When economists cheerlead GDP figures, they do so based on the supposedly positive judgment that growth implies consumption gains, which means that people are better off. There’s good reason to be skeptical of this claim, even leaving aside distributional concerns. Robert Reich, in discussing China’s currency announcement, speaks well to the issue of a production versus consumption economy:
Here’s the awkward truth that’s not openly discussed on either side of the Pacific: Both the United States and China are capable of producing far more than their own consumers are capable of buying. In the United States, the root of the problem is a growing share of total income going to the richest Americans.
Inequality is also widening in China, but the root of the problem there is a declining share of fruits of economy growth going to average Chinese and increasing share going to capital investment.
Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.
Unfortunately, political divisions tend to obscure the real class divisions here in the US. Absent some key distractions, I think the working class would prefer a society in which production implies consumption, while the capitalist class prefers a society in which production implies profit. Political bickering gets in the way of exposing this key difference, and seems to make consumption less virtuous than production. Worry not, though- consumption is happening, just not for the masses. Will China prove to be different, as citizens demand a higher level of consumption still far below what we have in the US?
What this implies is that prices should fall so that full output can be reached, implying full employment. Artificially high prices create an imperfect market (inefficiency) and the result is foregone opportunity of wasted capacity.
The purpose of an economy is production, distribution, and consumption of real resources based on the efficiency of supply and demand (downward sloping) and the effectiveness of return on investment (upward sloping).
What we are seeing world-wide is a demand problem rather than a supply problem. Too much wealth is being accumulated at the top (hoarded), and the solution is more equitable distribution.
There is never a problem with increasing demand in a fiat regime, which the global regime at present. The bottleneck is hoarders who are afraid that stimulating demand will be inflationary, adversely affecting money as a store of value.
This is morally deficient (selfish) and economically shortsighted since everyone would be vastly better off in a prosperous world, where distribution is equitable and demand sufficient to generate full employment.
Essentially, policies and incentives are wrong.
This now has me reading the wiki article on underconsumption theory- interesting stuff.
http://en.wikipedia.org/wiki/Underconsumption
Money “hoarding” is not possible. When a person or a business receives money, that money either is saved or spent. Either way, the money immediately goes to another person or business.
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If money were gold, it could be hoarded in a safe. But money is not “hoardable.” Except for the few dollar bills kept in a box, every dollar in America changes hands almost every day, sometimes more than once a day.
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The class difference between rich and poor is not caused by money hoarding, or even by “hoarders’” fear that stimulating demand is inflationary. I know many wealthy people, and I don’t know any who are money hoarders or who are afraid to stimulate demand. On the contrary, as most are business people, stimulating demand is a top priority.
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The wealth gap is caused by the failure of the poor to keep up with changing times. Blue collar jobs are disappearing in favor of more technical, often computer-related work. That is why productivity has grown so much.
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To close the wealth gap, ways must be found to educate the lower classes, so they can participate in the new economy. The notion of an unselfish, “prosperous world, where distribution is equitable,” is naive. Generosity is not the solution to the problems of the poor.
Education is the key to closing the wealth gap.
Rodger Malcolm Mitchell