Dr. Pepper Meets Dr. Doom
August 19th 2010 22:21
All you really need to know about the economy you can get from the New York Times – Wednesday, August 18, 2010. In one report the paper says “The money for schools to rehire teachers, counselors and support workers is instead being set aside by school districts worried about cuts to come...” while another report derails how the Dr Pepper Snapple Group is demanding givebacks by its unions in spite of the fact that the company is going very well. The company’s attitude is simple enough – in today’s job market they have the upper hand, so why not cut salaries and take away pensions while they have the chance? The only answer is that what’s good for the Dr Pepper Snapple Group isn’t good for the United States economy. This is classic Keynesian stuff, and runs head first into issues of economics and politics.
The problem is simple enough – the way out fo this, or any recession, is to encourage spending. The faux prosperity of the Bush years was due to spending, even if people were spending money they didn’t have. The money may have come from credit card debt and teaser rate mortgages, but it didn’t matter. As long as money changes hands, the economy grows.
Unfortunately, reality eventually set in, like a cartoon where Wiley Coyote runs off a cliff and keeps going until he looks down. Too many people were wiped out, couldn’t cover their credit card debt or mortgages, and the whole thing collapsed. We had been playing a kids’ game: Don’t Spill the Beans, Don’t Break the Ice. While politicians have been using the term “middle class” like a mantra, there’s an apparent lack of understanding of the importance of a middle class to the functioning of an economy. According to FT: “Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.”
In practical terms. middle class implies a large group of people with some level of discretionary income. If “working class” is a euphemism for “barely getting by”, middle class represents a degree of comfort – the ability to pay the bills on time, go to a movie, buy an occasional luxury item. This is the group that supports family restaurants and cable television. The wealthy can’t do it alone. Keeping the economy going means that money has to keep changing hands, and as more and more money is concentrated at the top, the economy stagnates then declines. “Middle class” translates as “customers”, and when there are too few, first the economy, and then all of society goes into decline. When companies move jobs to other countries, they’re relying on other companies to provide their customers. One company may move a factory overseas, reduce costs and increase profits, but there’s a limit, and when too many companies do it, there’s nobody left to buy cars or televisions. The corporate goal is to maximize profits, but the result is parasitic, trusting that other companies will produce an adequate supply of customers. At some point, the parasites destroy the host. The Dr Pepper Snapple Group is making good profits, but they don’t want to share the profits with their employees. That’s reasonable enough. Other companies are paying lower wages for the same work, so why should they?
Keynes understood this, and wrote that in bad times, the role of the government, of society in general, was to stimulate the economy by increasing spending, and reverse the downward spiral. During the Great Depression, the government created jobs, not only in the form of construction projects, but land management and mural painting. When people had jobs they were able to buy things from other people and the economy revived. It took World War II to totally revive the economy, but the principle remains true.
We should have learned from the Depression, but there are other considerations in play. We’ve been indoctrinated to fear taxes and government in general, and the central government in particular. The result is that the stimulus money was in large part focused on tax reduction. This helps appease the attitude that the long term unemployed are simply lazy, but it fails to stimulate spending. There’s a natural reaction among those who are working and paying taxes that they deserve to be rewarded and their money shouldn’t be handed over to people who are taking a vacation. Assume they’re right – morally – but unless they’re ready to spend the money they’ve saved in taxes, they’re a poor jolt to the economy.
In the same way, money that was given to school districts to rehire teachers isn’t being spent, for fear that things will get worse. If the money isn’t spent, to rehire teachers who will spend their regained salaries, things only will get worse. The stimulus can’t be effective unless it’s put into play, and even with free money, there’s a reluctance by both industry and local government to take the essential first step.
Taken as a problem in eco 101, everything is easy to deal with, but before that can be done, there are major hurdles, both in getting support for deficit spending and a more active central government. The challenge is simple enough: teach economics. So far, nobody seems to have figured out how to do that.
The problem is simple enough – the way out fo this, or any recession, is to encourage spending. The faux prosperity of the Bush years was due to spending, even if people were spending money they didn’t have. The money may have come from credit card debt and teaser rate mortgages, but it didn’t matter. As long as money changes hands, the economy grows.
Unfortunately, reality eventually set in, like a cartoon where Wiley Coyote runs off a cliff and keeps going until he looks down. Too many people were wiped out, couldn’t cover their credit card debt or mortgages, and the whole thing collapsed. We had been playing a kids’ game: Don’t Spill the Beans, Don’t Break the Ice. While politicians have been using the term “middle class” like a mantra, there’s an apparent lack of understanding of the importance of a middle class to the functioning of an economy. According to FT: “Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.”
In practical terms. middle class implies a large group of people with some level of discretionary income. If “working class” is a euphemism for “barely getting by”, middle class represents a degree of comfort – the ability to pay the bills on time, go to a movie, buy an occasional luxury item. This is the group that supports family restaurants and cable television. The wealthy can’t do it alone. Keeping the economy going means that money has to keep changing hands, and as more and more money is concentrated at the top, the economy stagnates then declines. “Middle class” translates as “customers”, and when there are too few, first the economy, and then all of society goes into decline. When companies move jobs to other countries, they’re relying on other companies to provide their customers. One company may move a factory overseas, reduce costs and increase profits, but there’s a limit, and when too many companies do it, there’s nobody left to buy cars or televisions. The corporate goal is to maximize profits, but the result is parasitic, trusting that other companies will produce an adequate supply of customers. At some point, the parasites destroy the host. The Dr Pepper Snapple Group is making good profits, but they don’t want to share the profits with their employees. That’s reasonable enough. Other companies are paying lower wages for the same work, so why should they?
Keynes understood this, and wrote that in bad times, the role of the government, of society in general, was to stimulate the economy by increasing spending, and reverse the downward spiral. During the Great Depression, the government created jobs, not only in the form of construction projects, but land management and mural painting. When people had jobs they were able to buy things from other people and the economy revived. It took World War II to totally revive the economy, but the principle remains true.
We should have learned from the Depression, but there are other considerations in play. We’ve been indoctrinated to fear taxes and government in general, and the central government in particular. The result is that the stimulus money was in large part focused on tax reduction. This helps appease the attitude that the long term unemployed are simply lazy, but it fails to stimulate spending. There’s a natural reaction among those who are working and paying taxes that they deserve to be rewarded and their money shouldn’t be handed over to people who are taking a vacation. Assume they’re right – morally – but unless they’re ready to spend the money they’ve saved in taxes, they’re a poor jolt to the economy.
In the same way, money that was given to school districts to rehire teachers isn’t being spent, for fear that things will get worse. If the money isn’t spent, to rehire teachers who will spend their regained salaries, things only will get worse. The stimulus can’t be effective unless it’s put into play, and even with free money, there’s a reluctance by both industry and local government to take the essential first step.
Taken as a problem in eco 101, everything is easy to deal with, but before that can be done, there are major hurdles, both in getting support for deficit spending and a more active central government. The challenge is simple enough: teach economics. So far, nobody seems to have figured out how to do that.
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