National Economic System - Understanding it

President Obama needs to put a Professor's cap on and have a Press Conference. It is astounding that Republican leaders seem to ALL be totally ignorant of basic facts of how a National Economy works, and Obama needs to TEACH the country the facts as they really are.

He and the Democrats have not shown much more in not alerting the public and Reporters what these facts are. They SHOULD already all know these things, as they are quite obvious. But the Democrats seem to allow the Republicans to make outrageous statements, without any challenge.

Geitner could certainly give this talk, but it is important that Obama give it, to ensure his great clarity of explanation on all aspects of the subject. And it needs to be given at the traditional Fourth Grade Level that is known to be required for the mass of the public to follow any speaker or writer.

It seems that Franklin Delano Roosevelt may have been the first to fully realize this matter, around 1933. He did some things right and some things wrong in his efforts to deal with the Great Depression, but FDR certainly learned a couple basic concepts in the process. Many Presidents since then have used the core concept, over and over and over. The current Republican House of Representatives has chosen to totally ignore or disregard everything that FDR and the others had learned, or maybe they are simply ignorant of the facts, as many of them have just entered Congress and they do not know how some things need to be. Worse, they arrogantly feel that their ignorance of standard practices is a merit, and they roar ahead with concepts that SEEM to be good ideas but which are horribly foolish and without merit.

IF they are not stopped in this delusional pursuit, they WILL entirely destroy the United States, in ways that the Country will never be able to recover from. A catastrophe beyond imagination.

The most important fact that FDR learned was that, when the economy was severely suffering, it meant that not enough money was flowing around through the economy. Interestingly, it does not really matter WHERE the money comes from! But once large amounts of money is fed ANYWHERE into the economy, that added money has a magnifying effect. Whoever received the money SPENDS most of it, and the companies receiving those dollars SPEND that, and those companies SPEND it. Much of this spending is as wages or salaries of employees, and THEY SPEND most of what they receive.
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THIS situation has resulted in the Federal Government budget growing and growing and growing. No politician has ever had the nerve to CUT any such spending, because they have KNOWN that a primary effect would be to severely hurt the overall economy of the Country.

Yes, this has resulted in a severely bloated Federal Government. That situation certainly is undesirable, for several reasons. But educated politicians have always KNOWN that to try to shrink the Federal Government now can have truly catastrophic consequences.

It is primarily because so many new Republicans entered Congress in November 2010, and that they had such lack of experience and knowledge, and such immense egos that they insist that they know all the answers, that the current situation is so grim. Their arrogance and their revulsion to all Members of Congress who had been around for a while, has even eliminated them ever wanting or being willing to LEARN from those experienced politicians (from either Party.)

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One fact should immediately make clear WHY there is such a problem in their seemingly attractive pursuit of suddenly chopping the National Debt and eliminating the rampant over-spending that Congress has done for the past 80 years.

Currently, BUSINESS only creates about THREE-FOURTHS of the cash flow of the United States. Fully the other ONE-FOURTH of the cash flow is directly from Government entities.

Imagine for a moment that ALL government spending was stopped. THAT would result in only 3/4 as much cash flow (and actually less, due to those magnifying effects) still being available to the people and businesses in the US. THIS would, and will, result in a DEPRESSION that is beyond imagination. The effect would essentially be as though every single person in the US had an immediate and permanent cut in pay to 3/4 of previous income. Instead of a family income of $80,000 per year, they would have to find ways to live on $60,000 per year.

This might not seem terrible, but that is $20,000 that this family would no longer be able to SPEND on cars and clothes and College and all the rest. Do you see the consequences of this? Sales of cars and SUVs would virtually stop completely, as few families could then afford to be making $10,000 in annual car payments. Sales of boats, light aircraft, furs and nearly anything not critically related to survival would virtually stop completely.

Of the ten million businesses in the US, ALL the businesses related to vehicle manufacturing or sales or maintenance would go bankrupt, as well as all the business selling and related to furs, boats, etc. Those millions of companies would then have to lay off many millions of employees, who now would no longer be able to make car payments and house payments and credit card payments. The overall effect would be an almost immediate end of all American businesses, except those directly related to survival, such as food stores and utility companies.

And how would all the millions of people without jobs, in other words, no source of income, be able to buy food and pay for heat and electricity, asssuming they could somehow keep ownership of their homes? They could not.

So the GOAL of greatly reducing the size of the Federal Government certainly SEEMS to be extremely attractive. But the CONSEQUENCES of actually doing it are unavoidable and catastrophic.

FDR first found ways to inject additional money into the Economy in the 1930s through an assortment of Public Works programs, such as massive hiring of people, handing them shovels, and building the system of highways we have used ever since. Rural electrification also employed millions of unemployed Americans. Building bridges and dams and other Infrastructure employed millions of others.

The RESULTS of those Public Works projects DID benefit the country by creating roads and the electrical grid and the rest, but the centrally important fact was that it enabled the Federal Government to GIVE millions of people PAYCHECKS, which BUSINESSES had been unable to provide for them. THINK ABOUT THAT! It is a core concept!

FDR also created massive WELFARE programs, to enable the Federal Government to give money to millions of others who might not have been capable of doing the hard physical work that the Public Works projects generally required. So the Elderly and the physically or mentally impaired also received checks, SUCH THAT THEY ALSO COULD SPEND MONEY

FDR realized that by finding ways to GIVE countless millions of dollars to many millions of Americans, they would then SPEND those billions at American businesses, and thereby REQUIRE those business to HIRE millions of additional employees to meet the new demand.

It did not matter HOW the people obtained the money. It only mattered that the Government had found a way to SPREAD enormous amounts of money around, essentially to the public and businesses. Once that was accomplished, the synergy of the public demand and the business capability for meeting those demands, no longer needed the government to continue feeding money into the Economy.

In the case of FDR, by the time Rural Electrification and road building and bridge building and dam building were basically complete, the Economy was back in its glory of the interaction of public demand and business sources. Therefore, when there was no longer any need for those millions of Public Works employees, they all easily and quickly found good jobs, often in factories.

As it happened, World War II began soon after that. England and other countries were not able to manufacture enough Military aircraft and ships and tanks and guns, and the US was able to convert many factories to manufacturing such things. It helped win the War, but it also ensured millions of manufacturing jobs, where families had reliable income.

After WW II was over, enthusiasm was rampant, and every family now BELIEVED that it could OWN A NEW CAR and OWN A HOUSE, and so there was natural demand that required millions of employees to build all those houses and those cars and refrigerators and the rest. NO involvement of government was necessary as the Economy was proceeding wonderfully on its own.

During the 1960s, the US wound up in the Vietnam War. Whatever the merits or flaws of the War were, the situation enable the Federal Government to spend wildly for Military equipment. At the time, ALL the equipment used by the US Military was manufactured in the US.

There were often newspaper reports of the Government paying $800 each for toilet seats and $600 each for standard hammers and such. There was always outrage at such wasteful spending, but it actually was very useful to the US Economy. Since all those businesses that manufactured those toilet seats and hammers were US businesses, the great prosperity of such businesses inspired in the hiring of millions of extra employees, and therefore the SPREADING of the cash throughout the economy, again due to those magnifier or multiplier effects. The US Economy therefore experienced a prosperity.

Note that this again was due to the Federal Government having found a way to inject money into the National Economy, where it could generate any desired amount of prosperity that was desired!

The Federal Government found several other ways to spend astounding amounts of money, all of which was spent with American businesses, and which each contributed to an Economy that gave the appearance of growing and prosperity.

The NASA Space Program spent quite a few billion dollars. The Cold War with Russia enabled the Military to spend even far more. The building of about a hundred obscenely expensive Nuclear Power Plants enabled more spending. Along a different line, many social programs of the 1960s enabled giving enormous amounts of money as Food Stamps, Unemployment Insurance, Welfare payments and many other programs also fed billions of dollars into the American Economy.

These methods of always being able to boost the American Economy created a sort of false-security in the public and in business and the government. An assumption arose that we DESERVED prosperity, and each government would make choices which always seemed to ensure that prosperity existed. NO President wanted to be in charge at ant time when prosperity seemed to fade or seemed to be less available.

Around 1991, the US Congress enacted two really stupid sets of laws, NAFTA and GATT. They believed that they were helping the poor people in other countries by those actions. At the time, Members of Congress bragged that they were going to eliminate the enormous wage differences between American workers and workers in other countries by RAISING the wages in those countries to match ours in America. They were only partially right, due to the fact that both those Agreements had clearly only been partially thought through. They WOULD greatly reduce the difference of wage rates.

But where American auto workers in the 1970s were being paid $75/hour and Mexican workers rarely even earned $1 per hour, we now see the results, which certainly seemed rather obvious to me in 1991. Modern American workers in automotive factories now commonly are paid $13 per hour and virtually none are paid more than $28 per hour, even for very specialized skills. Foreign workers have not (yet) quite risen to match ours, but that fact has allowed goods and vehicles made in foreign factories to have far more attractive pricing to American customers.

This process of sending many millions of manufacturing jobs offshore, has started to show themselves. There is little point of creating any modern American factories, as anything produced there could not compete with good manufactured in Asian or Mexican factories, primarily due to the fact that there are still enormous difference in wage rates. No one would even consider applying for a factory job in the US for $3 per hour, and so it is impossible for such an American factory to compete.

The result of this is the alleged Service Economy that the US has essentially had for the past 20 years.

THIS change has greatly affected the ability of the Federal Government to be injecting billions of dollars into the US Economy.

Now, the majority of bullets used by American soldiers are manufactured in other countries! Ditto for much of the equipment they use. So even if the Government decided to spend hundreds of billions for severely overpriced bullets, that money would NOT go into American pockets but to foreign companies! We are probably more aware of the situation of WalMart, the largest supplier in the world, where the majority of products have been manufactured in China and other Asian countries.

THIS then affects that MULTIPLIER EFFECT mentioned above. Where when everything was manufactured in the US, and we bought groceries from a mom-and-pop store, that money REMAINED in the US, and was spent by mom or pop in other businesses, often other LOCAL businesses. But with NO manufacturing capability in the US any more, our money immediately LEAVES the US. One result of this is that China currently owns more than a TRILLION DOLLARS of American debt, and Japan owns another trillion dollars worth.

But the point here is that the multiplier effect of the US Federal Government injecting money into the American economy has mostly vanished. The ONLY businesses which benefit from the current situation are those like WalMart or the Mobile Phone businesses, which really do not need extra billions of dollars. There used to be jokes about the sucking sound as American money was being sucked out of the Country!

So since around 1991, many of the traditional ways which used to work in injecting money into the US economy no longer work. Even things like the many billions of dollars spent for tower windmills, which are mostly manufactured in China, immediately leave the country.

This has caused an extreme reliance on Food Stamps (which around 46 million Americans now receive) and Welfare payments (a comparable number) and Unemployment Insurance (also many million Americans) and Social Security payments for Disability and other programs.

You might notice that NONE of these programs require the recipients to actually DO anything to receive their money! No Public Works projects like FDR created. No working in any factory to produce Military hardware or devices for a Space Program. Enormous numbers of Americans now can just sit back and not even try to find a job, because they are GUARANTEED receiving their checks. (In THIS, the Republicans are absolutely correct regarding the problem, even though they seem to have no clue regarding any good solutions.)

The alleged profits and spending of American businesses which Republican Congressmen seem so insistent on, are NOT remotely creating enough cash flow for the American people. There are a variety of reasons for this situation, but it IS the case.

But by 2008, it became clear that even these many Government programs were not giving out enough money to influence the MOOD or ATTITUDES of the American people.

President Bush initiated a Stimulus program which President Obama instituted very soon after becoming President. It involved nearly a trillion dollars which was to be GIVEN to assorted American people and businesses.

That Stimulus clearly DID do a lot of good, in keeping the US from falling into a deep Depression, which was seen to be likely comparable to the Great Depression of the 1930s.

But few in government seemed to realize the fact that the Multiplier Effect has nearly completely disappeared. Prior to NAFTA and GATT, such a large Stimulus probably would have shown immense positive effect in improving the US Economy, as the cash would have stayed in the US and gone from business to business and to employees. But the Stimulus which President Obama is blamed for as having little actual effect, probably had little chance of much success due to that disappearance of the Multiplier Effect. It DID BRIEFLY have some benefit, but nearly all that money soon either went to China or into the pockets of tremendously wealthy Multi-National Corporations.

Current Republicans criticize that Stimulus as having wasted a trillion dollars of American Debt. The reality is that it was money VERY well spent, but possibly that the AMOUNT of that Stimulus was far too small. Congress would never have authorized any Stimulus much larger than was done, so that was Politically not possible. But IF that Stimulus had been THREE trillion or FOUR trillion, the benefit from the Stimulus on the American Economy would certainly have been quite significant. Whether even that would have been enough to pull the US out of the multiple problems of millions of Foreclosures and business and bank failures and millions of personal Bankruptcies, is unclear.

The point here is that the unknowledgeable Republicans in Congress are ripping into President Obama for having wasted a trillion dollars, which they believe should never have been spent, where the reality is that President Obama certainly actually needed to have injected even more into the Economy than a single trillion dollar Stimulus had been able to do.

This presentation was first placed on the Internet in August 2011.

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C Johnson, Theoretical Physicist, Physics Degree from Univ of Chicago