Economics explains plight of US economy

info@islandpacket.comFebruary 12, 2014 

Misconceptions persist regarding economics. An economy (e.g., the U.S.) is the aggregate sum of purchases by consumers, government, businesses, etc. The invisible hand of a free market will stabilize where supply (aggregate sum of produced) equals demand (aggregate sum of purchases). This leads to interesting dynamics:

Productivity can be affected. If aggregate earners produce more per hour of work (increased supply) and the aggregate earnings (pay per hour) stay the same, an imbalance occurs. It's more supply than the earnings can purchase.

Outsourcing can also be affected. The same imbalance occurs. Just replace some aggregate supply with outsourced product. Aggregate supply stays the same. Aggregate earnings drop (laid-off workers who produced the sourced product). You get an aggregate supply greater than the aggregate earnings.

Free-market options exist to keep economic growth positive:

1. Increase earnings to match supply (pay per hour).

2. Prices of supply needs to drop to match same earnings (deflation).

3. Build inventory.

4. Sell increased supply outside of the market.

5. Borrowing (debt) enables the purchase of increased supply.

Now think about the U.S. economy since the mid-1970s:

1. Earnings have not kept up with productivity.

2. Aggregate inflation exists.

3. Inventories have been essentially constant.

4. The trade deficit has been negative.

5. Private and government debt has exploded.

Since the trade deficit turned negative about 40 years ago, only two presidents, Jimmy Carter and Bill Clinton, have not "enjoyed" the debt explosion. Debt has been the basis for our positive economic growth.

George Stuart


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