Trickle Down???

Dear friends...

I am NOT an economist, but like the rest of you I'm puzzled by the current economic crisis. Frankly, I believe that the "experts" don't know or understand what is happening either...so I took a stab at it...after all, I KNOW I DON'T understand the economy. Having said that, I do have some thoughts...and so share them with you now. WARNING: Don't read this if you think priests should keep their noses out of politics and the economy..

It Doesn’t Seem to Trickle Down Anymore

The idea that the wealth of a nation would “trickle down” to the rest of us from those that generated the wealth at the top seems to be an idea that has passed its time. The faith that we held in that notion and in the notion that an increasingly unregulated economy would benefit everyone indefinitely also seems to be shaken by current economic realities.

We find ourselves in a time when our financial institutions are foundering because they invested in an amazing array of financial instruments that few but the most technically savvy really understood. Unfortunately these speculative investments were not only undercapitalized but were also dependent on a presumption that the real estate market would continue its upward climb without a major correction. When the day came for that correction, and the debt was called in, the money was not there.

That is when the government began to try and bail out the financial system. Unfortunately, it tried to bail it out from the top down, again presupposing that wealth would trickle down to the rest of us. To the contrary the collapse that began when the real estate market began to correct itself continues as money is poured into the system from the top. It continues to collapse.

The new stimulus package proposed by the Obama administration has many attractive features but unfortunately does not generate enough jobs to build a solid foundation for the economy to build on. Tax cuts alone provide nowhere near the liquidity needed to prop up the financials in the economy and we are thus left with the prospect of a continuing downward spiral that seems to be heading rather precipitously toward a crash. As praiseworthy as infrastructure improvements are, they cannot alone drive the economy back to viability. As worthy as health and unemployment benefits are they too will not touch the fundamental problematic we face, or at lease so it seems to me.

To reverse this fundamental error in our thinking, we may need to explore the possibility of building the economy from the bottom up for a change and not from the top down. There is an ancient precedent for this approach in the biblical notion of the “Jubilee” which was mandated every fifty years or so. Occasionally, wealth gets so concentrated in so few hands that a redistribution of that wealth becomes necessary for the entire system to survive.

It is a matter of some urgency that we make a decision to reallocate resources, it seems to me because we can only go to the well so often especially when we do so to the magnitude we are proposing in our current bail out strategies and stimulus plans.

What strikes me is that the resources that we are pouring into all our stimulus plans and bail outs at the present time are somewhat misplaced and ineffective. Instead, let us consider taking these resources and paying off all those bad mortgages and a good deal of the credit card debt in the economy? What if we were to prop up the economy from the bottom up rather than from the top down? Not only would that rid our financial institutions of toxic debts but it would prop up the housing market, increase home ownership and take a huge burden off those caught in the current downturn. It would get the building industry back on track and that sector alone could begin to drive the economy back into some vitality and the consumer would then find him/herself in a better position to drive the recovery.

The theory then that I propose is not quite communist although it sounds like it at first blush. Karl Marx is quoted as saying; “From everyone according to their means; to everyone according to their needs.” If you were to press me hard, I would have to admit that what I am proposing here does sound like communism. But biblical theology does that from time to time, but not exclusively so. Biblical theology also underpins our capitalist systems especially from the point of view of developing incentives to growth.

The theory that I am proposing is more specific than communism. It is a theory that says that when the concentration of wealth in too few hands reaches a point where it begins to collapse upon itself you cannot prop it up by giving it more—it will merely continue to collapse. It is like a reverse form of welfare. The system is corrupt and bankrupt from the top down and tossing money at it continues the cycle of corruption and bankruptcy. It cannot rectify itself by giving it more money. The CEO's have forgotten the great virtues of capitalism; frugality, efficiency, and quality. The greed they exemplify has become so bankrupt, that it threatens to bankrupt the entire economic system.

In order to salvage what we can of the economic system, we may need to reallocate our resources from the whole of the system to those who have been frozen out of the system. We may need to buy out their debt in the form of a “Jubilee” and thus prop up the financial system from the bottom up.

Thus the debt burden is relieved throughout the system and a return to a free market is possible…and that I argue is the desirable end of whatever strategy we discover is the effective one in the end.

Hopefully some bright folks in the government will institute some controls to prevent some of the excesses and abuses that led to the current collapse in liquidity. That, of course, will take incisive analysis and sufficient time to understand and then institute.

Once we then buy the time to give the economy breathing room we can then look at a more basic question. How do we institute the kinds of incentives we need to begin to produce durable goods domestically once again? How can we make it possible for the consumer to purchase domestic made goods once again? I am not proposing protectionism but a leveling of the playing field that gives domestic labor and industry the incentives to become more competitive.

The most significant flaw in the notion of communism to my mind is that it does not build into its system incentives to production or quality. The primary problem with capitalism is that without some kinds of checks and balances it will always concentrate wealth in too few hands and again the system collapses on itself as it is doing right in front of our eyes at this very moment.

We have also been doing that in recent decades by exporting the means of production overseas. All kinds of durable goods are now made outside of the domestic economy and we are left with a growing service sector. That sector cannot provide income and benefits that can, in turn, sustain an economy that we need to satisfy basic needs especially for housing. With Wal Mart for instance now replacing the old manufacturing facilities that once drove the economy to sustainability, we find ourselves pricing our young and our elderly out of the housing market. That is to say our young and our elderly of modest means. Those who are of significantly higher income need not worry. But much of the population makes well under $100,000 per year. For them (let me say, for “us”) economic viability is becoming much less possible. This has actually become the fundamental problematic underneath the present crisis…and this crisis has revealed this fundamental weakness in our economy.

The unknown factor in all this is what great discovery is next and who will exploit it? The computer and its related digital discoveries have given us an exciting way of managing the information age.

How then shall we discover our way toward environmental sustainability? Who will make these discoveries? How shall we encourage those discoveries and then provide incentives for their exploitation? Not only would such discoveries provide opportunities for the development of wealth, they would go a long way toward salvaging the planet.

So there you are; another few thoughts from a non economist. Just a simple parish priest, I am, puzzling my way through this part of time along with all the rest of you. Hopefully someone will figure out the way forward through the mess we’ve gotten ourselves into.