Growth: The Economic Solution
Nearly every time the federal debt and budget deficits come under discussion, the focus for a solution shifts unerringly to “entitlement” programs; namely, which of them to cut and by how much. This approach ultimately leads to the same solution: First cut Social Security and Medicare, and then aid to the poor, the disadvantaged, and the hungry. It is a mindset that shows a fundamental misunderstanding of the economic factors that have created the issues; their severity; how they interact; and where the solution lies; thus it completely misses causes, consequences, as well as solutions. These issues quickly become immersed in political ideologies and gridlock, without a solution, as matters get worse and worse.
It’s time to start anew with an understanding of the economics that are at work. We need to identify how and why debt and deficits are created. Only then can we see with nearly perfect clarity how to solve them without causing a burden on anyone. Yes, it can be done—but only if we sincerely want to find a solution.
For starters, our economy is not performing optimally. If it were we would have higher GDP, higher incomes, more employment, greater tax revenues at the local, state, and national levels, and nearly all the problems associated with debt and deficits would start to disappear. Moreover, in a relatively short time a whole host of social issues would decline such as poverty, illiteracy, suicides, mental health issues, crime, incarcerations, obesity rates, teen pregnancies, drug usage, and social mobility.
Students of economics learn early that economic output consists of consumer spending (70%), government spending (20%), business investment (17%), and net exports (-7%). Add those components up and they total 100 percent. The key to making our economy efficient and productive is spending. Indeed, consumer and government spending account for 90 percent, while business investment comes from profits which depend on spending, thus the whole economy runs on spending! Although savings is related, it does little toward producing economic output. It is economic output (GDP) that gives us incomes, and employment, and tax revenues the three essential features of our economy. Saving by investing in stocks, bonds, real estate, or commodities plays a role in personal security, but they do not contribute to GDP, to jobs, to tax revenues, nor to the reduction of all those social ills mentioned above.
Let the preceding paragraph settle for a moment, and you will realize that boosting economic activity will solve a lot of issues. As incomes rise, employment rises, tax revenues go up, debt and deficits will fall—and it will put all those social issues related to poverty on a glide path to history.
But there is more. As employment and incomes rise, greater personal security is possible. Part of our incomes can be invested into stocks, bonds, and real estate thus creating more personal wealth. And more wealth means more freedom, greater opportunities, and less reliance on the government for anything.
If you are beginning to realize that politics is more of the problem than the solution, you are on your way to enlightenment. It is also fair to say that a growing economy is the biggest part of the solution to many, many issues—financial, social, moral, and spiritual—in the sense that the pursuit of life, liberty, and happiness are intrinsically linked to things spiritual.
Growing the economy depends on getting more money into circulation. That is because only money in circulation is spent. Money that is saved does not add to GDP. Remember: Spending accounts for almost 100 percent of GDP. Saving accounts for our security. But we must first have a job, and income, and fewer personal debts before we can save anything.
The Solution: Getting more money into circulation is the key to it all. Every dollar that is spent gets re-spent about 6 times in one year. Thus every dollar in circulation accounts for $6 dollars in GDP. Add $1 trillion to the economy and output jumps by $6 trillion! Moreover, personal incomes jump by $5 trillion, employment rises to full employment, tax revenues go up by $2.2 trillion (local, state, and national), budget deficits fall and debt comes down. Carefully monitor these outcomes for several years, and watch social ills fall, personal savings rise, while the need for government aid programs will also fall.
The critical link in getting money into circulation rests between the Federal Reserve and all our banks. The Fed makes new money available, while banks can direct it to small businesses and individuals—or to themselves and to big corporations.
And that diversion of new money is the key to everything. If it gets into the hands of small businesses and individuals, it gets spent and the economy grows with all its positive results. But if it gets diverted into savings (stocks, bonds, real estate, and commodities), the economy does not grow at all. Period. End of story. It was all “smoke and mirrors.”
The real solution is to change the Federal Reserve’s charter. They need to be able to direct that new money gets into circulation, not into the savings accounts of bankers, corporations, and the very wealthy. New money in those latter locations adds to the wealth of the few, but at the expense of the entire economy and to the detriment of 90 percent of all residents.
The above is not the total to solution to all our economic ills. We also need a fairer tax system, and curbs on excessive personal wealth accumulations. But they are secondary to putting the economy on a steady growth path.
Action: It is fair to ask: How many members of Congress understand how our economy can be made to work to solve most of the domestic issues that we face? More particularly, which do not understand these issues? Who among them is working for you, and who are working for corporations and the very wealthy? Knowledge is power. Apathy is the enemy.
I have noticed a downside, however. As long as that spending is on services it's okay, but if that spending is spent on goods, then it may impact the environment more. Most Americans seem to have a lot of junk and clutter from purchases of goods they desired, but did not need. While these "things" were manufactured and created jobs, they also use resources from the environment that are not easily put back, even with recycling. Our landfills and other ways of recycling and disposing of excess things continue to become a huge problem, while the environment suffers from wave after wave of consumer excess spending on the latest fad product.
Worldwide pollution is not being solved by growing the economy, it's being exacerbated. Destruction of natural ecosystems in "out of sight, out of mind" locations by corporations only interested in profit and consumption is rampant the world over.
That part of this economic equation doesn't quite fit.
Does economic growth + population growth = planetary destruction make any sense?
Ron
Love ya!
Jane