Wednesday, August 25, 2010

CREATING ECONOMIC GROWTH

In September of 2008 the American economy transitioned from a mild recession to a devastating collapse. Even after spending more than two trillion dollars to try to stabilize it, the economy continued to spiral down until it seemed to reach a plateau near the end of the first quarter of 2010. The American economy remains fragile, unstable, and unsustainable. With more than 33 million unemployed workers (19.6% of the workforce) and another 10-15 million economically-forced part-time workers, the flow of money through the economy can't sustain activity at a level higher than its current state. "We need to create more jobs!" has become one of the favorite clich├ęs of the talking-heads that parade across the newspapers and the television. Unfortunately, none of them ever suggest how to create new jobs, and the experts know that jobs follow spending - not the other way around.

It is impossible to force new jobs into the economy! New jobs are created when an economy grows, and getting the economy to grow is the difficult task. Growth in an economy, like growth in any complex system, is produced by increasing the flow through the system!

The Complex-Systems Theory of Culture (Gehlsen, 2009) is the only published scientific theory that explains Cultural Evolution. According to this theory, modern economies are complex evolving cultural phenomena, which it explains scientifically for the first time. The theory of cultural evolution can't be explained in this blog posting, but I can provide a simple analogy that describes how all complex systems function. An apple tree is a good example of a growing and evolving complex system. A tree is an open system, which means that it always grows by expanding its capacity to capture more of the flow through the system. The flow through the system is predicated on the size of the roots that produces the flow through the tree. The roots of the tree capture a portion of the flows (energy, water, and nutrients) available to it and use them to build a larger root system and to produce emergent properties (trunk, branches, stems, leaves, blossoms, and fruit). The tree continues to grow as long as the flows through the system are sufficient to sustain the growth process and as long as the tree can support an increase in size.

The "root" of the modern economic system is the consumer sector. Consumers earn money and spend it on goods and services, which produces the basic flow that sustains the economic system. Stores, factories, banks, and the government are examples of the emergent properties of the economy. Getting the economy to grow is a direct matter of getting more money to the consumers, which increases consumer spending. Business trends over the last thirty years have resulted in a shrinking middleclass and a declining amount of consumer wealth. Consumer spending continued to increase during this period due to enthusiastic "debt-spending". Debt spending is always unsustainable, and it has reached its logical end. The problem wasn't too much consumer spending, which is the common cry of the pseudo-intellectuals who want to blame the consumers for our current economic dilemma. The problem was all the easy debt that the financial institutions provided for consumers so that they could live beyond their means.

Debt spending is unsustainable! The debt load on consumers grew to the point that the system collapsed under its own bloated weight. After the initial collapse in September of 2008, the economy continued to spiral down until it reached a level of activity that can be sustained by the current level of consumer spending. This is analogous to what happens when the apple tree goes through a mild draught, and it withers back to a smaller size that can be sustained by the current flow of water. Trees protect their roots by disposing of the emergent properties (leaves, blossoms, fruit...) and use the flow to sustain as much of the root system as possible. With 33 million Americans out of work (and millions more forced into part-time employment) the flow of money dwindled because the American consumer can no longer borrow enough money to continue to spending at high levels. The economy is on life support (supplied by the 15 million Americans who are collecting unemployment). The economy will spiral down to an even lower level if the unemployment benefits are reduced or stopped.

Fixing the economy requires getting more money to consumers so they can increase the amount they spend each month. In other words, increase the flow of money through the roots of the system and the economy will grow and create new jobs. Many options are available. One way to create a modest amount of economic growth is to give all families a free month of housing each year. This plan could increase consumer spending by 100 billion dollars each year (and it doesn't cost the taxpayers any money). On the other hand, I am not convinced that this would create substantial economic growth.

Ironically, the only asset available for ensuring dramatic and immediate economic growth is the vast pool of consumer debt. We must restructure all consumer debt so that the amount of money paid to mortgages, car loans, credit cards, student loans... is substantially reduced, which leaves consumers with more disposable income to spend on goods and services each month. For example, a typical 30 year mortgage with a 5% interest rate could be changed to a 40 or 50 year mortgage with a 2% interest rate. I estimate that an aggressive restructuring of consumer debt would result in 100 billion dollars of new spending each month. This increase in spending provides the needed flow of money to produce growth and to entice investors back to the economy.

This isn't a "rob Peter to pay Paul" scheme. A sufficient amount of increased spending will stimulate new investments in the production of goods and services because the wealthy will compete to capture as much of this new spending as possible. New investments produce new jobs, and this represents a positive feedback process that puts more money into the roots of the system and continues to stimulate increased economic growth and activity. In other words, the long-term growth of the economy will be far greater than the amount of money that is released from debt payments.

2 comments:

  1. As always your commentary is enlightening. The analogy of the apple tree makes a good deal of sense. However, your paradigm for continual growth is concerning because of the nature of growth based, open market economies. My point is: given finite natural resources and land, are growth based economies inevitably destined to implode for lack either? It would seem this is the cause for most wars. Unless technology can better manipulate and develop what is finite, it would seem a mute point to simply redistribute wealth and restructure debt.

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  2. If a majority of the new spending that results from this plan goes straight to supporting the local economy in every way possible, or even in specific ways that are affordable, our local economies would improve. If you have a friend, and they sell a product that you normally use already, but usually purchase at a store, then buy it from your friend. If our economy became relationship based and as local as possible there would be less money in the hands of corporations and more money in the hands of those who might just use it to take you to lunch at another friend's local diner. (yes, I understand there are some things that need to be imported..like coffee beans.... but there is NO REASON any store in Oregon should carry anything but Oregon's own Strawberries!) P.S. I don't sell anything, but I buy my coffee from a friend who roasts it locally!

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