We humans live in a series of systems that occasionally seem inescapable. These systems are political, financial, religious, legal, social, ecological, intermixed, and more. Some of these systems are dangerously faulty (such as the American health system) and others are potentially broken (the economic system). Depending on which of these systems one finds most emotionally and intellectually engaging, one defines her role in her culture. Most of us prefer to be recognized by our small scale roles: we are wives in our family systems, parishioners or perhaps high priestesses in our religious systems, neighbors, volunteers, etc.
How the status quo defines the masses, however, is another thing. Our forefathers introduced themselves in our constitution as "We The People." Our nation began in such a way that the primary role of The American People was not to be subjects, but citizens. This shiny new democracy gave new privilege and responsibility to its people, which we are violently desirous to protect at almost any cost, even when France (our good friends at the time, who helped us win our independence from Britain by forcing England to withdraw, regroup, leave us alone, later ask to be allies, and send us handsome husbands with great accents a few generations later) pointed out the excellent benefits of socialism. Our role was defined as a political one, which implied that we were entitled to many rights, responsibilities, and precious freedoms.
It is nearly inarguable that the primary role of the people has shifted rapidly from "Citizen" to "Consumer" in the past forty years or so. Even though voter turnout has remained more or less steady for presidential elections (hovering between 50 and 60% besides a dip to 49.1% in 1996 and this year's record 61%), our importance as voters has been overshadowed in news forecasts and political speeches by our importance as consumers. From a historical perspective, this makes perfect, if disheartening, sense.
The birth of our nation coincided with the birth of the industrial era. With the industrial era came the incentive to produce, or participate in the production, of goods beyond the requirement or even desires of one's own household or community. Trade has gone on for hundreds of thousands of years, most likely a social activity more than anything else, but shopping as we know it
, relative to human activity, is a concept still in its infancy.
Jean-Beaptiste Say was the first to develop an explanation for the role of money and consumer goods. Say's Law of Markets basically states that the moment a product is created, the producer would immediately exchange it for money, before it has time to decline in value. Then, the producer would become consumer, trading the money for new product, "for the value of money is also perishable." in other words, supply created demand. Formulated 200 years ago, this theory was simply an observation of what was happening. People really were buying just for the heck of buying, and selling for the benefit of buying more. Saving and investing had yet to become an issue: most American homes still featured a cow in the back yard and some hens in the kitchen and large multi-generation families. Most people probably had some money set aside, but it certainly wasn't as important as having their summer vegetables canned or the wool socks darned before winter.
Fast forward, to the Great Depression. By now, money was for more than pins and bobbins, and quite a large part of the market depended on the production and consumption of food, clothing, shelter, and entertainment. Suddenly, despite the abundance of goods, people weren't buying. In fact, people were practically hoarding what little they did have, and many continued to do so for the rest of their lives!
John Maynard Keynes observed the inability Say's Law to explain the Great Depression and created a general theory, now known as
Keynesian Economics, to take into account savings, investments, wage adjustments, and most importantly, recessions.
Keyne's believed that the proper response to a recession is to lower interest rates and stimulate growth via infrastructure development. America is large enough that it stands to reason that we need new roads, bridges, schools, and so on pretty much everywhere, all the time. Pay the people, and they will spend money.
This is a very important swing in fiscal and social thought. I don't know about you, but I like having an infrastructure (though I would prefer more bike and buggy lanes, fewer overpasses, please).
But, and this is a big and bold
but indeed, this is the first time the yoke of our economic system was shifted from the shoulders of corporations and onto the consumers'. Before, producers were assumed responsible for the market as both sellers and the buyers. The government took big payoffs every once in a while, barely regulated when things got bad enough, and buyers were told to beware. With Say's Build It Sell It theory, businesses were on their own. Because Henry Ford recognized that his business would not succeed if his workers could not buy the cars they built, it stands to reason that many employers were at least vaguely aware of the need for some sort of wage-price equilibrium.
We could now see that the world economy depends on consumption, and consumption depended on employment. The government could produce jobs, employers were inclined to offer decent jobs, and consumers could leave their farms and take part in exchange for a better quality of life supplied by this arrangement.
Ancient social contracts were broken. Family was redefined: the elderly could no longer expect to be supported by their families upon retirement, neighbors no longer trusted each other to watch the other's kids, women demanded liberation. The benefits have been worthwhile, an amazing new freedom and quality of life our ancestors could not have imagined. However, the impoverished and downtrodden were no longer the responsibility of the families or communities they lived with: single moms, the chronically ill, the disabled, the newly immigrated and refugees, neglected and orphaned children, wounded veterans of war, the elderly, and others found themselves dependent on the state, and employment could not solve this problem. Even strong and capable workers were so busy earning money they no longer had time to insulate themselves from a potential lack of cash. They had little time to tend gardens, cook meals, train children, maintain their cars, clean their homes, care for their elderly, own livestock, or even clean their own homes. Women followed the men out of the house and into the workplace like confused Eves following our Adams outside the Garden on Eden in search of more fruit. The most temporary of unemployment could be devastating. The need to invest in the long-term future soared, the time and ability to prepare for the near future plummeted. Government and business had to step in and fill the space that family and community once occupied when it came to supporting the less fortunate or temporarily disabled. The government needed businesses to pay taxes, the businesses needed employees to consume, the citizens needed government to care for their unemployed.
In 1974 Arthur B. Laffer created a curve. He happened to be having dinner with the incredibly influential
Jude Wanniski, Donald Rumsfeld, who was Chief of Staff to President Gerald Ford at the time, and Dick Cheney (some obscure bigwig you've probably never heard of...). Laffer's economic theory is based on the tax system. If you don't tax The People at all, the government has no revenue and ultimately fails, if you tax 100%, the people will have no incentive to work, earn no money, and the government fails (unless you are the Soviet Union which was going strong at this point, as Jonathan Chait points out in his book The Big Con). Besides 0 and 100, there are no hard numbers officially associated with the curve. It is just assumed,
as this video explains, that at a certain tax rate earners at the top tax bracket will commit less tax fraud and invest more money than they otherwise would. An important note about this video: At one point he mentions that, in 1970 the highest tax bracket paid 70% tax, which affected people who earned as little as $108,000. He does not adjust for inflation to inform us that $108,000 in 1970 is the equivalent of over $500,000 today.
The Laffer Curve is pretty laughable, at best an experimental Voodoo Economics, a phrase George H. Bush coined to describe it, at worse an obvious visual aid to show how eager politicians are to bribe the rich. Yet it inspired a radical shift in the conservative Republican agenda: once dedicated to small government and a balanced budget, now only truly concerned with lowering taxes by any means necessary. With Laffer as his economic adviser, Reagan implied in more than one speech that cutting taxes would result in cutting government spending. Not so. The powers that be determined that "
deficits don't matter," and since the 1980's every president has cut taxes, dismantled and handicapped countless important government programs, empowered corporate lobbyists beyond their wildest dreams, and failed to reduce or even curtail government spending.
Recessions hit in the 1970s and the 1980s, it was realized that oil and other natural resources are nonrenewable, education prices were increasing steadily, health care became totally unaffordable to the working class, the unions so many of our grandparents fought and died for went the way of the urban hen house, and everyone was getting a little worn out trying to keep up with the cost of living when wages ceased keeping pace with inflation. The rich were getting richer as the government cut their taxes time and time again, the poor were getting desperate as their benefits were cut. The tech bubble came and went, but benefited India and the corporations that now take their business there more than anyone else. Clinton proved to be the "
New Democrat" by taking up the cause conservative Republicans once held dear, balancing the budget, while neglecting the traditional Democrat ideal of creating social programs. In fact, he created a surplus while cutting welfare benefits, replacing them with skill training programs that proved useless to the many single mothers plunged into desperate poverty as a result.
There's no telling what would have happened had easy credit not become available in the 1980's. Strapped for cash? Use credit. Starting, of course, with the elite, using credit cards went from being seen as a little tacky and suspicious (like writing checks today), to vogue, to the norm. For a brief period in history, consumers, government, and business could relax. By cutting taxes and encouraging investment, government only had to sit back and wait for a brighter, more profitable tomorrow. Corporations could continue to pay less than living wage to their employees, who would make ends meet with credit. The price of certain products could inflate based on how much consumers were willing to pay and how much they were capable of borrowing, which inspired a ludicrous housing market bubble. Other products and services could be shipped in from other countries, enabling consumers to buy despicably bad quality foods (cardboard stuffed wontons, for instance) at offensively low prices. Only recently has the housing market bubble burst, taking much of the credit industry down with it and leaving us stripped of our final weapon against an economy gone sour.
We have reached a point in history that, like the Great Depression, will require a massive reassessment of how our economic system works. Supply does not create demand - and more importantly - Demand Can Not Create Supply, particularly when it comes to nonrenewable resources such as oil. Producers are finding themselves between a rock and a hard spot: not only is the market flooded with unwanted product, but consumers couldn't purchase it if they wanted to, and the government is due any day now to find out that deficits DO matter - at least in the minds of voters. Right now our system is unsustainable: it depends too heavily on the exploitation of our people and our environment, the abundance of relatively rare components such as aluminum, and our willingness to consume products that are bad for us and harming our children. What will happen to the economy when everyone choses to abstain from foods containing dangerous hormones and pesticides, atmosphere destroying chemicals and oils such as gasoline, and paper products made from our old growth forests? Because every day more citizens are taking that route. And soon it will become very apparent that better quality products cannot permanently save our current economic situation.
Why not? Tune in tomorrow ;)