The Theory of the Consumer Class

One of the more interesting viewpoints of the recent economic crisis is the idea that society should consume less and save more. The view isn’t interesting in that it is novel, the view that problems arise from over-consumption has been touted for years. What is interesting, is it is now a scapegoat for the problems we are currently facing. The fact is, however, that consumption is not the problem, it is the way in which consumption is being financed. The actual issue isn’t that Americans save too little, but rather that a majority of Americans are almost expected to consume from debt as opposed to equity through high prices of items in relation to wages.

The Game of Trade

For most, an economy is perfect because it allows many participants the ability to interact with each other, share information, and allocate resources to the most productive portions of society. The common view is that the market creates the best of all possible worlds since it aligns its goal (the most production) with its structure (allow individuals to maximize their production given their inputs). It is because of this view, that we typically think of any problems in a capitalist society as self-correcting in the long-run. Abstractly, how could any system which has a goal of maximizing utility fail at that if it freely allows all participants to follow their natural tendency of maximizing their own utility.

Nationalization of Capital

            As the previous post described, there are a few reasons that account for the current economic crisis. One reason, the growing wealth disparity in the US, is one which deserves a bit more attention than it has already gotten. While wealth disparity may not be wrong from the views of a capitalist economy, it may be the root of many problems we experience today. One thought I have found myself wondering more often is whether we really should be looking towards a private market for capital investment. While it is important that capital be allocated to those parts of the economy which will use it best, I wonder if its truly necessary that this capital be privately owned and therefore the returns to capital being privately held. It is this privatized system of capital that may be one of the largest reasons for wealth disparity.

 

The Economic Crisis

            Over the past few months, we have seen a radical worsening of the economy. As the government continues to support banks in a hope to revive the lending market, the major US automakers are close to failing themselves. They now look to Washington to bail them out, labeling themselves as “too big to fail.” In this case, the automakers may have a more direct point than the banks seeing as they employ a large amount of individuals in the middle portion of America. Along with this, the ceasing of the credit markets have shown us just how leveraged the economy truly was. While banks struggle to stay solvent, many homeowners see the value of their housing decline rapidly. As companies begin to scale back their operations, unemployment has begun to rise rapidly, and consumer demand begins to fall. All these factors beg the question, How did we get here?

 

What is to be Done?

 

            As is ever present in the news, the financial markets are in disarray. The excesses of the last couple of years have led us so far on the up-cycle, that a huge downward spiral is bringing is far below what should be rational asset pricing. One of the most interesting trends in financial markets is that instead of decreasing volatility and managing economic risk, markets have begun to experience extreme volatility. Its not that this was unforeseeable, but few thought that such a rapid and extreme movement downwards for the financial markets would be experienced. Inevitably, there will be a large amount of after the fact commentary. Many will call this socialist or communist steps to manage the economy and markets, but in reality the situation is much more complicated.

 

Non-profit IPO

I earlier discussed about the possibility of creating markets that exist not for profit. In this case, a market performs the function of aggregator and analyzer of information which is essentially the main purpose of a market. Typically, the way in which information is valued in the market is by profits, but it is not essential that the returns for investment be to owning shareholders…. all that matters is the perspective those shareholders have. Recently, I came by an article in the economist which displays this concept in action….. it reads…

Two Tier America

            The disappearance of the middle class is a commonly cited and discussed phenomena. It is almost banal and commonplace in today’s society. Many of the previous posts discuss this and similarly many economists discuss the end of America with the loss of the middle class. It would be almost redundant to discuss the typical topics that appear in the classroom—the increasing returns to capital, the decreasing returns to typical service jobs, the correlations between both capital and technologically advanced workers, the perpetuation of wealth, etc. One topic, however, that I have not seen discussed at length is the possibility of a feedback mechanism in the economy causing a self-reinforcing cycle (in our case a negative one). This may explain why the process may become both accelerating and destructive.

 

The American Labor Crisis

            In economic theory, labor is often analyzed from two perspectives. The first is how corporations decide the right amount and type of labor to invest in. The second is how individuals decide to make their choices in terms of employment. For most of economic history, these have been quite adequate for analyzing the result of different economic outcomes. Often decisions have been made from these perspectives in order to maximize economic output. There is, however, a third perspective that is often not discussed within the labor context—disparity of wealth.

 

Oil Profit Tax

Every day in the news, there’s more discussion about oil and the price of gasoline. With the upcoming election, there will certainly be lots of campaigning and discussion around this issue. The usual rhetoric of wealth distribution and trickle down economics begin making their rounds. Obama would have a taxation of the oil companies and then reallocate these funds to decrease the price of oil for poorer Americans. McCain opposes this taxation stating that this will hinder investment going forward in Oil and Gas exploration and drilling. Unfortunately, both of these plans are dangerously foolish.

 

Financial Engineering – the Good and the Bad

            Right now we are in one of the worst times for financial institutions. A perfect storm has come about leading to a precarious situation for most banks and investment firms. While much has been said about the sub-prime market and the precipitous rise in interest rates, little is remembered of one of the first events that marked the beginning of the end—the Structured investment vehicles. The CDO and CLO markets also saw downturns at about this time.