Saturday, November 5, 2011

Here's the System, Where is the Balance?

I am no economist (or graphic image whiz), so I can’t claim any special insight into how things work.  That said, I would like to explain my view on the relationship between the business cycle in the US and what has been US Governments spending cycle as depicted in this crazy looking flow chart.  The actual relationship is, of course, far more complicated than can be pictured here, so essential simplification is necessary for a general understanding of  how our government responds to the ups and downs of the business cycle.  

For those who want to jump ahead and try to understand this graphic, the circular red and blue arrows on either side represent the business cycle (left) and the government spending cycle (right).  For our purposes here, direct government spending and reducing government revenues are treated as two forms of spending.  The green arrows represent the flow of capital.  The yellow arrows show where there is impact on other aspects of the economy or government finance.  The balance that seems to be missing in this graphic is in having a progressive tax structure that pumps sufficient revenue back into the government for the extra capital needed to soften the financial impact on ordinary Americans and to rekindle the economy for everyone when the economy tanks. This extra revenue should come from those who benefit the most from the system and not from the back of those who suffer the most when the economy contracts. 

Let me state a few of my assumptions:

1.      The business cycle has, and will continue to fluctuate between periods of prosperity and contraction.  This isn’t very controversial.  It is based on actual patterns observed for over 200 years.  Why the business cycle fluctuates and why these ups and downs are sometimes mild and sometimes wild is a hot topic of debate.  The main point of contention seems to be the relationship between government regulation and the business environment which we call, “the market place.”  Are free markets truly self-regulating as some claim or are markets best operated within a set of rules to assure fairness and to modulate the business cycle?  I favor the latter position because I believe the market place is a human construction, and human beings always need sets of rules in order to achieve the greatest good.  But this whole debate is a distraction to the fact that, for what ever reason, business and commerce are running in cycles.

2.      For better or for worse, citizens of the US have evolved the notion that it is governments role to relieve the suffering and financial displacement that follow in the wake of down turns in the business cycle.  Furthermore, we have come to expect our government to take an active role in helping the business economy recover from slumps.  These “socialistic” ideas weren’t always true, but they grew up as part of the social contract we called the “New Deal.”  It has worked well enough for the past 75 years or so.  In its current form it includes both direct assistance for people during business down turns and direct intervention in the business economy to rekindle prosperity. 

    1. Direct assistance for workers includes Unemployment Assistance, Food Stamps and a host of other financial aid programs.  It has also come to include some retraining programs as well.   Direct intervention in the economy initially meant lots of government hiring.  Creating jobs for people during an economic down turn created much of the nations infrastructure that people and businesses depend on today.  Government hiring directly benefits those people employed and stimulates the demand for goods and service in the business economy.  When more people have more money, their consumption creates demand which stimulates production and pushes the business economy in a more prosperous direction.  More recently, creating jobs directly has not been necessary during minor business slumps.  Tax brakes for those still employed has been enough to stimulate demand, restart the economy and get people back to work.

    1. Direct assistance for the economy included direct hiring, as discussed above, but also come to include a number of  financial measures from lowering interest rates by the Federal Reserve (technically not a government move) to creating tax breaks, paying out government substitutes to certain businesses, offering loan guarantees, easing certain business regulations, etc.  In some cases these measures result in substantial increases in government spending. In the case of tax breaks, the result is substantial decreases in government revenues.

  1. People with the most capital tend to invest in businesses during economic up turns and hedge their bets with US Treasury Bond during business down turns.  This has been a good deal for them as they make money either way.  It would seem that this is also good for government as it creates an infusion of revenue just as there is more demand for government spending on behalf of the economy and the unemployed.    

So what is happening in this graphic and what is going wrong this time. (More to follow later)

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