Nations Agenda™ - Constructive Political Thought
Informative articles and commentaries on government, economics, climate change, our times
Millennials, Seize the Future or Lose It All
 
Part 6 - Solutions to Economic Problems

Solutions

So far this series has looked, in a very simplified fashion, at how the economy works, and looked at systemic problems that are pointing the middle class toward poverty. It has also hinted at intransigent problems that are not easily resolved because of their very nature.

The biggest intransigent problem is, consumers aren't buying, so industry isn't expanding jobs. Industries use mergers to eliminate jobs. If consumers do buy, they want the lowest price, so this impacts jobs in industry. These are steady downward pressures caused by over-competition and focus on price, which is an intransigent, systemic problem.

Some caveats

Government intervention during the Nixon administration showed that freezing wages and prices doesn't work. We can also see that when corporations and financial institutions do well, it doesn't guarantee the economy will prosper if consumers aren't buying.

We are not going to change the basic nature of business, which is making money, or the basic nature of consumers, which is to buy cheaply. We might have some impact on these, but basically they won't change, and probably shouldn't.

We are probably not going to have much impact on international trade and free trade agreements. Those may be harmful in some respects, but they create opportunities and jobs in other respects. Isolation doesn't work very well. Third World Countries need the economic boost to become stable so terrorists don't thrive.

The government can't support everyone. That social safety net goal needs to be to help everyone to become self supporting, not make people dependent on handouts.

What is murkier though, is the role of government in social programs. While Republicans, Tea Party, and Libertarians want a smaller government role, in actual practice, money that goes into assistance is not only helpful for the poor, it is also helpful to the economy. Supply-Side Social Insurance Simply Doesn’t Work

What is more clear is that a dollar added to the economy has a 2x multiplier effect and a lot of other benefits. Expanding economies are better than contracting ones which are overly frugal or eliminating jobs and wages.  THE IMPACT OF A DOLLAR – PART 9

Economic stimulus by the Fed, when carried on too long, can be destructive. It can raise the National Debt.

Refresher from the Economic Policy Institute: Why Millennials are suffering from low salaries.

Goal setting

The two legs of the economy, consumer spending, and business, need a third leg for stability. That's what we have to attain.

We need to set goals that are attainable that support increasing and maintaining the public wealth to increase spending, which will benefit all sectors of the economy. Spending is multiplied through the economy.

  • Preserve and create jobs.
  • Maintain and increase wage levels.
  • Create monetary policy that provides economic stimulus without allowing injurious interest levels (maintain below 6%)
  • Create tax policies that don't overly burden companies or individuals.

1. We're seeing too much corporate flight to other countries because of the US tax system, and for cheaper labor. Tax revenue and jobs are lost. Work with corporations with incentives to change this.

Solutions: Remove the corporate income tax for the first 7% of profit, in exchange for maintaining the headquarters in the US and not shipping jobs out of the country. Give an additional 5% no tax incentive for 3 years for bringing jobs back, and for job creation. Economic Policy Institute: Policy Responses to Corporate Inversions

2. We're continuing to see merger mania, which eliminates jobs and entire companies.

Solutions: Examine these companies more carefully for why they are merging, so that if they are merging to reduce costs or eliminate competition, require them to surrender 15% of their stock to the government, to be cashed, and used for job creation and economic impact programs for job loss. Also be tougher with anti-monopoly laws. There should be at least 3 major competitors in a market, and several viable niche competitors.

3. Wage control is very difficult, and really should respond to some market pressure. But falling wages hurt the entire economy, including business.

Solutions: Create a wage council, with both citizen and business participation, that creates realistic minimum wage, hour, and benefit guidelines for most businesses, including for non-exempt workers. If businesses don't sign on, raise their taxes and give  the money to, or fund benefits for, the underemployed. It may be necessary to end the non-exempt status except for officers in companies.

Fortune.com: The Fortune 500 can easily afford to give low-wage workers a healthy raise. Article.

4. The taxes and wages paid by US employers places them in a somewhat competitive disadvantage with countries with very low wages.

Solutions:

A. Help make the playing field level for business.  Repeating: Remove taxes under 7% of profit for companies who maintain their corporate headquarters in the US, and don't ship jobs out of the country.

B. Create economic enterprise zones in which businesses with insurmountable foreign competition are able to manufacture and sell with economic advantages, such as reduced sales tax, reduced property tax, etc.

C. If companies continue competing on profit, which the public delights in, prices and profits will fall. Companies need to compete on value and diversity, so that consumers find the products that suit their needs the best and pay a reasonable price.

D. Companies that innovate and broaden their product line are the ones that thrive in markets. Others, like the Twinkie company, fail to support their business and go out of business.

A robust analysis of our current economic conditions and the policies that will get us on the road to recovery are covered in this report from The Center for American Progress: Report of the Commission on Inclusive Prosperity.

A Recipe for Economic Growth Former US treasury secretary Lawrence H. Summers believes institutional reforms and significant investment are required to push the world economy forward.

Confronting big economic challenges Nobel Prize–winning economist Michael Spence discusses how increased structural flexibility could encourage stronger global economic growth.

Tim Smeeding on how to reduce income inequality (Mark Thoma blog), from Lane Kenworthy's blog.

Rewriting the Rules of the American Economy:  An agenda for growth and shared prosperity. - The Roosevelt Institute

Ben Bernanke, former Chairman of the Board of Governors of the Federal Reserve System, and now Distinguished Fellow at the Brookings Institute, blogged on Secular Stagnation. He proposes that investment in new business is the cure to unemployment, and foreign markets are the answer to product demand. My sense is that there is no foreign market due to the down worldwide economy (Europe is worse off than the US). Corporations do create new products or markets whenever they see a market opportunity. Opportunities are very few. I think his answer is wishful macroeconomic thinking, and ignores the fact that consumers aren't spending. They aren't spending because they don't have income above the amount needed to meet needs, and they aren't going into debt to increase spending.

Redistribution is a viable solution that won't really harm anyone. See The Economics of Financial Redistribution on this site.

Ending Comment

Solutions need to be found now for problems in the economy, because other trends are going to make the economic conditions even worse.

Trends include:

  • The Creative Commons trend in which a product is designed once, has very low manufacturing, maintenance, and distribution costs, and sells for very low amounts.
  • The shrinking growth rate of the population, nearing zero in around 20 years, and now mostly growing because of immigration,  which means markets will not be growing. Investors will pressure companies for price increases to keep stock prices going up.
  • The growth of the service economy, 80% of GDP, while the manufacturing economy, 12% of GDP, continues to shrink. The largest occupation in most states is truck driver. The service economy doesn't require college degrees, although trade school is often required, and most service fields don't pay high wages.
  • The continuing erosion, since 1980, of real spendable income.
  • Over-competition, which drives wages down for profitability, and drives companies out of business.

Sixty percent of US workers are the US economic engine working for small business. Most of small business has very small profit margins, and can't afford to pay large increases in wages or benefits. They go out of business regularly. But the problem is more so that they fail to adapt (innovate) to changing market conditions with adapted or new products. An example is the Hostess company, when they blamed realistic labor demands for putting them out of business, when it was actually failure to adapt to the market.

Business is difficult, and not all businesses survive. For example, retailers periodically go through this. Each business has to adapt to changing environments, and not try to blame failure on the inflation related increases in labor and benefits.

Wage earners are in a period of limited power. Unions are basically dead. Most jobs are non-exempt, meaning few are to union and National Labor Relations Board rules.

There are companies with bad labor policies, and there are unions who unfairly treat companies. Unions create an adversary relationship instead of a symbiotic relationship.

The entire labor system needs to change so that people aren't overworked and underpaid, and are subject to safe working conditions.

But change needs to be gradual enough that companies aren't destroyed, and the economy can accept the impact.

One thing to keep in mind is that if you put a dollar into circulation, it goes to the next person, and the next, and the next, improving the lives of each.... Even if some of it goes to taxes, and is paid to others, it still circulates. If it goes to a company, it pays workers. If you save a dollar in a bank, the multiplier effect is around 10x through the lending and redepositing system. The most important thing is for money to be spent. We now have mostly a service economy, so the help to others is more direct. Small businesses need it badly.

Currently putting money into the stock market is not helping the economy. Corporations are flush with money, and it only drives up the price of stock. The danger is from a stock market fall and loss, until more money is circulating and putting people to work. Small business employees 80% of people, and that's where the fix has to be.

An Economist Walks into a Bar: TEDx Talk by Robert Litan

Economic Graphs - Part 7