Friday, April 20, 2012

Don’t ignore the demand side

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Without customers willing or able to buy, there can be no exchange of goods and services and, therefore, no healthy economy. The wall-to-wall focus of financial bloviators on deficits, productivity and growth, especially from the tea party wing of the Republican Party, entirely misses the point.

Discussions of deficits, productivity and tax rates and loopholes frame the central issue of a healthy economy in terms of too little supply. But the economy does not suffer from too little supply. The central issue of the Great Recession, as it was with the Great Depression, is too little demand.

In the theoretical world of economics, a lot of nonsense masquerades as brilliance, and wisdom is not all that common. Unproductive and overcompensated workers are not the reason there is little growth. Lowering local, state or federal spending to reduce deficits has not stimulated more employment.

Any respectable study of the past several decades, and especially of the last three years, will show that money has been trickling up rather than trickling down. CEOs making more than 400 times what their workers are and driving increased disparity between the haves and have nots has not been good for the economy.

The simple fact is that when large numbers of people have no disposable income, they stop spending. The rich cannot spend enough fast enough to counterbalance the shrinking consumption. Supplies, no matter how desirable, languish on the shelves. Factories need not produce replacements so they don’t hire or pay wages to factory workers. Without paychecks, workers can’t buy things. Demand continues to shrink and the cycle repeats. Sound familiar?

One of the first to recognize and champion the importance of the demand side during the Depression was Utah banker and businessman Mariner Eccles. He realized that a broad swath of the population had exhausted their resources, had taken on all the debt they could possibly carry and simply could not longer buy. Without customers, businesses could not function, and neither could the economy, no matter how much those at the top amassed. Eccles championed infrastructure projects, the minimum wage and old-age pensions as legitimate means of stimulating demand.

No matter what the bloviators claim, only more customers can bring an end the Great Recession.

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