Too Big To Fail or Too Small To Succeed
The goals and form of the bailouts is just an extension of the US’s long standing belief in the “trickle down” theory of economics. In this theory you support and give to the wealthy so that they in turn can use their profits to create new jobs and subsidize reasearch and development spawning new technology and life enhancing discoveries.
Does this theory have any merit? Does it work in the real world?
Of course it works, but not very efficiently.
Imagine a huge furnace that is constructed to generate heat for an entire wintry culture. The ideal is that coal put into this centrally located furnace would warm the entire society. This image will suffice to relay what has happened to our “trickle down” economy since the Reagan years.
Initially let’s say we found that for every lump of coal we produced a rise of one degree of temperature per household. State thermal engineers hailed this as a success saying that coal used by individual consumers produced less than 1/2 of a degree per home. After a few years the furnace began to be less efficient and we had to add more coal to produce the same benefits. As the years progressed we soon had to use 5 and then 10 lumps of coal to produce one degree of heat.
In the US economy let’s say we use to get close to one dollar of growth in GDP for every dollar spent by industry. Soon industry’s impact on the real economy began to weaken and we needed five dollars of investment to produce one dollar of growth and now we need something like 10 dollars of investment to produce one dollar of growth.
Since the 1980′s the bulk of this investment by corporate america has been done with borrowed money. The amount of borrowed money needed to produce one dollar of GDP growth has been climbing steadily over the last two decades. The efficientcy of the system has slowed drammatically, and growth has been maintained by creating mountains of debt.
Now, even though we are being told that the mountains of debt created through credit is a major cause of current economic crisis. We are also being told that bailing out the big furnaces is the only way to prevent our society from freezing to death. We are being told that these financial furnaces these multinational behemoths are too big to fail.
Yet, the bailouts and loans are just adding to the mountain of debt which is suffocating the entire system, and each dollar given to these corporations is producing less and less growth. The amount of jobs and wealth being produced per dollar spent is decreasing with every loan. Sure trillions of dollars will create some jobs, but it should create 10 to 20 times the number of jobs it probably will create.
These stimulus plans based on corporate bailouts will produce more jobs in the short run. They will also produce growth in the general economy. But they are duplicating the process by which we have arrived at this crisis. They are generating growth at the cost of future payment. They are delaying tactics which only serve to make the problem larger in the long run. One dollar of growth for every ten dollars borrowed is going backwards not forward and any temporary relief provided by these actions is at best an illusion and at worst a set up for the future.
It may be too soon to worry about stimulating the economy. The first task for dealing with a patient in crisis is to get them safe and stable. The first job of this economy should not be stimulating growth but making all citizens usually referred to as consumers safe and stable. Putting money in their pockets immediately is what is needed. Creating an environment where saving and getting out of debt is important rather than trying to stimulate and encourage citizens to consume more would be the first step towards health. Stimulating the economy will be important at some time, but job one is stability and safety.
We don’t have time for trickle down solutions. Some captains of industry need to go down with their ships, and some furnaces need to be upgraded for better efficiency. And maybe the average citizen needs to challenge the idea that there are those out there too big to fail and that we aren’t by logical comparison too small to succeed.
Later this week I’ll explore the way that socialistic solutions are created and then demonized by economists and financial pundits.
Jim Guido
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