Saturday, February 9, 2008

The Howell's Check is in the Mail

It seems that the crew and passengers of the SS Minnow knew more about economics than do most of our leading economists and politicians. The bipartisan “economic stimulus” package just enacted in Washington is so illogical that it is hard to take it seriously. The plan is for government to raid the nation’s savings, via borrowing, in order to pass out checks for “consumers” to “spend our way to an economic recovery”.

Don’t get me wrong. With the taxes we pay, I’ll take the “rebate”. But as far as economic policy goes, I can only say, GIVE ME A BREAK!

This is bad economics based on a false premise…that consumption is 70% of the economy. This false premise is partly a result of the way we “measure” the economy. GDP is essentially a quantitative figure that tells you how much money is changing hands during a specific time period. But, essentially, consumption is the end of economic activity. Production is its meat and bones. This bill ignores production.

To illustrate my point, I’ll use an analogy.

When the SS Minnow of that old sit-com show Gilligan’s Island became marooned on that uncharted island, what was their first response? Did Gilligan, the Skipper, and their assortment of tourists immediately rush out and begin spending their money? Better yet, why didn’t the millionaire Howells just hand out clumps of cash to all the others so they could’ve started consuming their way to a vibrant island economy?

“But Mike”, you say, “there was nothing to buy!” “Why not ?”, I ask. “Because”, you say, “That island was uninhabited by humans! How could there have been anything to buy and consume when there where no people around to make anything to buy?” OOPS! But wait. No problem, President Bush, or Hillary, or Barack, or congressional leaders or talking heads assures the Gilligan Islanders. “Consumption is 70% of the economy,” they say in unison. “Just start consuming, and prosperity will spring to life on your little island!”

Of course, Gilligan, the Skipper too, the millionaire and his wife, the movie star, the professor and Mary Ann knew better. They went immediately to work fashioning tools to build shelter, cultivate the ground to grow crops, hunt for food, etc. It seems the Gilligan Islanders knew some things most of our leaders today can’t seem to grasp.

Money is not wealth.

The things humans need to survive and thrive are not found free in nature. They must be made.

And, above all, production comes before consumption!

What a profound discovery by those islanders!

Do these basic facts of human existence change in an advanced industrial economy of 300 million? What is missing is an understanding of what spending really is. When you spend money that you have earned by productive work on goods or services, what you are actually doing is engaging in trade. You are exchanging the product of your work, as represented by those dollars, for the product of the work of others. A sale is really an exchange (a trade), not between a consumer and a producer, but between two producers.

The fact that the item you received may be consumed by you does not change the fact that it first had to be produced. In fact, consumption is not fundamentally a part of the economy at all. It is the goal and end result of the economy. Essentially, the "economy" is your production and that of every other participant. The economy is 100% production and trade, in that order. (I’m not here referring to GDP, which measures money changing hands. I’m referring to what actually constitutes the real economy.)

If our political leaders really wanted to “spur” the economy, they would recognize that the source of “economic growth” is not “money in consumers pockets”. It is the minds and productive work of individuals working for their own benefit. And then they would look to remove or reduce the barriers and disincentives that restrain the production that leads to trade and finally consumption.

They should take steps such as cut taxes on income (current production), capital gains (future production), savings and investment (capital for future production), permanently, as well as cut or at least put a moratorium on new government regulations (costs on current and future production). They should focus on the source of wealth, not it’s consumption.

The current snake oil “stimulus” package reverses cause and effect and will thus do more harm than good, reducing long term economic growth by consuming the “seed corn” of future production, the nation’s savings. If the Gilligan Islanders faced a shortfall in their food stocks for the upcoming months (i.e., a recession), should their first response be to throw a banquet and feast on their remaining stockpiles? Or should they harbor their existing food reserves (i.e., their savings), and then embark on an effort to plant a larger crop, expand their hunting activities, etc. (i.e., expand production)?

The answer is obvious. And so is the answer to the current economic situation.

That silly little 1960s sitcom, Gilligan's Island, taught us more economic common sense than our current political leaders and many of our prominent economic thinkers gazing down from their academic ivory towers.

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