Making Money Work

Pres. Obama and Gov. Romney have both talked about freeing up money to help business grow, thereby creating jobs. Their plans differ in details, or the lack thereof, but the basic idea seems to be that money is somehow frozen in place and needs to be liberated.

The place up from which--picture Winston Churchill rolling over in his grave--money needs to be freed is the accounts of people like Romney. Money was intended to circulate but instead it is piling up in tax havens. And the reason why the rich are not investing it is that there is no use making more stuff because most people have no loose money to spend on it.

In a blog posted on Ezra Klein's WONKBLOG on August 10, 2012 Dylan Matthews showed that “Higher productivity doesn't mean higher wages.” Using unpublished data from the Bureau of Labor Statistics (BLS), generously provided to him by the Economic Policy Institute’s Larry Mishel and Nicholas Finio, Matthews showed that wages tracked productivity growth until the early 1970s. After that, wages stagnated even as productivity continued to grow. To show the relationship he presented the following graph based on EPI's analysis:

Source: Economic Policy Institute.

When hourly compensation ceased to grow even as productivity increased, the purchasing power of hourly-paid workers no longer enabled them to buy the additional products with cash. (Picture Henry Ford rolling over in his grave.) To continue their lifestyle many of the workers used credit. This led to debt piling up on the workers until the dam burst and their mortgages ceased to float. Suddenly much of the market for the increased productivity disappeared. The recession at least in part was caused by the failure of pay to keep up with productivity.

It is not that employers ought to pay their workers more. It's not a moral imperative. It's an economic imperative. Money was meant to circulate. If you choke off the money supply to the consumers you eventually break the economic cycle that produced prosperity. That is what our employers have done.

It is time for a redistribution of wealth in America. If our major parties actually understood economics I think they would both agree that more money needs to go to the poor and middle class. The reason is simple: They will spend it instead of sitting on it. When people spend money, markets are created and the upper class has something profitable to invest in. Everybody wins.

If the upper class really want an economy that works for THEM they are going to have to redistribute some of their money to the consumers in the lower classes. It doesn't matter whether they do it through charity or government dole or deciding to pay workers better. If they don't do it somehow, the USA is soon going to resemble the impoverished nations in Africa and the Middle East whose dictators hide their people's wealth in Swiss bank accounts.