Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Wednesday, March 23, 2005


It's important to understand America's uneven distribution of wealth. It is a requirement for capitalism. But in excess it is counterproductive. Though capitalism has been very successful, it can be hampered by its excesses. These excesses reduce the benefits. They can actually reduce the total wealth produced. An excessively uneven distribution of wealth is one of the drawbacks. The key word is "excessively." This applies to economic "growth" as well as social and economic justice. The "justice" issue is highly subjective. The economic issue is more objective.

The degree of uneven wealth distribution is crucial for the economy. Too little, as well as too much, can worsen the economy. There must be balanced "unevenness." Balance is necessary between the means of production and the means of consumption. There needs to be sufficient money for the means of production, as well as the means of consumption. (If balanced, consumption = production.) A shift in the balance in either direction hurts the economy.

Uneven distribution of wealth is necessary to create capital. Some members of society must have sufficient money left over from consumption spending to invest in the means of production. This 'extra' money is necessary to pay for the means of production-- factories, raw materials, labor, etc. More unevenness allows for more potential capital. However, benefits of this unevenness disappear if too large. Excessively uneven wealth distribution actually reduces the growth of the economy, because it reduces the means of consumption.

The "means of consumption" appear to be ignored by current financial analysts. But they are essential for a capitalist society. Money needs to be available to purchase the goods produced. Capitalists make money from the SALE of goods, not from the production. The value (or price) of the goods is determined by what consumers will pay for goods. The less spendable money consumers possess, the less the market value of the goods. If the total spendable money of all consumers decreases, the total market value of all goods decreases. Success of capitalistic society depends greatly on spendable consumer money. Too little consumer money decreases the total value of all goods produced, regardless of the quantity of goods produced.

When the sum total of money available to consumers decreases, there is no benefit to further "capital" investment. Further wealth will not be produced from more capital, because total dollar value of sales cannot increase. Total market value of goods decreases if total money to buy goods decreases. More goods production will not increase total value. Spendable consumer wealth limits total consumer good value. In the current U.S. economic situation, capital is plentiful. It is consumer wealth that is limiting our growth.

The Wall Street Journal states that the markets are "glutted with capital." Which means there is more capital available than necessary. Many investors are not investing this extra capital in the "means of production." This seems reasonable, given the limited ability to increase sale of products. Much of this extra money, or capital, is put elsewhere. Savings is one such place. Savings money does little to help economic growth. It may facilitate investment loans somewhat, but there is little benefit to further investment. Again, the benefits to that investment are limited by consumer ability to buy the products of that investment.

In our current situation, more "progressive" tax policies and economic agenda will increase economic growth. A more progressive tax policy would increase consumer take-home wages. A more progressive agenda would actually benefit capitalism. Any policy that reduced the current uneven distribution would result in production of more wealth and increase overall prosperity. Reducing the current "degree" of uneven wealth distribution would put more money in to consumer spending. It would increase demand for goods and services. It would increase the aggregate market value of all goods and services. It would benefit business, as well as consumers. It would increase the production and profits of corporations. It would increase the hiring and wages of workers. Thus, an initial increase in take home wages could initiate a self-perpetuating cycle of economic growth.

This would return us to a more "demand-side" economy. A return to more demand-side principles is not socialistic. It is not a move in the direction of socialism. It is a move towards capitalism. It would benefit capitalism, not hurt it. It is a move toward real economic growth, not fictitious economic growth. It would make our capitalistic economy thrive, instead of stagnate.

Remember the adage: "necessity is the mother of invention." And so it is that "demand is the mother of supply." Demand will increase supply. But supply will not increase demand. If society demands round wheels for cars, someone will produce them. But if someone produces square wheels, no one will buy them. And no matter how many square wheels are produced, no money will ever be made from them. Supply of square wheels will never create a demand for them.




Blogger Rabenstrange said...

I disagree with your belief that redisribution of wealth (which is essentialy what "progressive" taxing does) is the answer to current economic inequalities. I think that if government would quit providing subsidies and special benefits to larger companies and creating legistation that errects barriers to entering markets the market as a whole will distribute the wealth in a way consistent with the competence of the producers. It seems logicalt to me that it is desirable to have the bulk of the resources in our society in the hands of the most capable producers.

11:01 AM  
Blogger unlawflcombatnt said...

Dear Rabenstrange,
Thank you for your comments. I appreciate the time you took responding. I think you may have missed part of the point I was making.
Reducing "economic inequalities" was not the main purpose for increasing progressive taxation. Overall economic growth WAS the reason. Reducing economic inequalities would be a nice side effect, but not the main purpose.

Again, the main reason for redistributing some wealth from the most affluent to the lesser affluent is for the benefit of the economy. It would stimulate economic growth. Giving more money to the producers may seem like a good idea at first. (It also "seemed" like a good idea to me in the past.) But it doesn't make sense economically. Someone has to purchase the goods that are produced. Profits are made by SALES of goods, not production. If less goods are being sold due lack of consumer spending, then consumer spending needs to be increased. Total market value of all goods produced is determined by total spendable consumer dollars. Producing more goods with constant consumer dollars does NOT increase GDP or increase economic growth. It creates a surplus. Nothing more. It does not help business. It increases CEO salaries, nothing more.

Consumer spending and demand are the engines of economic growth. Capital allows for supply to meet demand. Current demand is already being met. Our current industrial capacity utilization is 77-78%. This utilization % was 82% during the 90's. Which means we already have the capacity to meet an increased demand. We have no need to invest in increased industrial capacity when we are underutilizing our current capacity. We need to increase DEMAND to increase utilization of our current capacity.
Excess indutrial capacity = Insufficient demand

There is no benefit to giving more money to producers if consumers can't buy an increased supply of goods. Consumer spending and demand are limiting our economic growth at present. Consumer spending, which creates DEMAND for goods and services, will not be maintained if consumer income continues to fall. Supply and demand concepts are important here. Current industrial capacity and supply exceed consumer demand. Increasing industrial capacity by giving producers more money will provide no benefit at present. Consumer spending and demand limit the dollar-value and quantity of goods that can be sold. It limits the value of our GDP. Currently consumers are spending about 123% of their income. (23% of this spending is consumer credit.) Consumers are maxed out on credit. Real wages have decreased 2.3% in the last year. (see my link: Average Wages) Savings are approaching 0%. The only way consumers are going to be able to increase spending is through increased income.

More progressive taxation will increase take-home consumer income. It will increase demand for goods and services. It will increase demand for labor to produce those goods and services. Increased labor demand will increase total labor/consumer income. Which will increase consumer spending. This will provide the DEMAND that our economy so desperately needs.


3:47 PM  
Blogger unlawflcombatnt said...

Dear Rabenstrange,
I didn't address your point about "creating legislation tha erects barriers to entering markets." I need more information on what you are referring to. What barriers and what legislation are you referring to?


3:55 PM  
Blogger rightsideblogger said...

I truely am enjoying your blog. While you have a convinsing argument and I can appreciat the path that your logic takes you, I have a question for you. How do we redistribute the wealth. And are trying to redistribute the wealth to help those "less fortunate" (and I use that term loosly), to move to a high economic standing or just so they can spend more on product?
That brings me to another point, you say we need to redistribute the wealth to allow consumer consumption, but we don't need any more supply. I would argue that while consumer consumption has gone down in some industries it has increased in others, in other words it has been redirected. This is evident in your own argument where you say, truthfully, that savings is approaching 0%. The reason for this is because there is nothing to gain from a savings account. The interest rates are too low. But there is another side to the interest rates being so low. The cost of borrowing is cheaper for everyone, so the consumer is out borrowing $$$ to buy homes. First time homeownership is at an all time high. Allen Greenspan said a couple of years back that this is what has been getting us through the resesion that was associated with the .com crash.
While I agree with your comment to Sae's Law that supply does not creat the demand (which I have personally tested and discovered it was true), there is a natural ebb and flow of supply through certain industries.

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4:12 PM  
Blogger unlawflcombatnt said...



I think we agree about the benefit of Greenspan's interest rate reduction. It was a good idea in my opinion. It did allow for more home ownership and allowed many to take out home refinancing loans. People were able to borrow money off of their home equity loans to prop up consumer spending. It maintained consumer spending when incomes nosedived. We would have sunk deeper if Greenspan hadn't taken that action. I'm not advocating increasing our overall personal savings at this point. That would reduce consumer spending and cause an economic decline. My point was that there isn't much reserve left to increase consumer spending. With incomes decreasing, there's not much room to even maintain the current level. Interest rates are still fairly low. Which means there's not much room to reduce them more if spending again declines.

Business profits have been increasing. Average wages have declined. There is plenty of money for capital investment. And very little need at present. There is NOT plenty of money for consumer spending. And there is great need for it. Bush's major potential tax-cut benefit was to increase capital investment. We don't need any more capital investment when consumer spending is barely keeping up. We don't need to invest to increase supply when demand is limiting the amount of supply required. That's money that should be redirected towards consumer spending. Our economy is out of balance in regards to capital and consumer income. Capital does no good whatsoever if consumers can't buy the products of that capital. A little less capital would actually be more valuable if some of it were re-directed into consumer income.

I'm glad you agree about the lack of truth in Say's Law. It seems like some economists actually agree with it.


11:01 PM  
Blogger rightsideblogger said...

Everything that I have read in the WSJ and other media have suggested that the economy is healthier than when Clinton was in office. The growth may not be to as fast as it was during the .com exlosion but there is still growth. And I for one would much rather see economy grow steadily. The rapid growth tends to have a sharper decline when the markets correct (and I am not just talking about Wall Street).

We agree that the consumer spending has carried this economy since the .com crash. But that has been a long time. Just as in the rest of the economy there is a cycle of who's shoulders the economy will rest. With the interest rates at all time lows everyone has benefited, consumer and business alike. As well with Bush's tax cuts, everyone has benefited. Business where able to depreciate equipment purchases faster, and families where able to get a higher tax credit for the number of dependents. People who married were allowed to to get a deduction for starting a new life. Individule investors had less of their capital gains taken away from them for the risk that they take by putting their disposable income in to investments.

But I know this is falling on deaf ears so I will make one suggestion. Get rid of the income taxes all together and replace it with a consumption tax. This will take care of increasing the available disposable income for consumers and not place the burden on to businesses.

1:51 PM  
Blogger unlawflcombatnt said...

Thanks again for your letter.

I'll have to get back to you on the bulk of it. But you're worrying me a little bit here. It appears you don't accept the possibility of a demand failure. Otherwise, you wouldn't dream of suggesting a consumption tax. That would be a tax raising the consumer price on all items, without increasing the profit to the seller. Please tell me you're joking. Raising prices reduces quantity of sales. But the price the retailers get would not go up. The total amount of money retailers and businesses would bring in off of a consumption tax will be LESS. Do you really think it's a good idea for business to take in less money while consumers pay more? Isn't this just about as counterproductive an idea as humanly possible? Business will make LESS money. Because consumers will buy less. This is a perfect parallel to the housing market. The home values have gone up because the interest rate/finance charges have decreased. The consumer can get more home for the same money as a result. The consumer will get less product for more money with a consumption tax. I'll have to finish this up later. I'd really like to see you rethink this one. Thanks again for writing.


2:24 PM  
Blogger unlawflcombatnt said...



Let me start at the beginning of your second paragraph. We do agree that consumer spending has carried the economy. That's consistent with the views of many financial analysts. I think I understand your point about "who's shoulders the economy will economy will rest." I've heard this concept before. However, I don't completely agree with it. Consumer spending ALWAYS carries the economy long-term. Profits are made from SALE of goods, not from production.

Investment spending can temporarily make up for a decrease in consumer spending. But only temporarily. It can never carry the economy long term. Investment capital is supposed to increase production or, at least, the means of production. Building production facilities and building up inventories does temporarily increase the "investment" portion of the aggregate demand equation. However, investment will not continue indefinitely if it does not result in increased product sale from increased consumer spending. Production facilities will not continue to be built if product demand doesn't increase.

Inventories are included as part of the investment fraction of the equation

Inventory buildup can be included in GDP temporarily. But it cannot continue to increase as a percentage of GDP indefinitely. This is where the mathematical model is wrong. The mathematical model may show an unlimited ability for inventories to contribute to GDP (and Aggregate Demand.) But this is illogical and incorrect. In reality it will do the opposite if it continues to increase.

Continued increase in the percentage contribution from inventories will actually REDUCE GDP. Excessive inventories become a surplus. Long-term surpluses add nothing to the GDP, in spite of what the formula implies. In reality, they are reducing GDP. Why do they reduce GDP? Increasing surpluses decrease the demand for labor. There is less need to hire workers to make products as surpluses increase. Reduced labor demand reduces labor/consumer income. Reduced income reduces consumer spending. Reduced consumer spending REDUCES the sum of the GDP equation. It reduces aggregate demand, both logically and mathematically. This reduction is a direct result of increasing surplus. The GDP formula is not correct if inventories rise too much. The GDP formula should somehow factor in a reduction in consumer spending for inventories over a certain level. In my opinion, GDP is not increased solely by increased production. It is increased by increased SALE of that production. Many economists share this belief. Many economists believe sale of GDP is more representative of our national production than GDP alone.

It seems logical to me that labor demand will be reduced if surpluses are created. The resultant decrease in labor/consumer income and aggregate consumer spending reduces the value of the entire consumer market. In other words, the value of all products goes down, in spite of the creation of more products. In addition, consensus among the majority of economists is that consumer spending is 2/3 of economic activity. Allowing investment to contribute an unlimited amount seems to contradict this. Consumer spending is still going to need to be at least 2/3 over the long run.

You mentioned Bush's tax cuts. Bush's tax cuts were overwhelmingly slanted towards the affluent. They did help everyone to some degree. But some were helped more than others. The dollar value of the cuts was greater for the top 2% than it was for the lower 98%. The last government numbers I saw from HR 2, passed by the House of Representatives in 2003, showed that 70% of the tax cuts were for those with incomes greater than $100,000. Though the tax cuts may have helped everyone, they certainly helped the top income earners more.

But Bush's alleged reason for the tax cuts was to help the ECONOMY, not to help certain segments of society. This was not the best way to cut taxes. A majority of economists agreed on this point. But Bush planned tax cuts in November of 2000, before he even took office. He wanted to cut taxes on the affluent, regardless of the reason he used to justify it. He was looking for an excuse. As Paul Krugman might say, Bush had a solution in search of a problem. The recession gave him his problem. Bush's tax cuts stimulated the economy very little. Investment capital was far more abundant than consumer demand. Tax cuts aimed at increasing investment capital made little sense then. They make little sense now.

Consumer spending was maintained at that time by consumer borrowing, facilitated by the drop in interest rates. It's being maintained now by consumer borrowing. When that borrowing bubble bursts, our economy will sink. More tax cuts for corporations and the affluent are not going to help maintain consumer spending. The economy isn't just about how business can reduce costs and make more products. It's about how business can SELL more products. They can't sell more products if consumers can't buy more products.


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