Post No.: 0293
Spending is often extolled as the solution to getting out of any economic recession. It’s true that domestic spending will boost the domestic economy. But no one can spend or consume if they don’t have enough wages (more specifically disposable income) to do so in the first place. But workers won’t have enough wages if there is not enough economic production and well-paid jobs in the first place. But economic production won’t increase if there is no spending in the first place. And so forth in a vicious cycle!
Gross domestic product (GDP) – which was questioned as an adequate measure of the status of a country’s progress in Post No.: 0263 – is a calculation of a nation’s net income based on how much individuals, corporations and the government spends, earns or produces. Using any one of those metrics (spending, wages or economic production) should, in theory, result in the same answer as each other, after taking into account exports less imports.
It’s therefore equally valid to demand that private firms and investors and/or the government should invest in economic production, or indeed to pay workers higher wages, including setting higher minimum wages, in order to boost the economy. It’s an interdependent macroeconomic circle or closed chain. No consumer spending then no tax revenues either, unless from exports and incoming tourists, but if no government spending then less job creation too. Differences of political opinion regarding what to do to boost an economy basically boil down to deciding at which stage we should aim to intervene and how (e.g. reduce income taxes (particularly for the poorest because they would spend more if only they could) to increase disposable incomes to increase spending, or increase government spending (via government borrowing/debt) to increase economic production and job creation to increase spending. Cutting business taxes is less helpful though because companies won’t increase production when demand is low regardless of how low their taxes are – only profits are taxed, and overproduction will dent profits).
So probably the wisest conclusion is to understand that all parts of the chain are important when we look at the full picture. It’s often down to the government to do something though – to break the stalemate between consumers not spending because low production has hit their wages, and firms not producing because consumers aren’t spending. The government and central bank can also employ fiscal and monetary policies, respectively, to manage the economy (e.g. keeping interest rates low to discourage saving and encourage borrowing and therefore spending). They must try to balance against deflation (when consumer spending is too low, which pushes prices down) or rapid inflation (when consumer demand is too high and exceeds supply, which pushes prices up, hence too much consumer spending is bad too). Meow.
Therefore one could argue that it’s not directly down to people to spend in order to stimulate the economy – it’s down to firms to innovate, compete and sell goods and services that people want or need to buy and are able to buy. It’s just like a shopkeeper cannot blame people for not coming in and buying stuff from her/his shop – the shop needs to innovate, compete well and sell goods and services that people want or need to buy and are able to buy.
Also, the poor already (necessarily, just to survive) spend a larger percentage of their income than the rich – they can’t save or can only save a little of what they have. So to cut the salaries of the poor, or deny them state welfare, further cuts their spending potential. It’s thus never really down to the poor to spend more to boost the economy to get a country out of a recession – it’s up to the rich with their massive disposable incomes and asset portfolios to do so; rather than some of them off-shoring and hoarding their money or locking their money up in assets, including buying up properties and leaving them empty because they’re just waiting for them to appreciate in value, meaning that other people cannot utilise them (which is an inefficient under-utilisation of assets from a national perspective). Instead of spending what they could, they’re saving and accumulating wealth to build up their asset portfolios and unearned economic rents.
If money should be earned and then spent, like breathing in then breathing out, then it’s the rich who are failing to do this. In wild, un-tampered-with nature, everything gets constantly recycled rather than hoarded – the concept of ‘perpetual legal ownership’ is modern human only. (Not that I’m advocating an end to legal ownership and a world where theft doesn’t exist simply because theft isn’t illegal and it’s one massive fuzzy anarchic contest to acquire and keep resources using your own strength and wits.) The rich take in far more than they give out – that’s precisely how they’ve accumulated so much capital and wealth over time.
On the other paw, should we punish those who have simply been frugal? After all, bad household debt is problematic too when people spend more than they’ve got. Well it’s not about spending more than we can afford or manage to repay; and those who are saving their money for their pensions, for a rainy day or for large, good investments down the line, such as a house for a home they’ll live in, should not be grouped in the same category as rich hoarders who stash money in tax havens or investment assets just for the sake of trying to get from rich to obscenely rich.
But then sometimes we cannot blame them. And they can only eat so much per day, like anyone else, or care to buy another laptop this week, etc.. So maybe the concept of perpetual legal ownership needs to be reviewed? People should be afforded legal protections for their private property so that people cannot just burgle them from each other, or the government cannot just appropriate them as it wishes, but maybe it shouldn’t last forever? There are already things like inheritance and capital gains taxes when things are passed on between generations, intellectual property rights don’t last forever, and ‘squatter’s rights’ or adverse possession (in limited situations) to encourage and reward the productive use of land. However, wealthy donors frequently fund politicians and their political campaigns, which makes it difficult for prominent politicians to push laws that negatively impact the rich. The rich find it easier to influence politicians, shape political campaigns, spread their political views and manage their own public images, including on ‘free’ services such as social media (e.g. via paid adverts) – so we should be wary of many of the promoted messages we hear and read.
When people are poor, they’re just focused on surviving and putting food on the table – not taking business or investment risks, or even building personal capital (acquiring assets). So it’s the rich that people should be looking at to increase their spending to stimulate the economy. Implementing austerity measures to dramatically cut government spending, which hurts the poorest the most, is therefore strongly arguably the morally wrong, least fair and least effective strategy. It’s thus possibly a symptom of listening to the ‘rich person propaganda’ to demand that the relatively poor should be the primary actors to boost the economy or to burden the suffering after a depression or economic crisis (which are usually caused by recklessness and unfettered greed in the wealthy financial sector too).
I’m not suggesting that those who can, wherever they are on the wealth spectrum, shouldn’t donate to charities, but it kind of reminds me of super-rich people asking the relatively poor to donate to charities in order to eliminate an ill in the world. According to a 2013 Credit Suisse report, the richest 1% owned 50% of the world’s net wealth, and the richest 10% of adults held about 85% of all wealth – so sensibly concentrate on asking them for the money! (This level of inequality continues to widen too.) They have the most power to solve many of the world’s pressing problems, if only they truly wanted to. But, not all but, many don’t put their money where their mouths are – for them it’s just PR for their own carefully-managed public images. The UK’s National Health Service, for example, would be fine if wealth redistribution was better. The 90% (the poor to middle-classes) with only about 15% of all wealth between them, probably don’t have enough power or ability to change the world even if they gave all their money away.
Going back to the issue of stimulating the economy – saving should theoretically work equally too because if you save your money in a locally-supportive bank then that bank should use that money to invest in local businesses, which should boost economic production, which should boost job creation and wages, which should boost consumer spending, and so forth. Investing in local businesses was what banks used to do more of in the old, simpler (higher-regulated) days, but nowadays they use a lot of that capital gambling on the markets and seeking economic rents rather than directly on true wealth creation in the economy. The financial sector was primarily to blame for the 2007/2008 Financial Crisis, and it could also be partially to blame for the slow recovery. (‘Negative interest rates’ had been considered to get banks and consumers to loan and consume respectively rather than sit on their cash. But some savings are required because wasn’t not saving enough capital in reserve a key problem as to why several major banks went bust during that crisis?!) We need to consume less for the sake of the environment and most people need to save more for the sake of their future pensions too.
The relatively high personal savings rate of Chinese households didn’t stop China’s economic growth during the same time period (an average of 34% between 1992-2016); although different economists dispute whether it’s good or bad for the country going forwards and other specifics.
However, we must also factor in the increasing impact of mass automation nowadays i.e. computers and robots taking jobs away from humans, which means that production does not exactly equal job creation or higher wages. The macroeconomic chain – of economic production creating secure jobs and boosting wages, which will boost spending – arguably will not work quite as well anymore. Some predictions indicate that mass automation will still create jobs but just of different types, but others see ever more power being concentrated towards those with the means of production. This is why some people are calling for a ‘standard living income’ for all; although this’ll generally be a hard sell to the electorate, along with the big question of how it would be publicly funded?
Increasingly more ‘white collar’ jobs are giving way to machines too – in fact, current artificial systems are generally more accurate and faster at ‘intellectual’ decision-making (e.g. probabilistic decision-making) tasks than performing fine manual tasks with non-standardised items compared to humans (e.g. physically picking individual items up, such as a bunch of bananas in a warehouse rather than whole uniformly standard boxes), so we might find a world where computers will make the decisions and command humans to do the menial fine-motor tasks?! The most experienced workers are likely to be the most safe, but this raises the old conundrum of ‘how can a young person build up her/his work experience without first getting the opportunity to work in lower-skilled jobs the first place (without being exploited e.g. with zero/low pay internships)?’
I don’t claim to have the answers! These are just some of my present thoughts according to my present fluffy level of education, which will continue to expand. It’s all complicated because it’s not only about economics but also about politics. It’s also environmental – we cannot expect infinite material consumption in a finite material world. And it’s about the technological predictions of the future too.