens to our consumption driven society when only the few rich people get the income gains. The income doesn’t go to driving the economy, it goes to driving asset bubbles and in the two cases he talks about, that leads to some pretty bad economics results. Reich says that “We’re in a Recession Because the Rich Are Raking in an Absurd Portion of Wealth: Our economy can’t thrive when the richest 1% get an ever larger share of the nation’s income and wealth, and everyone else’s share shrinks.”

The end of the Hoover years and the end of the Dubya years brought as big increases in income inequality. What was the result?

Each of America’s two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

You can’t have an economic machine driven by consumption and then turn the switch over to people who have so much money that all they do is speculate. It just doesn’t work. If you want long term real investment, then you have to ensure that the investment dollars are going to things of real value. A good example of something of real value is a factory that employs people that have to pay for houses, groceries, clothing and transportation. Every dollar of a well earned wage trickles outward to a community. Putting all your investment eggs into derivatives does nothing to support long term growth. Taking all the income from productivity coming from the people that work and giving it to people that just simply want to drop a few dimes in a stock that might go up like a BP oil gusher does not create customers for businesses. Customers are what businesses need to grow. No amount of tax cuts or cheap credit will expand a business that doesn’t see customers coming in the door. Also, there’s a real good chance a lot of these people–and the corporations in which they invest–offshore their wealth anyway so there’s no guarantee that it stimulates our economy. Although, if you check it out, you’ll see that the richest countries in the world are those small countries that are depositories and shelters of offshore funds. These are the little countries that banking and no taxes built like The Grand Caymans, Guernsey, Bermuda, etc.

Anyway, Robert Reich does a very good job pointing to how we let our government leaders recreate the environment of the 1920s and how by only a little finesse and a lot of liquidity by the Fed stopped us from going over the edge into another period where unemployment was 25% instead of 10%. What I worry about is that the current leaders seem to be recreating the second dip of the Great Depression also. Remember, the two BIG recessions since World War 2 happened when you’ve had people who sincerely believe in the Trickle Down hypothesis. It frightens me that we have a President who admires Ronald Reagan and has continued Dubya Bush Policies. (Here’s another great link to Brad DeLong’s Blog who has similar worries. The piece is called “These are NOT the Ones We have been waiting for”. No kidding!) If we do have a double-dip, it will be because of all this austerity nonsense. We really don’t need any more lessons from Voodoo Economics. We’ve had enough to traumatize several generations and put a lot of people into unemployment hiatus.