Posted 9 months ago on July 29, 2012, 2:14 p.m. EST by Misaki
This content is user submitted and not an official statement
Older sister said that instead of creating a new system, we should revise the old system incrementally. This could still happen, but data shows that things are not getting significantly better and there would have to be substantial changes to the current system to fix the problems with the economy. Charts follow.
From the St. Louis Federal Reserve:
Observation 1: although unemployment has decreased, the civilian employment to population ratio has not increased during the recovery.
Observation 2: males are at a historical low for employment.
So corporate profits are up, but we're not really creating jobs so much as people who can afford to are giving up looking.
Observation 3: kicking anyone out of the workforce is completely out of the question.
Observation 4: job growth has "settled into a slower trend".
Observation 5: there has been a huge increase in government spending over the last century. Federal government spending made up about 3% of GDP in the first decade of the 20th century, compared to 20~25% during the last decade.
To fix the economy through incremental changes to the current system requires either higher taxes or deficit spending, which would continue for the foreseeable future. The problem with taxes is that it introduces inefficiency as well as greater incentive to cheat the system. Suppose you want to hire someone to do something you could also do yourself, but they are taxed at a 50% marginal rate. They will naturally set their prices so that unless they are more than twice as efficient at the task as you are, you might as well do it yourself unless you're very wealthy. The result is a bunch of people doing stuff inefficiently to save money, and other people using business expenses to avoid taxes which is another layer of complication.
If jobs are created through deficit spending, it means endless payments on the national debt and higher inflation. Deficit spending does not necessarily lead to inflation, see Japan for example, but in the US people have come to expect regular wage increments which means prices must increase as well. And inflation causes people to invest in financial markets, which causes much of their money to go to financial sector profits.
Observation 6: financial sector profits have increased from 8% of all corporate profits to about 30%.
Observation 7: the 'FIRE' economy has greatly surpassed manufacturing in size.
There is another story here, of the wealthy running out of money. A key point is that many people did not really have any particular goals, but were determined to capture a fair share of company revenues through labour unions. So everyone continued to work full-time and spend with low sensitivity to prices—just like now—except that wealthy people couldn't afford to buy luxury goods while also loaning money to the government. Since government demand for long-term loans to finance debt was inelastic for political reasons, this led to high inflation and high unemployment.
Observation 8: the share of income for the top 0.01% was at a record low during the 1970's.
Observation 9: Interest rates for all sorts of loans spiked during the same period; for the government borrowing money long-term, for the government to lend short-term, and for people lending to banks.
Observation 10: market capitalization compared to GDP was unusually low when all this was happening.
So there were many ways to 'invest' money if you had any and end up with more than you started. Although the stock markets were not really rising faster than inflation, they would have been a good long-term investment. The only problem was that then, just like now, it was the specialists in the financial sector who stood to profit from all the changes going on and so many people just spent their excess money on material goods, leading to inflation.
This situation ended when labour unions were weakened and taxes on the wealthy were lowered in the 1980's, which led to greater sensitivity to prices for the typical person and let wealthy people buy their expensive toys while also being able to loan money to the government.
Observation 11: inflation dropped to significantly lower than the interest rates for loans. (second chart)
Since people were addicted to getting money for simply having money, lower interest rates led to stock market bubbles but this isn't very important. What you should know is that it is not going to get better through incremental changes to the current system. The wealthy are unable to spend substantially more money, and the only way to create enough jobs in the private sector as productivity increases is for people to work less.
Observation 12: the billionaires who have agreed to donate the majority of their wealth to charity are not deluded into thinking this will fix unemployment.
Observation 13: many poor people are severely burdened with the cost of basic necessities like housing, and cannot accept lower wages.
Observation 14: the best way to ensure people can afford food and health care without government assistance is full employment.
Observation 15: inflation is an indirect subsidy to banks and other financial institutions, which creates financial sector jobs.
Observation 16: neither political party seriously intends to reduce government spending since tax cuts need to be larger to create the same number of jobs.
Observation 17: the idea of 'austerity' is just a political ploy to gain votes, or supported by economically illiterate politicians. While people are deluded into thinking the government directly pays Wall Street and won't support higher spending, taxes or inflation, they will also vote out of office politicans who don't fix the economy.
High unemployment is a global problem, which has affected many major economies such as the European Union, the United States, and even China and Japan. It is not really possible to 'export' unemployment by lowering wage costs because no nation is prepared to accept the lower outside demand, and this would just be seen and labeled as currency manipulation or some other term. Incremental changes to the current system will only create jobs through the mechanism of higher financial sector employment and profits and higher inequality.
Observation 18: economists can only think of a limited number of 'useful' things that people would agree the government should spend money on.
Since people are opposed to higher government spending, that is not likely to happen anyway and the political parties will just switch control of the government as they scramble to create jobs before being voted out of office for not reducing spending.
Observation 19: by encouraging wealthy people to spend less time working, we could employ more professionals and fix unemployment without more government spending. However, this might cause the inflated financial markets to crash.