Over the weekend, I was browsing about on the Internet reading blogs by self-identified conservatives. While I am quite certain that what I am about to say applies all across the political spectrum, it was these conservative bloggers that brought it to my attention. It would appear that many, otherwise well educated Americans, lack a clear understanding of how our present day capitalist economy functions.
The primary misunderstanding seems to be lodged in the assumption that what is good for individuals and families is always good for the overall economy, and vise versa, what is bad for individuals and families is always bad for the overall economy. Certainly, many times that is true, but not always.
In many posts and comments I ran across this weekend, the writers blamed our current economic down turn (and possible recession) on Americans spending too much and getting too deeply into debt. Yet, when we look at the remedy being offered by President Bush to provide "economic stimulus," the solution offered is putting more money into the hands of people to spend; not to save, not to pay off existing debts, but to spend on new purchases. Notice also that the response of the Federal Reserve to the economic down turn is to reduce interest rates. Reducing interest rates encourages borrowing, and discourages traditional saving (although it may help encourage investment in the stock market). This is because President Bush, his economic advisers, and the Chair of the Federal Reserve understand that our economy lives or dies on consumption [even the consumption of goods made in other countries].
While the U.S. still does have a substantial goods producing economic sector, its importance in our economy today has declined in comparison to our service sector, where goods and services are sold. Back in the 1940's it was said "As General Motors goes, so goes the nation." Today it would probably be more apropos to say "As Walmart goes, so goes the nation."
I suppose that it is easy to confuse one specific economic problem -- the melt down of the subprime lending market -- with the overall economic process. Certainly the large number of defaults by subprime borrowers who were severely over-extended has contributed to current economic down-turn. However, it is how those defaults impact consumption through cutbacks in housing construction, purchases of construction goods, and workforce layoffs that is crucial.
From the standpoint of the individual or family, cutting back on expenditures and paying down debts is rational and sensible. Saving, may or may not be rational from an individual depending upon the relationship between interest rates and the cost of living. But for the economy as a whole, rebounding from recession depends upon expanding consumer demand for new products and services.
As presently constituted, our economy depends upon continuous growth in production of goods and services, which requires continuous growth in consumption. The expansion of credit in the United States has been one major means by which our economy has produced growth in consumption. This has obvious negative consequences for individuals and families whose debt grows to unsustainable proportions. Moreover, as our current economic downturn evidences, in the long run, growth cannot be sustained on credit.
The economic history of capitalism has been a cyclical history of booms and busts. After the Great Depression of the 1930's governments, including the U.S. government, became more involved with the economy to moderate the devastating impacts of the bust periods. Nonetheless, down-turns are inevitably built into to the our economic system, they are not the "fault" of the individuals and families who borrowed beyond their means, since that is exactly what is required to create the boom periods. This is one of the internal inconsistencies or contradictions of capitalism. To remove it, means to modify the economic structure in significant ways.
It is interesting to me, that one of the primary beneficiaries of our economic system has recently suggested exactly this, that our economic system requires modification. Last week Bill Gates, speaking to the World Economic Forum in Davos, Switzerland, said:
"We have to find a way to make the aspects of capitalism that serveIdeas worthy of further consideration.
wealthier people serve poorer people as well. I like to call this idea creative
capitalism." He [Gates] also called for making changes to capitalism so that corporations and governments devote more time and money to doing work that "eases the world's inequities" - and bringing science and technology to everyone. ("World's Richest Man Criticizes Capitalism")