Fixing the current economic mess
May 7th, 2009 | Published in Current Events, Economics idea | 18 Comments
For us to get out of our current recession, someone has to start buying the things that the economy produces. This is a problem because people are worried about the future and aren’t spending.
Instead of increasing government spending or trying to encourage consumers to spend more when they don’t want to, I think we should save physical goods for the future. When people save, they are working now to consume later. If the economy as a whole is saving, it should be stockpiling goods for future use. The way to do this is to stockpile goods that deteriorate slowly over time and won’t become obsolete.
Good candidates for long term storage are mineral commodities like metals. What would happen if the government used borrowed money to stockpile iron? The mining industry could expand production, providing jobs for unemployed workers. This would help end the recession.
If consumers start drawing down their savings once the recession is over, the government could sell off some or all of its stockpile of iron to prevent the economy from overheating.
There are lots of details that would need to be worked out to use saving physical resources as a tool to combat recessions. I like the idea because it matches real world activity with the decisions consumers are making.
May 7th, 2009 at 10:59 pm (#)
In terms of stimulating the economy, what is the difference between the government borrowing money to buy iron ore and, say, borrowing money to build a bridge?
Eric
May 8th, 2009 at 10:41 am (#)
Artificially created jobs merely push the day of reckoning back. When the US treasury borrows money (that the FED printed) to create jobs, the overhead cost per job probably exceeds the wages. The results will be a greatly increased deficit, a longer recovery time line, higher taxes, greater foreign ownership of US assets and a weaker country.
The only viable course, as I see it, is to swallow the bitter pill, let those entities that can’t make it go bankrupt, and I include the US government in this list. Our outstanding debt combined with the unfunded entitlements have reached such staggering proportions that we have no chance of recovery by traditional means.
The paradox is that to recover, we must make things, to make things we must have bountiful energy, abundunt raw materials and an available workforce. To justify making things, we must have a market.
The workforce is the only one of the four we have. Every newscast has strident environmental opponents to the energy component. Environmentalists demand we curtail extracting the natural resources for raw materials and the rest of the world either satisfies its demand from domestic production or as is the case with most, their per-capita consumption is such that they do not represent an potential demand.
We and most of the nations of the world have the dilemma of significant unemployment for the forseeable future and the sooner we develop an alternative plan for individual income that does not require a job, the sooner we start to recover.
May 10th, 2009 at 5:46 pm (#)
Eric Monrad
In the short term, there is no difference between borrowing to build infrastructure and borrowing to buy iron ore. Both stimulate the economy. The difference comes in the long term. In the long term, people saving money now will want to draw down their savings.
Once people start drawing down their savings, interest rates will go up. If the government has iron to sell, it can sell it off into the strong market and pay down it’s debt. If it has infrastructure, its only recourse is t raise taxes.
May 10th, 2009 at 5:51 pm (#)
ClydeB
I agree that it doesn’t make sense to artificially create jobs. The reason I think the government should build inventories of commodities is that they have value. The work being done isn’t wasted. People want to save today, let’s save iron metal or something like that. When we want to draw down our savings, we can sell it off.
The problem isn’t that there isn’t a market. People want to eventually spend the money they earn today. The only problem is timing. The market may be 10 or 20 years from now. The question is how do we work today to meet needs a decade or two down the road.
The problem of energy and resource shortages is more serious. We need to use less resources, that’s for sure. This doesn’t mean we should work less though. If we are to reduce the amount of resources we use, we have to use what is available very carefully. It seems to me that there is more work than ever that needs to be done.
May 10th, 2009 at 9:08 pm (#)
I believe people are buying and saving metals, it is just that the metal is gold rather than iron, but the concept is the same. With respect to the government building inventories, I’m totally opposed. Government sohuld have the barest minimum to survive until the next tax collection, with emphasis on protecting the borders, maintaining order and staying the heck out of the way. Our Constitution was deliberately constructed to severely limit government but we’ve allowed it to grow excessively and somehow must get it back in control.
Nne of the proposals put forth so far has a ghost of a chance of success, in my opinion. They will merely delay recovery and increase the overal cost. Chrysler Corp. bankruptcy is a current example and GM will be next. Our inept administration pours billions of dollars down the rat hole then funds the bankruptcy.
All of the indicators I see are structured to gain control with and attendant redistribution of wealth, recovery is incidental.
May 11th, 2009 at 10:46 am (#)
ClydeB
Gold is a strange beast in terms of its role in the economy. It isn’t actually that useful. Other than jewelry and a few specialized applications, it is useless. Gold is valuable primarily because it used to be used as currency. We hoard gold because we hope someone will buy it from us in the future. In a way, it’s like some celebrities that are famous because they are famous.
I don’t know if the government spending is helping or hurting the current recession. I do know that markets don’t always sort things out on their own. The depression in the 1930s didn’t sort itself out. I think if the government just got out of the way, we’d fall flat on our faces.
May 11th, 2009 at 9:21 pm (#)
Actually the jobs of the gold miners, etc., are just as valuable as those of iron ore miners. The entire process is quite similar and there is consumer demand for the product. Gov’t. stockpiling of iron or any other commodity merely ties up tax revenue, additional debt or both in order to create artificial jobs. Admittedly, there could be future profit, but the last thing on earth we need is politicians attempting to run businesses. Just look at what they have done to Chrysler, GM, Bank of America, etc., etc., etc.
May 12th, 2009 at 9:56 am (#)
Even if you think governments aren’t good at running companies, they still might have a role in stabilizing the economy. Market based economies, on their own, seem to be badly behaved. Someone needs to do something to help them work more reliably. Governments are in the best position to act.
There are lots of ideas about what may help. Hopefully something can. Even if, in the end, nothing can, it’s at least worth a try.
May 16th, 2009 at 3:38 pm (#)
I still contend that central government of any stripe is the absolute last resort when it comes to managing anything. Most elected members have no comcept of cause and effect, are accustomed to absolute obiedience from their staffs of ‘yes men and women” and re-election is their primary goal once elected.
The civil servant members of government have the primary goal of keeping their heads down so as not to be noticed when things go wrong. Their secondary goal is quitting time and third is payday.
I’ll take anarchy rather than that much government.
Actually, I’d rather have WalMart in charge day-to-day with UPS or FedEx as backup than the US Congress.
May 18th, 2009 at 4:23 pm (#)
ClydeB
I think large bureaucracies of any kind have problems. GM and Chrysler are going down in flames despite being private companies. The banks screwed up too. Governments don’t have a monopoly on stupidity.
I believe anarchy would be much worse than even poor democratic governance. Government may get a lot of things wrong. I believe they do, however, get a lot of things right as well.
At a more fundamental level, I don’t believe that individual pursuit of self-interest alone will produce good results for society as a whole. We need to be able to cooperate and work together. I’m willing to give up quite a lot of freedom if the result is that we can work together effectively.
I think the reason many people don’t like government is that we haven’t yet found the best way for it to operate. The answer isn’t to scale back government. I believe we need to press ahead and find ways for it to more effectively strengthen the economy.
May 19th, 2009 at 8:18 pm (#)
The present government we have in the US is the founding fathers worst nightmare. Their vision was of a government deathly afraid of the people due to it’s intrinsic weakness. Enumerated powers and structured with checks and balances. What we have is a veritable dictatorship. When the chief executive can fire the CEO of GM, for instance without recourse, we have a central government totally out of control.
Our tax revenue requirements exceed the value of our production if honestly acknowledged. Our entitlements programs have created a populace where the entitled have the power at the ballot box to vote for themselves the assets of the producers. No nation has ever been able to survive that condition.
May 20th, 2009 at 8:21 am (#)
I agree that the system needs to be fixed. The question is how.
May 20th, 2009 at 9:15 am (#)
How to fix the system?
The US needs to return to Constitutional government.
Limited in scope as defined in the first 10 amendments.
Our courts should apply the law rather than try to legislate from the bench.
Our legislators should return to the original concept that theirs is a temporary civic service assignment, not a career.
We should limit our political campaign cycle to 6-8 weeks of public appearances and debate with NO TV advertisement allowed.
We should eliminate the income tax and replace it with a consumption tax.
We should levy tariffs on all the manufactured goods coming in to the country proportionate to the per-capita disparity with sales to the exporting country.
When all this is in place, we step back, take a bow and congratulate ourselves on a job well done.
May 20th, 2009 at 2:12 pm (#)
ClydeB
I agree with everything except perhaps the protectionism. If the US slaps tariffs on imports, other countries will retaliate. Maybe this is okay. The US is big enough that it has the economies of scale needed to produce things efficiently. My only concern would be that the US needs access to foreign resources, oil for a start.
May 20th, 2009 at 4:31 pm (#)
Stephen,
If your take another look, I specifically limit my reference to manufactured goods. This is where the enormous population disparity causes the problem. Our economy subsidizes the payroll in many over populated nations by importing their manufactured goods while they refuse to purchase anything from us that they are able to produce at home.
Calling the effort to achieve some sort of balance in our trade with others can hardly be properly defined as protectionism. By the way, Canada would benefit by a reciprocal trade agreement that called for just such a tariff, while Ireland would be the most seriously affected, followed by Japan and Germany. We are bleeding roughly half a trillion dollars annually to make payroll in foreign countries, and that doesn’t take own unemployment in to consideration.
May 20th, 2009 at 7:28 pm (#)
ClydeB
I’m working my way through Pete Murphy’s book, “Five Short Blasts”. I need to fully understand his argument to respond to your last post. I believe your point is based on the arguments he makes.
May 20th, 2009 at 10:14 pm (#)
It is very true that Pete and I agree on several issues, yet there are several where we don’t. His research and attention to detail do a far better job of explaining the population problem than I ever could. Mike Folkerth makes some similar arguements as well, yet I completely disagree with hime of some financial issues.
I wouldn’t have recommended Pete’s book if I were not in general agreement.
June 4th, 2009 at 9:54 am (#)
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