The economy is like a two legged stool that can be tipped over very easily. It is a very short tumble to feudalism and industrial barons in which lords owned the land and protected their citizens, in return for living in filth and working in miserable and dangerous conditions for food.
To emphasize this, many poor countries are unable to rise from squalor because they have economies in which the privileged trade with each other and don't include the rest of the population (privileged trading circles). It isn't difficult to reach this point, and currently this is the direction we are headed as the middle class sinks into poverty.
"In the mid-1970s, the majority of Americans were in the middle [economic class], with 52 percent earning the equivalent (in today’s dollars) of $35,000 to $100,000. Today, according to census figures, the share of households earning under $35,000 is virtually unchanged, 35 percent. The shift has occurred in the other two categories. Households with incomes over $100,000 have doubled, to 22 percent, while less than 44 percent are in the middle cluster."
- Washington Post article.
As a percent of Gross National Product (GDP), since 1970 wages have steadily fallen, as shown in this article on a less than authoritative source: Growth of Real Hourly Compensation for Production/Nonsupervisory Workers and Productivity, 1948–2011.
NPR Story: The Numbers Add Up To This: Less And Less Opportunity For Poor Kids
Incomes have stalled for several years, while many prices, like college, continue to increase at very high rates, and inflation merrily takes its toll at 3% each year. The Congressional Budget Office expects wages will remain low, unemployment will tick down just slightly, and the National Debt will tick up slightly in coming years because wages pay most of the taxes.
While the stock market was elated over this news, if wages were up, consumers would buy more products. Consumer spending accounts for 70% of the economy (GDP). Only 45% of people are spending more in 2014 than 2013, and it is mostly going on essentials. "What has traditionally led the U.S. economy out of past recessions, is consumers' willingness to buy discretionary items." Spending is instead going on necessities. The people who are spending more are millenials, and they aren't much help because they have less money to spend.
America's wealth gap 'unsustainable,' may worsen: Harvard study.
Okun’s Equality and Efficiency - Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University.
If you impair either one of these, the economy fails. If people lack the money to purchase goods and services, companies fail because they can't sell. If companies don't hire enough people, or pay people enough in wages, they can't buy goods and services from companies. Wall Street may be elated when wages are lower, but it's like laughing while you get your leg cut off.
These two elements are locked in a dance in the economy. For one to prosper, the other must prosper. But making one prosper doesn't necessarily mean it will do what is necessary to make the other prosper. Companies are currently prospering, but not helping workers. The economy doesn't get any more basic than this.
Two problems today: We have a major problem with dwindling wages. People are buying, but not much.
Even business to business, and business to foreign sales, ultimately depend on the power of consumers to purchase.
While making and saving money may be the driving influences for both consumers and companies, this driving influence can easily spin things out of control and wreck the economy.
We have a lot of things going wrong, creating a perfect storm of economic malaise putting us into a tailspin that has to be corrected.
One of the defining characteristics of capitalism is the idea of competition. It puts companies into a contest to either create a better, cheaper product, or create a niche market product that is different in a way that a select group will prefer it. Innovation and technology are the main mechanisms of this process. Competition is considered to be very beneficial to the consumer.
Since the US reconstruction of Japan after WWII, competition has come increasingly from outside the US. Other countries can create products at lower prices. When this happens, US companies either find ways to reduce prices, or go out of business. Consumers love low prices. Most consumer purchases are driven by price. So the process is nearly automatic. Any time a cheaper priced foreign product is introduced, consumers flock to it, and a US company goes out of business.
Businesses are also attracted to foreign countries for different reasons. First, there is the tax dodge. They stop paying US taxes. Second, there is the lower cost of labor. They can create the product more cheaply in another country.
The effect of products imported from foreign countries is to do three things. 1) US jobs go away. 2) Less money is put into circulation in the US because prices are lower. 3) Fewer taxes are paid, which means individual taxpayers have to pick up more of the share of funding government, and new programs are more difficult to fund.
Legislators are not helping with this. They look at expanding trade relations so that US companies can export more, and in doing that, they pave the way for more imports.
The question becomes, how much do we ruin our own economy, particularly in manufacturing, to get more markets open to US manufacturers?
Technology and mergers are also competitive devices that have bad effects. Companies can become more competitive by lowering the costs of providing services and manufacturing goods. Automating processes through technology makes products cheaper, but eliminates jobs. Merging with competitors means eliminating some competition and eliminating duplicate jobs or entire companies.
The overall effect of technology and mergers is to eliminate jobs.
The question becomes, how much do we allow our selves to ruin our own economy by eliminating jobs?
The Great Recession showed us that corporations can be very profitable, while only expanding their markets incrementally, and not expanding their pool of employees. Since the 2001 dot.com bust, "merger mania" has been occurring, and businesses haven't done enough hiring to keep up with the demand for jobs from layoffs and new people entering the work force. It's very similar to the situation of preferred trading circles in third world countries. Companies can get along just fine without including the rest of the population... at least for the moment.
This has even greater significance. Supply Side Economic theory thought that if you shove more money to business, principally by cutting taxes, it would trickle down in the economy by creating more jobs.
Under President Reagan, the first political proponent of Supply Side Economics, taxes were cut, and military spending was increased. The result was a major budget deficit that sent the National Debt up a ski slope to frightening levels. The theory was used by Presidents through George Bush in 2008, and together with military spending on an unfinanced war, the National Debt went up like a rocket to destructive levels.
Most economists no longer think of Supply Side Economics as a simple solution. Other economists can show statistical significance of the opposite theory, that raising taxes has economic stimulation, and it doesn't cost jobs or raise the deficit. This was done to very good effect by Eisenhower, and ushered in a major period of prosperity, but the idea of raising taxes is disfavored by Washington.
Putting money into circulation, even through taxes, has a positive, even multiplying effect on the economy and benefits individuals. Putting more money in the hands of corporations, simply raises the value of stock, unless the company plans to use it for expansion, and right now most are using mergers.
The other type of economic stimulus that has temporary impact is Keynesian Economics. In that theory, interest rates are reduce (by the Fed) and the government invests in infrastructure. This increases the money supply to both business and individuals so that spending increases. More people are hired. It is an economic stimulus that brought full employment to Europe when unemployment was around 30%. It helped the US climb out of the Great Depression. But the government has to borrow money for spending, so it also drives up the National Debt.
The US is currently keeping interest rates low and investing in infrastructure, as an economic stimulus. But while only small gains are being made by the people, corporations and financial institutions are setting records, and are not doing enough hiring.
This raises the question of where economic stimulus belongs? Is it better to have lower taxes, or temporarily higher taxes?
Population stagnation. Another problem is occurring in the US, that Europe has already faced. The US population isn't reproducing at a high enough rate to maintain the population. Birth rates are down. The US population will grow by around 20% in some areas mostly due to immigration.
Businesses that are in the stock market, depend on expanding markets to increase their business and please investors. If markets can't expand, then they either have to cut costs (jobs) or raise prices. If they don't, the value of the stock falls. The only places where they will be able to expand is in countries like Africa, where the population is growing.
This raises the question, "How will businesses survive in the coming 20 years?"
Japan has faced similar problems in the last 10 years. This paper outlines the problems it has faced and the effect. Japan’s Lost Decade: Lessons for Other Economies - ADBI Institute.
Solutions - Part 6