To understand why the so-called stimulus package will not stimulate growth in the economy, we need to distinguish between two central economic factors in a market economy: income and wealth. The stimulus package is intended to boost private income, but its income boosting components only indirectly address income. The stimulus package is largely directed toward public wealth, but the economic crisis is not caused by a collapse of public wealth. The economic crisis is largely caused by the liquidation of private wealth. To understand what is going on here, we need to understand the difference between income and wealth.
Income is the sum or stream of payments (usually money) to a person or business. The person or business receives these payments for services rendered or products sold. Over the past year, incomes of individuals have held up well, with over ninety percent of the labor force continuing to receive income for work rendered and income to businesses has declined only modestly, about ten percent, for most businesses. The slowing economy of the first half of 2008 and the financial crisis of fall 2008 were not caused by a precipitous decline in income or by a precipitous retraction of consumer spending. The real problem was with wealth.
Wealth is assets that can produce a stream of income. There are many definitions for wealth--sum of possessions, total net value of property, and so on--, but the issue in a market society is what wealth does. What wealth does, placed in the market, is to produce income. The real nature of wealth is more accurately identified by the economic term, assets. Assets can be physical or intangible. What assets do is to produce income. The wealth of a manufacturing company is, in part, for instance, its manufacturing equipment, its skilled laborers, and its experienced management. The activity of these physical and human assets create goods and services that, in the market place, are sold for money that is the company's income.
Similarly, an individual person has assets or wealth. Intangible assets include the individual's education, skills, labor, and personal motivation that, when sold in the market to other persons or businesses brings income--usually payments in money. Individuals can also have other kinds of wealth, such as financial wealth. Homeowners have wealth in the accumulated equity in their home and in savings for retirement, for instance. The equity and savings are assets that at present or in the future will be placed into the market by the homeowner to bring income.
It is collapse of private wealth that is the basic cause of the economic crisis. America, as a whole, has seen three kinds of wealth evaporate into thin air, or be "liquidated".
The first kind of wealth is the nation's manufacturing wealth. Manufacturing wealth has dramatically and steadily declined over the past thirty years. As the nation has shifted from a manufacturing economy to a services economy, the physical wealth that is in manufacturing facilities and the human wealth that is in skilled workers, managers, sales persons, and so on, has become less important to the nation's economy. Notice what the decline of manufacturing wealth means--the decline of ability to produce goods that, when sold to other persons than ourselves, brings income. What we have done is to replace manufacturing wealth with service wealth (doctor's, teachers, and accountants' skills, for instance), but it is not clear that service wealth benefits society as much, by producing income, as does manufacturing wealth.
The second kind of private wealth that has evaporated is private savings invested in the financial markets. The destruction of 25-50% of retirement savings has destroyed a generation of Americans ability to retire. How? By losing their savings, they lost the ability to generate the income they needed to pay for retirement.
The third private wealth that has evaporated is homeowner's equity. Home equity was one of the largest sources of business investment funds in the nation. Homeowners would cash out some of their equity and start a small business. That opportunity is gone and gone with it are all the potential small businesses they homeowners would create.
Whether or not the politicians know the real causes of the current economic crisis, they are responding to it with misdirected and ineffective measures. The stimulus package is largely an public infrastructure building program, intended to employ construction workers. But problems with the nation's public infrastructure are not the cause of fiscal crisis or recession. We are not in the mess we are in because some school buildings are not up to earthquake code or prisons are over crowded or bridges are old or Amtrak is running old passenger cars or railroad stations are old. The public infrastructure is of course absolutely necessary for the private economy to function and to produce wealth and income. We need the public structure of commercial and criminal law and enforcement. We need extensive and open transportation systems for private goods to travel upon. We need schools to educate workers. We need some government bureaucracies to administer regulations. But none of these public infrastructures have failed in the past year, causing the current crisis. Investing more in them will not get us out of the crisis, not in the short term, not in the long term.
The only actions that will get us out of the current crisis are protecting and restoring private wealth (e.g., housing equity, savings in the financial markets) and creating the economic, governmental, and tax environment in which private initiative can generate more wealth by investing existing, even if diminished, wealth in business enterprises. These enterprises will generate income--revenues--that can be used to expand jobs, pay workers, and further invest to grow businesses.
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A Primer on America's Economic Crisis
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