Why Our Present Economy Is Not Sustainable

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by: Kimball Corson

Most of us are not going to like to read what I write here, but, after careful consideration, I believe it is the truth, whether we like it or not. However, I doubt that we will be able to face up to the problem and fix it. Succinctly put, the problem is this--

Within the U.S and some other nations, the levels of consumption required to sustain our existing economic and productive arrangements are inconsistent with our present distribution of income.

We cannot maintain our expected, post recovery social and economic arrangements with the present distribution of income in the US. Given our trade deficit and increasing productivity in manufacturing, and in light of that maldistribution, aggregate demand will continue to be deficient, even if consumers dropped their savings rate to zero and had minimal debt to service.

With only 21% or 22% of all income going to 59% of households, and the rest to the top 41%, with the very top 1/10 of 1% getting 6% of all income, the prospect for aggregate demand, because of the income class differentials in the propensity to consume, is simply too low to generate full employment or use up our existing excess manufacturing capacity. Savvy economists who have thought about this and studied the numbers realize this is true but are not willing to raise or discuss it, given the sources of their or their institutions grant support. It is a secret that needs to be put on the table.

As one economist, who will remain nameless, has put it: “Social and economic stability, therefore, depend upon redistribution for which there is no overt legal framework or political consensus.”

In an effort to try for sustainability, ever greater government consumption expenditure or transfer payments to the poor are needed and occurring to partially make up for the deficit in consumption by the middle and lower income classes. This increases our federal deficit unsustainably and induces increases in the money supply to finance that deficit.

At the same time, government is using all available means to redistribute income from government revenues to the higher income households, while enriching governmental participants in the process along the way. The system may be thought of as one for looting the government and the middle and lower income households by the well to do or rich. None of it is sustainable in the longer term.

Rerouting so much income to the higher income households causes the average propensity to consume to drop and increases the demand for financial investments. Secondary financial markets become overvalued relative to the economy. Booms are fueled to induce greater private consumption, but they invariably result in messy busts. The Fed goes along with the need for the moment, not realizing what is going on at the macro level. The stock market largely stays up because there is so much wealth and so many wealthy supporting it.

But the core proposition is that the economic system as we know it is not sustainable, with the present resulting maldistribution of income and what is going on that will worsen it and damage the government, already very badly in debt. Things simply cannot stay this way.

The economic system will eventually collapse and indeed, I submit, it is already starting to so. Most people do not have a clue about what is going on. All they know is the US government is a mess and it has let them down relative to their expectations and the economy is not recovering too well, while the wealthy seem to be doing fine and getting wealthier. They see the results, but not the mechanism. I call it the looting of America by the rich. There are limits to how far it can go on before government, the economy or both collapse.

Support programs for bad economic times, such as unemployment benefits, and some entitlement programs are the countervailing band-aids being used to literally maintain social stability at the price of ever increasing deficits. Without them, the economic system would sink altogether and social unrest would quickly move toward revolution.

While funds are borrowed or money printed to maintain this end game, the shoveling of revenue and income toward the wealthy by government continues largely unabated, with government employees taking their cut along the way, in one form or another. Witness the revolving door between government employment and employment in the industrial complex that lives off Washington.

Production and consumption in America are too badly out of whack. Government is shoveling funds as fast as it can in both directions, but the effort is not sustainable. Funds for the bottom end are too largely borrowed. Government cannot handle the ensuing debt load and the longer run prospect of inflation. On the other hand, not to provide those funds, such as unemployment benefits, is to court social disaster. The looting of the middle and lower classes and of government by the wealthy likewise continues unabated.

The on-going maldistribution of income must stop if we are to have any chance to rebalance and save the economic system, the less fortunate and our government. However, too many seem absolutely clueless or too badly caught up in ideology over the matter or worse, unmitigated greed, to the extent they do realize what is going on.

The situation developing longer term is therefore increasingly hopeless, in my view.

Disclosure: No positions