Production drives long term growth. Consumption drives short term growth. The Congressional bailout was designed to short circuit the liquidity trap thats manifested in US Banking by stimulating short term consumption. This was the correct treatment, as we are in a liquidity trap and direct stimulus to consumers is whats prescribed. As far as supply-side growth. Revolutionary inventions or process improvements slash production costs while maintaining profit margins. Consider a pencil maker. Pencils cost 50 cents to make and sold for 1$. A breakthrough in pencil construction reduces manufacturing cost by 50%. The pencil now costs 25 cents to make and is sold for 75 cents. Profit margin stays the same, cost goes down. This is how economic growth arises through supply side innovation. Consumers, although earning commensurate income, have more money to spend on pencils via price deflation. That excess income is spent on more pencils (or cars, or vacations) than before and the economy expands. That economic growth lay in unlocking the dormant cost of production that was otherwise 'wasted' in the process of creating the product --- and "giving" it to the consumer. All historical booms resulted from a revolutionary supply-side innovation - steam engine, car, assembly line, appliances, computer etc. Supply-side growth is incremental and inches along, everyday. But only during times of revolutionary innovation does its effect result in a massive deflationary BOOM that is the Holy Grail of economic growth. The 2001-2007 Bull Market was largely the result of a massive credit expansion and not any appreciable supply-side breakthrough. Credit gluts give birth to unsustainable Bull Markets and we're witnessing the faltering of one right now. Many argue that overseas outsourcing was the supply side driver to this recent bull run. To an extent, they're right. In the short term, outsourcing suppressed prices low enough to finance the Iraq War and half trillion dollar budget deficits -- at a palatable 6-10% inflation. Long term, the economic health and wages of this country are being exported, piece-by-piece. Factories that used to pay US workers 200$ to make a widget now pay a Chinese laborer 40$, sell it for less and still make bank. The fatter margin goes to shareholders and American wages are decimated. Hydroblunt has explained this well before. Americas economy depends on wage earners (spending). By eroding wages at home by exporting jobs abroad, the economic base that drives this country is rapidly chipped away and sold to foreign powers that are building their own Empire with the toil of our people. Of course this is horrible policy, but driven by Corporate America and sold to an ignorant sheep class who couldn't tell you which way the wind blows on any given day. The credit situation is the bread and circus meant to distract us while our economy is raped & pillaged. The powers that be have decided to blow out America. Sink the Titanic, as it were. Until we take back the controls, hoping for an economic Renaissance won't save us.
You're mostly right. However the problem is not "too much/too little" government, but the fact that we allow other countries (i.e. China) to dictate the terms of trade. Unsurprisingly, we now have a huge trade deficit, and U.S. companies can't move fast enough to offshore production. Things would be different if the only way to compete in the U.S. market was to go into business with an American firm and do most of the work in the U.S., using American labor. And by American labor, I don't mean imported Indians or Latin American illegals. This one in particular is nonsense. It's probably easier to fire workers in America than in any other first-world country. Why, exactly, might a company want to hire Indian programmers? They do the same work for much less than you'd need to pay if you actually hired one of your fellow countrymen. It's that old "jobs that Americans won't do" canard to justify hiring illegal Mexicans. Americans won't take strenuous jobs that don't pay anything, and why the hell should they? All you do by importing workers is drive down wages and standards of living for everyone. If American manufacturers can't compete with Chinese workers living ten to a room in squalid barracks, then we should introduce protection. Quite frankly, I view support for unrestricted free trade as borderline treason.
Consider a pencil maker. Pencils cost 50 cents to make and sold for 1$. A breakthrough in pencil construction reduces manufacturing cost by 50%. The pencil now costs 25 cents to make and is sold for 75 cents. Profit margin stays the same, cost goes down. -------------------------------------- Pencils cost 50 cents to make and sold for 1$. WMT contacts mfg and suggests "If you would like to keep selling pencils at WMT, we need to retail those pencils for 75 cents." Deal or no deal? The breakthrough innovation is a smaller pencil. The pencil now costs 25 cents to make and retails for 75 cents. Unfortunately,, baby Joey poked his eye out with the pencil and sues the mfg. Liability insurance on the new pencil is 25 cents per unit.
The problem your example ignores is that WE DON'T MAKE *ANYTHING*, we just IMPORT and CONSUME. 77% of goods sold by Wal-Mart', the nations largest retailer, are imported. At what point will they stop lending us more and more to consume?
The problem is WE DON'T MAKE *ANY* PENCILS, we just IMPORT and CONSUME them. Eggsactly, no money in pencils BUT if we can get you to buy our pencils on CREDIT, then we can make some money.
I'd like to see you back that statement up with real #s. Do us all a favor and rip the GDP up. Show how much we make; show how much we consume, with details.
I can't. I just get the drift, the money to be made selling an auto, the profit is in the financing. The money to be made selling a sweater at Sears, the profit is in the credit card charges. If you sell a washing machine and make ten dollars on the product and $50 on the financing, the item sold becomes the vehicle. Retail, as a stand alone profit center is horse and buggy economics.
But labor still costs too much. Repeal the minimum wage and child labor laws and we can be competitive again.
No, you (and nutmeg) missed the point. The OT asked if production or consumption drove long term economic growth. The pencil example was a simple illustration of why productivity improvements/innovations make that so. Substitute pencil with circuit boards, software, telcom equipment, medicine (things made IN the US), and the example becomes applicable to our economy. I understand your frustration with our Countrys vanishing industrial base. If you had the read the remainder of my post, that would have been clear to you. To answer your question - at what point do the Chinese stop lending to us? When they exploit other export markets or refuse to eat the horrendous cost of buying inflated dollars to subsidize their mercantalistic growth. It will likely be the later and happen sooner than later.