To restore economy, make it in U.S.

After over five years, despite close to ten trillion dollars in deficit spending and economic easing, our economy is, at best, sluggish.  

Deficit spending and economic stimulus, which have gotten us out of every post war recession, don’t seem to be working this time. Despite massive deficit spending and an extensive quantity of money fabricated by the Federal Reserve (Fed), our economy is moribund at best.  We continue to lose jobs amid high unemployment and poor and uncertain growth. The problem is the multiplier effect.

John Maynard Keynes observed that the economy could be stimulated by deficit spending and/or tax reduction or cooled by tax increases and/or spending reduction. Since World War II, three presidents have engineered major tax cuts — Kennedy, Reagan and Bush. Of course deficit spending has been a matter of course during that period. Only the Bush tax cuts failed to produce significant growth in Gross Domestic Product (GDP) and employment, because by 2001 we were importing most consumer products and thereby exporting the multiplier effect. Imports have also blunted the impact of an extensive Obama stimulus.

Stimulus spending and Fed easing are taking vast national wealth, putting it in a gift wrapped box and sending it to China.

The multiplier effect is the core of Keynesian economic theory, which has been the underpinning of economic policy since the Great Depression. As the theory goes, if the government gives you one dollar (the stimulus), which Keynes calls the marginal dollar (one more dollar) you could either spend that dollar or save it. The portion you spend is the “marginal propensity to consume” and the part you save is the “marginal propensity to save.” So if your marginal propensity to consume is 80 percent your marginal propensity to save is 20 percent.

Put simply, if the government gives you a tax rebate of one dollar, you might go to the store and buy an 80 cent widget. For the sake of this example, let us assume the storeowner has the same 80 percent propensity to consume, he might buy a doo hickey for 64 cents (80 percent of 80 cents) with the money you gave him for the widget.  

This goes on for six or eight slices until the original dollar the government gave you produces five or six direct dollars in economic activity and myriad indirect dollars spent on components needed to replace all the widgets and doo hickeys on retailers’ shelves. That is how jobs are created by the government. That is what the multiplier effect is. Why isn’t it working in this crisis?

When you go to Walmart to buy that widget, it is reordered from an overseas manufacturer, because we produce scant consumer products domestically, far less than in past recessions. These massive government stimulus programs are pushing on a string — because we export much of the multiplier effect to other countries.

Our economy will not be on sound long-term footing unless we reestablish the consumer products manufacturing sector here in the United States.  If the government concentrated on accomplishing just that, robust economic growth would surely follow.

Government does not directly create jobs or economic activity. Government provides an environment that enables the private sector to create them.  

Consumers have gotten us out of every post-World War II recession, yet today they are holding a tight rein on their purse strings.  

How can consumers show confidence when unemployment by any measure — out of work, underemployed or scared to death of losing your job — is very high?  

This vicious cycle can only be broken by American corporations. It is time for companies like Dell, Hewlett Packard, banks and credit card issuers to ask — not only from a business point of view, but as Americans — whether it would be better to hire American workers to man their telephone sales and technical support rather than outsourcing it overseas.  

Then some of those graduating with a computer science degree could get a start and earn a salary. That sure beats government stimulus programs, which print money and export much of the multiplier effect.  

But, what about the price of products and services provided at American worker wages? How do we compete with workers in China, et al?

Well, price is not the only element in a product, quality is an important factor too. I can take you through Walmart, Kohls, JC Penny, Target and, yes, Macys and show you the exceptionally poor quality that is being offered today for clothes, that won’t even last a year and coffeemakers, irrespective of brand, that don’t even make hot coffee.

We have what China does not now have, a $16 trillion economy and a per capita GDP of $45,000. We have a business’s greatest asset: the customer. We hand it to China on a silver platter for poorly made products.  Furthermore, we are giving China what is inherent in the Yankee spirit: our initiative, creativity and entrepreneurial zeal. 

That is not to say we should do no importing, surely there is a place for it.  However, importing requires very long lead times between order placement and delivery. A domestic vertical manufacturing model, provides a nimbleness to the production process which creates volume and profit not inherent in price.

Profit and volume are not just the goals of a business, they are a result of an economic model that has served us so well in the past, by fulfilling customer needs and wants. There are limits to the positive impact government can have on our economy and quality of life.  While I doubt that it is always true that the government that governs least governs best, it is always true that the government that governs most governs worst.

It is time for American business to step up to bat.

Local resident Howard Ring is president of Securing Your Interests Inc., a consulting firm. He has served as a government regulator in the financial services area and as a merchandising executive in the department store industry.