The A, B, C's of the American Economy
By Walter Sorochan, Emeritus Professor, San Diego State University

Posted 2010; updated November 14, 2021

Two striking things about the economy: the first is the causes of its collapse world wide; and the second is the gross lack of understanding amongst the media, the politicians and public about how the economy really works.

This article attempts to explain, in simple common sense terms, how the economy should work.

house5 So what caused the housing real estate bubble in 208 to burst on main street? One spin answer has been to blame the speculators on Wall Street for investing in swaps derivatives. Another spin has been to blame the bankers, insurance and loan companies trying to make an easy and fast “buck!” The more sophisticated persons now view congress as stealthily passing a bill that allowed the selling of swaps derivatives, without oversight or regulation. The current bailouts by congress to bankers and even possibly the big three auto makers are attempts to fix a broken economy.

"During the great depression the US dollar was a hard currency backed by a mountain of gold. Today, the US dollar is a fiat (paper) currency backed by a mountain of debt." By Karl Denninger

No one seems to be able to put their finger correctly on the cause of the problem; the broken economy. Instead they are grasping for straws in hopes that one of these grasps will fix the problem they cannot perceive, find or admit!

All of these happenings have collectively contributed to the current economic crises.

outsourced world But overlooked in all of these causative explanations and attempts to fix the economic crises has been outsourcing the manufacturing of products and technology. Although outsourcing originally was viewed as a good economic way to make more money and have American companies become more competitive in the global market, jobs were also outsourced along with the manufacturing plants.

What was overlooked at that time of outsourcing was how outsourcing jobs overseas would affect the supply and demand balance of the American economy. As more and more technological and industrial manufacturing jobs were shipped overseas, the unemployment in the United States also increased. The trickle down impact is obvious: Unemployed workers do not pay taxes to state and federal governments. Hence the revenues of both governments also plummeted!

So, when workers don't get a paycheck every month, the big economies like government also feel an economic earthquake! The unemployed domestic worker cannot continue to participate in the supply and demand economics. He cannot buy products and keep the dollar circulating. He does not pay taxes which the federal and state governments need. Without the dollar circulating the capitalistic system of Adam Smith grinds slowly to a halt.

demand supply sys And that is what has been happening over the past 30 years. Only today, the economy, run on the internet, is accelerating faster and faster than ever before. The free market system, lacking transparency, has not been allowed to correct itself and even be manipulated!

The other striking aspect of the economy is at the federal and state government levels. Governments get their major revenue from workers paying income taxes. But when workers are unemployed, then they pay no income taxes. Consequently the state and federal treasuries start to collapse.

bailout Bailouts do not solve the problem: Bailouts actually make the problem worse. How? By diverting money from a treasury that itself is broke and insolvent, thereby increasing government debt. Government is dolling out loan money it does not have to big money spenders! Big spenders hoard the loan money to shore up their weak liquidity instead of using the loans to fix the real problems on main street. And if the problems on main street were to be fixed, such a fix would only be temporary since this type of fix is a short term fix.

Fixing main street and wall street, as proposed by many pundits, reminds me of the Chinese story about saving a starving man. “Give the man a fish and you make the man dependent on receiving food forever; but give him a fishing rod and you help him to catch a fish each day and feed himself!” This story pretty much sums up why “fishy” bailouts will not solve the current economic problems. We need long term solutions and not short term ones!

outsourcing1 The real “long term” problem is too few workers to keep the federal and state treasuries full. We need to create jobs at home, jobs that stay in this country and give workers an opportunity to earn a descent living. The real solution is to also restore the jobs sent overseas. We need to bring back the manufacturing plants and the accompanying jobs. For it will be the good paying jobs brought back home that will provide employment and in turn, restore cash flow to the treasuries. We also need to make sure that all governments live within their economic means, do not spend money they do not have and balance their budgets each year. After all, it is illegal to write and issue a cheque when one does not have money to cover it!

Buuuut! Robots are displacing manual labor jobs in manufacturing and industry. So it is dobtful that bringing overseas-outsourced jobs will happen.  Even if jobs were brought back, these would quickly be replaced by robots!

The federal government was short-sighted in allowing jobs to go overseas. Lobbying by vested interests blind-sided congress to see clearly the big picture down the road. This is the flaw in the capitalistic system. Either being swayed by vested interests to do the calling of the vested interests, or interfering with the free market system and not allowing the free market to correct itself.

Instead of bailing out the bankers and insurance companies the federal government should allow the free market to correct itself. Such a painful correction would allow the cleansing of insolvent derivative debt swaps. The speculators would lose, but they are the ones who did the investing and gambling, caused the problem and must accept responsibility for same. We need to get rid of the unsecured bad debt, most of which is still hidden and difficult to ferret out. The monetary system needs to cleanse itself of the toxic debt that is killing the system itself! We also need to concurrently change the morality culture of how we reward and punish those who gamble and those who play by the rules.

dollar recycling In summary, what is good for the little guys is also good for the giants of the economy. We need to structure our economy on solid ground for many and not on virtual reality for the few. A solid economy has, as its base, workers who produce real products. Products generate cash flow. Producers sell products and, in turn, pay their workers. Workers use their paychecks to buy goods they need. Workers become a base for governments to use to collect taxes from workers and generate revenues. The dollar keeps circulating and Adam Smith is happy and healthy!

We need to revamp the way we do business, the way banks work, the way we make money and in general the way the economy is supposed to work. A sustainable economy works best when all persons, including corporations and governments, interact justly, honestly, fairly and responsibly in their worldly activities. The economy needs to be fixed so that the dollar, that is created by manufacturing and workers in general, remains & circulates within the country.

globilization We are now living in an internet global economy where the rules for playing in it are very different from those of playing in your own back yard. We need to restore a moral sense of responsibility to the economy. Business the old fashioned way and "voodoo economics" will not work very well. “Things ain't the way they used to be!” We really need good and honest common sense economics!