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What is Going On With The Economy?

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LeoPTY
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Most of the discussion regarding to U.S. economy at my university has a strong marxist/socialist slant. Perhaps someone on this board can clarify, if not refute outright, some of the things being said.

My economics professor claims that the current recession in the U.S. economy is the result of a mammoth income disparity. He claims that the upper class (pejoratively referred to as the "entrepreneurs") have been able to push U.S. wages so low that the middle and lower classes have no buying power. The problem is further compounded by the entrepreneur's quest to maximize profits which leads to the reduction of product quality. This supposedly causes international trade to suffer as no one wants to buy American exports of "crap" quality.

I agree that Capitalism is supposed to cause income disparities due to differences in talent, ability, motivation etc., but his argument logically makes sense when examined by itself. So what is the missing the piece that has been surreptitiously omitted? It seems to me that if an entrepreneur is able to sell a good or service, he is satisfying someone's unmet need and therefore doing good for society as well as himself.

What is the real cause of our economic woes? Is it simply politicians monkeying with the money supply to boost their approval ratings?

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"He claims that the upper class (pejoratively referred to as the "entrepreneurs") have been able to push U.S. wages so low that the middle and lower classes have no buying power."

My ass, the minimum wage goes up all the time and I don't know anyone who can't afford a computer or TV or other luxury items like that.

Maybe, rather than the intelligent successful business owners raping the little guy, maybe it has something to do with the fact that the little guy fucked around all through high school, spent all his money on weed and video games, got fired from McDonalds for swearing at customers, lives off welfare, and trades his food stamps for 40-ounces of cheap malt liquor. Maybe the fact that what I just described is roughly 533% of high school kids across the country, none of them will grow up to be anything simply because they are too lazy, primitive, and nihilistic to want to succeed and because our culture constantly re-affirms them that this is the best way to live, this is how everyone lives, you are no worse than anyone else, it's all "The Man's" fault if you fail at life.

I grew up in a poor town. Like, "could barely afford chalk for the chalkboards" poor. Drugs and violence were everywhere, most kids I knew lived from drunken party to drunken party with an animal-like whimsicality. Me, on the other hand, I studied hard, worked my ass off at a grocery store to help support my family, never did stupid shit, etc. So now I'm in college making $15 an hour at my job and working hard at doing what I love, which is making music. Nobody ever gave me a huge advantage over everyone else. Nobody ever handed me anything. But a lot of other people, they just give up the second people stop handing them things and become worthless Warren, Ohio trash. The cultural mentality of "F*ck it" combined with the state persistently making things like standardized tests and drivers exams easier and easier for people has bred a culture of nihilistic decay, and that's what I think is ruining the economy. Maybe it's different in other places, but this section of the country seems a lot like the later part of Atlas Shrugged.

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Most of the discussion regarding to U.S. economy at my university has a strong marxist/socialist slant. Perhaps someone on this board can clarify, if not refute outright, some of the things being said.

My economics professor claims that the current recession in the U.S. economy is the result of a mammoth income disparity. He claims that the upper class (pejoratively referred to as the "entrepreneurs") have been able to push U.S. wages so low that the middle and lower classes have no buying power. The problem is further compounded by the entrepreneur's quest to maximize profits which leads to the reduction of product quality. This supposedly causes international trade to suffer as no one wants to buy American exports of "crap" quality.

I agree that Capitalism is supposed to cause income disparities due to differences in talent, ability, motivation etc., but his argument logically makes sense when examined by itself. So what is the missing the piece that has been surreptitiously omitted? It seems to me that if an entrepreneur is able to sell a good or service, he is satisfying someone's unmet need and therefore doing good for society as well as himself.

What is the real cause of our economic woes? Is it simply politicians monkeying with the money supply to boost their approval ratings?

Well I'm not an economist but I can't believe your professor gave this as the primary reason for the economic slump. I know a lot of it is the housing market and all the bad loans made without verifying people's credit worthiness, and the greedy people who bought too much house for their income level. Then there's the price of oil going through the roof which makes everything more expensive and decreases people's ability to spend; consumer spending is 70 percent of the American economy. The effect of globalization is driving down wages, as companies are forced to come up with ever more creative cost effective strategies to stay competitive, which includes finding the cheapest but yet still productive work force. The spiraling costs of health care adds even more of a burden to not only wage earners but businesses as well.

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My economics professor claims that the current recession in the U.S. economy is the result of a mammoth income disparity. He claims that the upper class (pejoratively referred to as the "entrepreneurs") have been able to push U.S. wages so low that the middle and lower classes have no buying power. The problem is further compounded by the entrepreneur's quest to maximize profits which leads to the reduction of product quality. This supposedly causes international trade to suffer as no one wants to buy American exports of "crap" quality. ... What is the real cause of our economic woes?

The cause of our current economic problems is twofold: (1) the government's central bank manipulating the money supply and (2) government mandated egalitarianism of banks to give mortgages to all-comers regardless of ability to repay loans. The first cause put out too much liquidity in the marketplace, which resulted in a debased currency (less purchasing power). The second cause put people into homes who cannot afford them, which resulted in foreclosures and bank losses. Now capital markets are contracting due to problems in the banking sector, and this is having a spill-over effect throughout the general economy.

What is the solution to this mess? The solution consists of free-market banking, objective money and getting the government out of banking, i.e., stopping the government from dictating to banks who they must lend money too.

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It's a combination of many things, but it certainly isn't the repression of the lower-class by the capitalists. It sounds good in a college classroom, but that's all.

Right now the markets are in turmoil and I think it starts with the dollar and inflation. Plus, all the synergies that don't fit in the finance models (the "noise") are really pulling the markets down. Margin calls, the weak dollar, unfunded liabilities of the US government, low yields, uncertainty, liquidity, commodities speculation (including gold, silver), looming inflation, an incompetent Fed chief, state government spending... man, the list goes on.

If I were a betting man, though, I would bank on lower volatility in the second half of the year when things kinda level out. I would look for things like declining options prices, for instance, if I was a trader or investment banker (which I'm not).

We need to lower individual and corporate tax rates. That is a must. Sarbanes Oxley is also putting downward pressure on companies because CFOs are being over conservative when it comes to asset right-downs. Auditors (like myself) have a lot of power with SARBOX, almost to the level of thugs. I've seen first hand the battles between us and management when it comes to valuing these securities and we win most of the time.

Edited by Toolboxnj
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... He claims that the upper class (pejoratively referred to as the "entrepreneurs") have been able to push U.S. wages so low that the middle and lower classes have no buying power.

So what is the missing the piece that has been surreptitiously omitted? ...

The missing piece is: where did that buying power go? If we grant his (false) premise that one set of people have taken "buying power" from another set, the total "buying power" in the economy remains unchanged.

But, really, it is going to be tough for you to understand rebuttals that are piece-meal. If economics interests you, you probably need to read some books by free-market economists: von Mises, Bastiat, Say, etc. Henry Hazlitt's short book, "Economics in One Lesson" is available online, and is a very good introductory read.

What is the real cause of our economic woes? Is it simply politicians monkeying with the money supply to boost their approval ratings?
The first question to ask is: what woes? If you step back and look at things one decade at a time, rather than year to year, you will see progress. The progress ought to have been much better, but it is not a downward slope. That long-term trend is held back mainly by laws that impede business: laws related to labor, environment, "safety", etc. It has also been held back because the government takes a huge bite out of the economy and fritters much of it away.

If one looks closer, at year by year changes, you see fluctuations that are caused by the Federal reserve trying to "fine tune" the economy and causing it to be more like a roller coaster!

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The cause of our current economic problems is twofold: (1) the government's central bank manipulating the money supply and (2) government mandated egalitarianism of banks to give mortgages to all-comers regardless of ability to repay loans. The first cause put out too much liquidity in the marketplace, which resulted in a debased currency (less purchasing power). The second cause put people into homes who cannot afford them, which resulted in foreclosures and bank losses. Now capital markets are contracting due to problems in the banking sector, and this is having a spill-over effect throughout the general economy.

What is the solution to this mess? The solution consists of free-market banking, objective money and getting the government out of banking, i.e., stopping the government from dictating to banks who they must lend money too.

I'm not one to give the government an out, but I think the banks hung themselves here. Nobody forced them to make all those subprime loans, or prevent them from even verifying people's incomes. Not too long ago it was common for people to just state what they made on a form and nobody ever checked it. Banks didn't care who got loans, because they were selling them off to investment banks. No one thought interest rates were going to rise anytime soon.

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I'm not one to give the government an out, but I think the banks hung themselves here. Nobody forced them to make all those subprime loans, or prevent them from even verifying people's incomes. Not too long ago it was common for people to just state what they made on a form and nobody ever checked it. Banks didn't care who got loans, because they were selling them off to investment banks. No one thought interest rates were going to rise anytime soon.

Actually, many banks in the US are forced to make loans to non-creditworthy customers via the Community Reinvestment Act.

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Actually, many banks in the US are forced to make loans to non-creditworthy customers via the Community Reinvestment Act.

I had not heard of that. When I looked it up I found this link to a study that claims the opposite. Not sure if it is a valid study though. One quote:

To a much greater extent than other lenders, CRA Banks avoided

making the types of home purchase mortgage loans that provoked the

foreclosure crisis.

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I thought a recession was defined as two (2) consecutive quarters of negative growth. Has this happened? Am I missing something?

You have to ask yourself what do people have to gain by calling the current slow down a recession?

I'll give you 8 months to answer the question. :rolleyes:

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Thanks for the replies, everyone, there is a lot of good info here. I'll be sure to expand my reading list since my economics course insists on stacking the deck against Capitalism, freedom and de-regulation.

The missing piece is: where did that buying power go? If we grant his (false) premise that one set of people have taken "buying power" from another set, the total "buying power" in the economy remains unchanged....

The first question to ask is: what woes? If you step back and look at things one decade at a time, rather than year to year, you will see progress....

Do you mean that if this were the case, the same amount of money would stay in the economy since the supposedly expropriated income would trickle through banks and investments (just as an example)?

My knowledge of what is going on in the U.S. economy is very limited right now. Doesn't the falling U.S. dollar indicate lower confidence in the U.S. economy (higher supply of dollars on the market)?

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I thought a recession was defined as two (2) consecutive quarters of negative growth. Has this happened? Am I missing something?

You have to ask yourself what do people have to gain by calling the current slow down a recession?

I'll give you 8 months to answer the question. :)

The definition of what constitutes a recession always changes depending on who I talk to. Looks like I fell into the nihilist "abandon-all-hope" trap :(. So the economy has to actually shrink for 2 quarters in order to have a recession, or can painstakingly slow near-zero growth be considered grounds for a recession?

BTW, looks like you've got a lot of snow up there.

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A recession is a decline in RGDP for two or more consecutive quarters. The economy is fine. Any hiccups or bumps are caused by the Federal Reserve tinkering with the money supply. However, long-term the economy will be relatively ok. It's just that politicians nowadays can't let markets correct themselves. And I say relatively because as long as the US Treasury bond/bill/note is considered the safest debt in the world, America will always be in an ok fiscal situation.

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Do you mean that if this were the case, the same amount of money would stay in the economy since the supposedly expropriated income would trickle through banks and investments (just as an example)?
Sort of....

Your professor claimed that the rich were keeping more wealth for themselves. Supposedly, this was causing a reduction of buying power. What is "buying power" though, other than wealth? So, even if we take your professor's claim as true, we're talking about a redistribution of "buying power".

If confronted by this, I can guess what the typical college professor would say. He would probably speak about the "Marginal Propensity to Consume"; but, I was curious to see why you drew the conclusion that a redistribution of "buying power" implied a reduction in "buying power".

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Nobody forced them to make all those subprime loans, or prevent them from even verifying people's incomes. Not too long ago it was common for people to just state what they made on a form and nobody ever checked it. Banks didn't care who got loans, because they were selling them off to investment banks. No one thought interest rates were going to rise anytime soon.

All government policies involve force of one sort or another. I suggest you familiarize yourself with the ABCT.

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If confronted by this, I can guess what the typical college professor would say. He would probably speak about the "Marginal Propensity to Consume"; but, I was curious to see why you drew the conclusion that a redistribution of "buying power" implied a reduction in "buying power".

I don't think it is reduction in overall buying power so much as it is a shift in the way wealth is spent.

Let me illustrate my train of thought:

Let's say we have two different factories A and B.

Assume that factory A pays its workers more "equitably" because the management feels obligated to pay its workers above market value. Workers at factory A make $500 per month (in the interest of simplicity). Workers at factory A theoretically spend their income like this:

$200 for rent

$50 for food

$50 for gas

$200 on a TV (or some other commodity)

The income received by each of these industries is compounded for each worker at the factory.

However, at factory B, the management pays its worker $300 per month. Workers at factory B theoretically spend their income like this:

$200 for rent

$50 for food

$50 for gas

The owner of the factory in this case would have an extra $200 from each worker, however due to diminishing utility he probably would not buy the same amount of televisions that each worker in factory B could have theoretically bought, and as a result the television industry would not develop.

Due to diminishing utility, a single person would not buy as much as a group of individuals. Wouldn't factory B's scenario cause the consumer goods industries to not develop, assuming certis paribus?

Which would lead to greater prosperity: "spreading the wealth around" so that everyone can own a TV (not morally justified), or the owner of factory B using the extra $200 to invest in capital goods, and boost the economy in the long term?

Yeah, I know its not the best example. The whole thing has me very confused :) since I don't have a fully formed opinion about the matter, except that it sounded dodgy.

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Due to diminishing utility, a single person would not buy as much as a group of individuals. Wouldn't factory B's scenario cause the consumer goods industries to not develop, assuming certis paribus?

Which would lead to greater prosperity: "spreading the wealth around" so that everyone can own a TV (not morally justified), or the owner of factory B using the extra $200 to invest in capital goods, and boost the economy in the long term?

Interesting concept, and I'm confused about it as well. Certainly you can't morally enforce wealth equality, but the benefits of it seem apparent.

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Assume that factory A pays ... $500

...

However, at factory B, the management pays its worker $300 per month.

...

That's a good example, and I agree that the owner may well not buy another TV (or any consumer goods) but might spend the $200 (multiplied by the number of workers) on capital goods.

Strictly speaking, this is due to his lesser "marginal propensity to consume" rather than the "diminishing marginal utility", but that is not relevant because I agree about what the facts, so let's forget about the precise naming of the causes.

Then, you raise the million-dollar question:

Which would lead to greater prosperity: "spreading the wealth around" so that everyone can own a TV (not morally justified), or the owner of factory B using the extra $200 to invest in capital goods, and boost the economy in the long term?
Prosperity for whom and when? If one looks at the economy as a whole, and beyond the short-term, the answer is: in this situation, rational spending on capital goods creates more prosperity in the long run. The immediate effect of the spending is similar to spending on consumer goods, in terms of "creating employment", but capital goods are the "gifts that keep giving" -- assuming the investments are productive. Essentially, $200 in capital goods today, yields more than $200 of goods in the future.

As a thought experiment, consider that there was one uber-billionaire in the economy, who (somehow) paid all the serfs very little, and they still worked just as hard and creatively as in a free-economy. Suppose the uber-billionaire invested everything back into capital goods. it is a crazy hypothetical, but if you're willing to suspend disbelief for a second, you'll see that this would be a low-consumption scenario, where overall wealth would be growing much faster than if the serfs were allowed to fritter it away on luxuries like black-and-white TVs!

The lesson is: more money for the rich often means more capital formation.

Edited by softwareNerd
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I am having a hard time understanding market psychology's role in the up and downswings in economies. What if any part of the current economic problem in the US is due to social influence, like the self-fulfilling prophecy? This is a prediction that, in being made, actually causes itself to become true. For example, in the stock market, if it is widely believed that a crash is imminent, investors may lose confidence, sell most of their stock, and actually cause the crash. Likewise, people may expect hostility in others and actually induce this hostility by their own behavior.

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The owner of the factory in this case would have an extra $200 from each worker, however due to diminishing utility he probably would not buy the same amount of televisions that each worker in factory B could have theoretically bought, and as a result the television industry would not develop.

It seems like a ridiculously contrived notion, especially with a fiat currency. Any wealthy person who stashed an inflatable currency in a chest buried in his back yard, taking the money out of the economy, would not remain wealthy for long. In fat it is doubtful that he would have become wealthy in the first place with that mindset. Money invested is spent and savings are primarily invested.

In a gold backed economy it might be believable, but probably not long term. Even then, if people by and large hoarded money, interest rates would rise until the motivation to un-hoard it occurred.

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Wow. Some excellent points. Interesting how Keynesian theory falls apart under scrutiny. I'll need to do some reading on wage determination in the market. So, in the example I mentioned above, such a scenario is just about impossible because wages are a large spectrum, rather than just a 0 or a 1, correct? I'm sure that in the real world with so many goods and services on the economy stagnation due to income inequality wouldn't happen either.

Thanks for the help, everyone. I've never lived in the U.S before, so I'm not entirely sure how things are going over there.

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Let's say we have two different factories A and B.

The example is invalid.

Assuming both factories produce the same product (this has to be the case for a valid example), and that the owner of factory B is driven by profits (which is the premise of the example)...

A factory is the embodiment of an idea with inherent value. The value of that idea is realized as the difference between the cost of production and the price of sold goods. The better the idea, the lower the cost of production and/or the higher the value (and thus the price) of the good, and the higher the profit.

Assume that both factories make the same number of product, 100 per month, and assume, for simplicity, that each product sells for $600 (ignore the cost of materials, utilities and capital depreciation).

Owner B makes $300 per product, while owner A only makes $100, because he's a nice guy. If owner B drops his price to $599, his sales would go up to 200/mo, his profit would increase from $30,000 to $59,800, while factory A would sell nothing and go bankrupt. Oh, wait, no, factory A would lower his price to $599, and cut his workers wages by $1.

As factory A lowers his price to match factory B's continued profit-maximizing price changes, he will find himself forced to reduce his workers pay, or simply go out of business (and pay his workers nothing). If he's rational, he will reduce his price and his workers' pay until a price equilibrium is reached.

On the other side of the coin, given the high profit realized by owner B, relative to other industries, owner C will decide to convert his factory to increase his profits. He will offer $301/mo to workers, and pull all of owner B's skilled workers over to his factory, with a profit slightly lower than owner B's. Owner B will respond by increasing his workers' wages until a wage equilibrium is reached.

In the end, all things being equal, profits will drop until they reach a point, below which the factory owner would earn a better living doing something else. In the real world, all things are not equal. There are costs and risks associated with starting a new business, which protect, to some extent, the ability of the owner to maintain a relatively high profit. But that profit is limited by the cost/risk equation of entry into that industry. (the "barrier")

What your professor is missing is that workers don't work at a factory because they have a right to a job, they work there because the factory offers them the best compensation for their time. If the factory didn't exist, they would have to work elsewhere, for less compensation (compensation, based on the individual worker's value judgment of risk/reward).

What he's also missing is that the factory owner isn't the boss because he's greedier than anyone else, he's the boss because he has a valuable idea, and the guts and tenacity to bring it into form. His pay shouldn't be compared to the pay of the lowest worker at his factory, it should be compared to the total loss in wages to all workers, if the factory didn't exist, and they were forced to work elsewhere. It should be compared to the total decrease in standard of living of all the people who buy his products, if those products didn't exist. If you make those comparisons, what you will no doubt find, is that profit the factory owner makes is vanishingly small compared to the total added value he provides to his workers and customers.

If a factory owner was able to show great profits, what would he do with those profits? He would start or invest in other business ventures, based on his judgment of their value. (on edit:)These ventures will, in turn, increase the demand for labor, driving wages up, while providing new and/or better products, driving prices down and standards of living up.

And therein lies the real sticking point for socialists: "What right does the factory owner have to concentrate and control so much wealth?"

The answer, very simply, is that his "right" derives from his proven ability to maximize the productivity (and thus pay) of workers, while minimizing the cost of products to consumers, as evidenced by his profits. No other form of economy can claim such a straightforward and effective mechanism for optimizing what the socialists call "the common good."

Edited by agrippa1
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From

John Galt Plan Might Save U.S. Financial System

by Caroline Baum:

Any day, I expect some government official to unveil the John Galt plan to save the economy.

Galt, the hero of Ayn Rand's magnum opus "Atlas Shrugged,'' stops the world by going on strike. He and the "men of the mind'' literally withdraw from the world after watching their wealth confiscated by the looters (the government).

Toward the end of Rand's 1,000-plus page novel (or polemic), the economy is in shambles. Desperate, the looters kidnap Galt and prod him to "tell us what to do.''

Galt refuses, or rather tells them "to get out of the way.''

Road Is Cleared

You probably can sense where I'm going. Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

That's not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It's a tough way to run an economy.

Link to full story: http://www.bloomberg.com/apps/news?pid=new...id=avFnuh9oWHVo

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It was great seeing an article with that title run on Bloomberg, which is widely read and very respectable.

Sadly, instead of Galt, we have "Helicopter Ben". Just today, the Fed said they would pump still more cash into the economy (about $200 billion). Bush and Congress are already going to send out checks for about $150 billion. Meanwhile, the Chinese are not propping up the dollar as much as they have done in the past. The next President -- GOP or Democrat -- and the next Congress seems set to "correct" our problems with more of the same old medicine, and if they dole out more subsidized medical care, that could be a big bill.

So, it does seem that we're in for a spot of bad. The U.S. has generally made it out of these phases, and I think it'll do so again. Perhaps we'll go into Jimmy Carter mode for one or two presidencies before people get disgusted enough, and a better leader emerges to shake the U.S. up.

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No other form of economy can claim such a straightforward and effective mechanism for optimizing what the socialists call "the common good."

Socialists think any inequality of wealth is bad for "society." So if A has $100 and B has $200, and capitalism allows A to have $500 and B to have $20,000, a socialist will not like it. He will think the "society" would be much better off if both A and B had $10.

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