“THE PRIVATE SECTOR CAN SOLVE IT”…COUNTER-INTUITIVE ECONOMICS 101

The elections are over and the devil’s brother, ahem, the Republicans, won sweeping victories throughout America on Tuesday.  Over and over again the conservative rallying cry was, “Government can’t create jobs…only the private sector can!” In the midst of possibly the next Great Depression, over and over, we’ve heard one common theme. We’ve listened to the pundits and the candidates tell us time and again that only corporate America can bring us out of this recession.

Wrong.

Way, way, way wrong.

When demand for products begins to dwindle, what is a business to do?  What recourse do they have?  One of the first things they do is to cut costs, and amongst the costs they cut are labor costs, because after all, if demand is down, you have to protect your margin.  No one can blame a business owner or corporation for managing profit.  If those profits become losses, the company will fail.  As demand reduces further, these same companies will continue to cut labor costs, cutting hours, paying employees less, and laying off workers.  Their solution for their particular business is to reduce the amount of labor they are paying for because the amount of income they had is shrinking.

Demand is down, and that one company reduces its labor costs.

What happens when most companies in America reduce labor costs?  Does demand increase?  Is the solution that works for one company a solution that can work for the entire American economy?

You know the answer as well as I do.  The solution that works for one company is counterintuitive to what will work to end the recession for the American economy.  If every corporation and every small business reduces labor costs in order to stop losses or protect profit, the private sector fails.  What started as a small reduction in demand quickly grows into a gaping hole in our economy.  The lesson here is not that one company reducing labor costs is wrong; I think I’ve already stated that no one can blame that one company for protecting profits.  But that one company is contributing to a “solution” that actually grows the recession rather than prevents or ends it.  Reducing labor costs means reducing the amount of money that American workers earn over any period of time.  Typically, a loss of demand signals a lack of liquidity in the consumer markets.  That can also be defined as Americans spending less because they have less money.  Further reducing what they have at that point in time creates a whirlpool effect, which sees demand spiral downward faster and faster as the supply of money available to fuel that demand dwindles.

We have seen American jobs leave our shores because Corporate America saw an opportunity to increase profits by using cheaper, less argumentative overseas labor.  What was the result of that?  Fewer jobs available to Americans, and from that grew a lack of the ready cash necessary to fuel our consumer driven economy.  Wages have been reduced and workers have been laid off.  Free Trade agreements that gave American jobs away to foreigners not only reduced the number of jobs available to Americans, but reduced the amount of cash available to fuel the very demand that a demand- side economy requires to thrive.

In short, reducing labor costs is counter-intuitive to a healthy American economy.  When you reduce labor costs, you also reduce the amount of money needed to drive demand, and without demand, singular companies and corporations all over America begin reducing labor costs even further.  It snowballs, and the rest is history.

The private sector can save the economy?  Impossible.  The private sector is destroying the economy in a last ditch effort to save each individual corporation.  The correct move to create demand would be to keep labor on, to bite the bullet for a little while in the hopes that demand would return.  Instead, corporations all over America took the red pill, cut labor costs, and in doing so, shared in growing the lack of demand.  I can’t blame them.

The conservative Republican, “common sense” (winks to Sarah Palin!) solution to the depression is in reality a Non-sense Conservative recipe for destroying the economy.  When demand is down, a company is within its rights to protect itself.  But when every private sector firm is busy protecting itself, who is left to protect the American economy?  From a macro perspective, the massive layoffs that result from individual corporations attempting to cut labor costs spell the end of economic boom in America until an outside force can act upon it.  The private sector, at this stage, is no longer able to save the economy.  They are part of the problem, unwittingly it would seem, nevertheless, they are at the mercy of someone or something else.

To my newly elected Wisconsin Senator:  The private sector cannot solve this, Senator Ron Johnson.  You’re a businessman, you ought to know better!  You ought to know how absolutely your business is at the mercy of demand.  When demand is down, you cannot create it by yourself, because your response contributes to a further contraction of the economy.  You are the private sector, Senator Johnson.  Got any solutions?

Now that you’re the new Senator from Wisconsin, we expect you to fix it.  Voodoo, as shown here, won’t work.  You need to try something else.  The first place you can start is to figure out how to get some or many of those millions of jobs we have shipped overseas back to our shores.  Start there, and start quickly.  We don’t have much time left.   Ω