Consumption vs. Production

Although this topic has been debated for a long time, it seems to be slightly emerging within the political debates more recently relating to the US economy.

What is the basis of a healthy economy? Is it the capacity at which consumers buy products? Or is it the capacity at which the economy produces?

Im sure most would say that, to have a strong economy, you must have both; but who can offer some historically relavent information that could start to help the understanding of how the economic situtation has been dealt with (Stimulus) and what led to the situation now (Free Trade Agreements?).

For instance, to beleive that consumption is the road to recovery, then stimulus is a viable option.

Or

If you believe consumption is only the result of a working and productive economy, then stimulus is not viable.

Im not taking any sides officially, but I do tend to sway in one direction more than the other. Hopefully this is not a repost and that I have asked a clear question to open healthy debate.

 

Efficient consumption is productive.

 

Without production there is nothing to consume.
Without consumption there is no need to produce.
Without resources, it is possible neither to produce nor to consume.

The point of stimulus is to get the resources to potential consumers to signal demand and tell firms it is time to start producing.
It only works under certain conditions... like the ones we are under now... where consumer demand is low, unemployment is high, and firms are not producing despite having capital to spend (a complication is that smaller firms lack the capital and should be given resources so that they can start producing).

I believe theory shows that in the long run it evens out. But stimulus reduces human suffering and reduces the chance of the whole system falling apart in the short term.
Also since people seem not to want to fix infrastructure when times are good, stimulus based on investment in infrastructure probably leads to better long-term results.

 

Workers are your consumers. We are now a "service" economy, the problem being only management makes enough money to truly be consumers. They can beat around the bush for awhile with stimulus injections and infrastructure projects, but all they are doing is delaying the inevitable. A lot of money being spent in the service sector is from baby boomers who have retirement packages, social security and paid off homes, which allow them to spend a lot of money. We won't see the collapse of the service sector fully until the majority of baby boomers are gone, but the sheer fact most people in the service sector don't make enough money to sustain said sector dictates we're on a steady economic decline. I'm sure those in power are simply trying to tread water, hoping another bubble will come along in some new industry to keep the myth alive that a country can be a economic power without a strong industrial base.

 

The way we measure economic growth is through GDP.

GDP = Consumption + Investment + Deficit Spending + Foreign Trade Balance

This basically is the measure of transactions. It literally comes down to how many times money exchanges hands from one person/entity to another person/entity.

Right now we are a production heavy economy. We can produce a ton, especially using labor overseas. As you can see by the equation, the more money we spend overseas on cheap products done by cheap labor, the more we have to compensate in the form of C+I+G... since this trade imbalance is typically negative for us and getting worse.

What we need now is more consumers. Consumers create the need for production, production creates the need for labor. It's one of those circular logic problems... producers are waiting for consumers to buy their products, consumers are waiting for producers to give them money to buy their products. So it's a standstill and the only entity that is not affected by this is the Govt, which the Govt should be spending much more right now.

 

Jesus. How do you not look at your post and see how flawed it is? Chinese workers are producing a ton, hence, why Americans have less jobs, hence, why we don't have enough demand, a.k.a less consumers. I didn't know the definition of theory was to dodge reality. The state doesn't generate its own wealth. Hence, if all taxes collectively are 40%, then the money the state has to play with annually is 40% of what the private sector is making. We are not China where the state can print more money, we are America where the state has to barrow more printed money with interest.

 

Ridiculous how you even came to this conclusion based on my post.

 

GDP is no way to measure economic growth. Government spending currently makes up about 40% of GDP. It's all smoke and mirrors.

The true key indicators of a healthy economy are the price of consumer goods, housing and real unemployment (not the numbers spewed by the Dept. of Labor).

In any case the US is in a depression.

 

Your own words. Are you honestly implying workers are a different group of people than consumers? Or are you implying "demand" has nothing to do with consumers?

 

We should start a war...

Not a (*)(*)(*)(*)(*) war like the Wars in Iraq, Afghanistan and Libya. A Global War.

That'll really bring consumption and production way up and it'll lower employment below 5 percent.

 

All I was implying was we do not have a production problem here in America. We have a demand problem.

 

You equate producing overseas with American production. Such a faulty premise ensures no solution to the current crisis. Before the free trade agreement was signed with China, we had an employees market, plenty of jobs, and no "demand problem". Chinese slave labor is like heroin for corporations. They can't help themselves to the point of their own destruction.

 

The United States is not in a depression. We are on the cusp of another recession. Furthermore, GDP is one part of economic growth. The other part is GNP, or Gross National Porduct. To calculate economic growth, you find the difference of GDP and GNP.

 

Very few people would argue against the anti-trust laws established in the early 20th century to combat the tactics of the robber barons at that time. Fact of the matter, as much as those robber barons threatened in-house competition, they in no way were capable of destroying the American economy through their tactics. I don't see how anyone who loves America could argue, even true free marketeers, that the state stepping in to put in policies to combat the tactics of the modern global robber barons isn't absolutely fundamental to preserve the American way of life. We are not facing a threat to in-house competition, we are facing an end to America as we know it. If we aren't there already.

 

Nice conversation going so far!

One thing I do agree with is that both consumers and producers are important for different reasons in economies. But since economy is based on a world scale and not a national scale, I see some tactics such as infrastructure investment to stimulate economy or returning more money back to tax payers as making more harm than good for the fact that those stimulus monies are being borrowed at interest, running up national debt.

What I start to think is, that yes, we need both consumers and producers. Does America need more consumers? Can Americans consume more? I thought, even now, that America was still the #1 consumer?

I think, production is much more important to American economy considering it is near non-existant. Yes we have American economies that produce, but those productive projects consist of Asian workers, not American. I believe it would be smartest to begin looking at economies like China, India, Brazil and see what products they would like to start consuming. As these countries grow at the rate that they are, comming out of mass poverty, I see a growing demand that could possibly be the demand American companies need to see before investing into projects. Just need more foreign based products.

In other words, does America need consumers to be solely American? Or can we enter the world market competetively and rely on foreign demand?

 

Here is the problem with "selling products to other countries". America is a completely different culture, as in the fact our level of consumerism, the buying of massive amounts of things we truly don't "need", is what made our economy so strong. Other countries will never care about kitty litter boxes. They would just make their own and throw sand in it. Some might argue we should do the same, but it is that massive purchasing of "useless junk" that our huge economy relies upon. The outsourcing of jobs, while good for huge cash reserves for corporations in the short term, will force us to think like those other nations in the long run, and destroy the world's greatest market. China is a non-issue for America as far as a market is concerned, as their factory workers average $136 a month, and 80% of their nation still craps in holes in the ground. They are in the infant stages of a market, so 99% of our consumer goods will not be eyed by their people, even if they could afford, for centuries. Markets that could purchase "useless junk" on the levels that we do are mostly old world Europe, where not only do they pay high levels of taxes which takes from their "useless junk" money, the are not as superficial, live in small sized dwellings, and have no desire, want, space, or need for 99% of the goods Americans produce. There are really only 2 societies on Earth I could see matching America with a drive for superficial, unnecessary purchases and building their markets like that of America's and they are Canada and Australia. However, globalism(free trade/outsourcing), dictates ours dies, and no others will ever grow to match its glory, size and scope.

 

You obviously believe the hype.

Yes, the US is in a depression, and one that is likely worse than the Great Depression.

The economic indicators spewed by the state and their "economists" are cherry picked to gloss over the reality.

 

Well I would make the argument that the useless consumption America has undergone is negative towards the strength of our economy, not the other way around. Many Americans go into massive unsecured debt using credit cards for instance, which is not beneficial to the U.S. Economy because bankruptcy nearly eliminates an individual's ability to borrow in some way that IS positive to the economy.

I also dont think the mass amount of americans are the zombie-like black friday walmart stampeed (Nice imagery haha) type either. Yes, the general american has coffee makers and other utilities that would be considered non-essential. But, people also buy non-essential items that aide in some sort of production, which are the type of items im suggesting that these rising economies will demand.

I dont think any investor would invest in a project to make spounge bob and hello kitty dolls in america. But, if you could manufacture electronics in the U.S., and make a product that competes, quality is more valueable to professionals, and even enthusiasts, over low price.

Although 80% of Chineese are still poor, their economy is growing at 15%ish per year, along with india. The long term goals of US companies, in my opinion, need to be focused on those economies and to "invade" those foreign markets so that they can have pieces of the pie.

 

Those "black Friday" Americans are truly what feeds our market. Do you know how many occupations, to industries, are just superficial tokens of a rich people? Do you think any other nation on earth would/could have plastic doll to shamwow moguls? Bunny slippers to seat covers? Massage therapists to chiropractors? LOL. Our economy was the size and scope of yesteryear's because as a whole we were affluent down to the very bottom. America, as we know it, cannot exist as part of one world. I do not see Indians or Chinese rushing to buy designer label anything, as a whole, for a long time to come. Yes, technology crosses all lines. But as that is the only common frivolous expenditure, the margins will be extremely low, as all will rush to that last industry to increase their wealth.

 

I completely agree with you in the respect that those people are what fuels the economy today. But dont you also think that they are living off the wealth of previous generations? Yes, most of the most wealthy are self made, first generation millionaires, but I think the majority of people are able to live lives of credit and spending because we had previous generations who were so dedicated to US Manufacturing, making things in the US and selling to domestic and foreign spenders.

One thing is for certain, there are strong US companies in today's bad economic times, companies like Caterpillar opperate largely on world scale, and offer competetive advantages over their competition that influence world contractors to use their equipment.

On the other hand, companies who were once large, before the major onset of world economy like GM, are hurting so bad because they are just now, mid 2000's, getting into the world markets of China and such. Japan had cars here in the 60's. So those companies who did not recognize the world market are hurting, and ones who opperate on a global scale are not. Ford has been opperating internationally for a while and they were the only US auto manufacture that did not take a bail out, and seem to still be doing somewhat decent at least.

Thanks for replying as well, I appreciate it

 

No problem.

I just simply think breaking America, for the sake of 230 other nations, will lead to nothing but an entire planet of mediocrity and despair. Yes sell them our knowledge. Help teach them to fish. But don't take our pile of fish and spread it out to all. The same rules of capitalism vs socialism, that apply to individuals, apply to nations as well. It is worth it for our own corporations to make products here, at high labor cost, to guarantee our market for generations to come. It is worth it for protectionist policies, on made products from foreign nations, to make sure their companies can't use cheap labor to cut our companies throat when accessing our great market. And it's worth it to fight for our great market until all catch up in their own right, even if it means 10 more world wars.

 

If you can refute their economic analysis, I will consider your reality correct. Remember, the only way to illegitimize their economic analysis is to provide more intelligent economic analysis. It must be positive economic analysis. I await your response.

 

I agree, I think the trade agreements that we have now, like NAFTA and GAT, would work out better if they were only applied to countries who share the same ideas of workers rights, environemntal protection etc..

As Ron Paul, and many other politicians claim, our regulations make us uncompetitive. So, we either need to kill our regulations or kill free trade with countries who will not enforce the regulations we enforce?

 

We need to do both. Get rid of the FED on top, and the world has never seen prosperity like America would see for the next thousand years.

 

The reality is that this will not happen. The best we can do is limit the functions of the Federal Reserve. At the same time, we can limit the ability of investment banks to cause another financial crisis.