Sunday, August 14, 2011

…connecting the dots

By kay.e.strong

For a week now all eyes have been glued on the financial markets as profit-chasing investors, using complex risk models and high speed computerized buying/selling algorithms attempting to recalibrate their portfolios, propagate and amplify disruption in a perfect feedback loop.  The kind you get when the mic signal gets picked up and amplifies continuously through the speaker.  Ooouch!

In fact, I’m rather at a lost to understand why so much media energy is being expended on the tail-end of the economic story.  Beginning students in economics learn two important lessons:  first, the US economy is consumption-driven, unlike the export-driven economy of China, and second, households own all the income in the economy.  In the simple circular flow of economic activity model, households jump start the reciprocating cycle between households and producers by demanding products.  Firms produce and sell those products to households and earn income.  That income is used to purchase resources from households.  Income earned by the sale of resources enables households to make new demands in the next round. Any discussion about “profit” occurs much, much later in the textbook.  

So, if the economy is experiencing a weakness, then, according to the circular flow model, the fault lies at the feet of households.  Why, then, are households not doing their part to jump-start the reciprocating cycle?

Perhaps, these sentence strings collected over the past week from NYT are telling.

…preliminary data for one of the leading barometers of consumer confidence fell in August to its lowest levels since May 1980

Why falling consumer confidence?

Twenty-five million Americans could not find full-time jobs last month. Millions of families cannot afford to live in their homes.

More layoffs are also likely in many states, on top of the 577,000 jobs eliminated by state and local governments since 2008.

For individual investors, whose ability to retire depends on stock investments in 401(k)’s and other retirement plans, recent swoons are yet another hit.

As xxx, R.I., sorts out its finances after filing for bankruptcy, it is trying to put bondholders in line for payment ahead of pensioners.

States have been cutting frantically for the last four years because of declining tax revenues, but the 2012 budget year will have the deepest cuts to education, health care and other services since the recession began.

It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available.

At little Grinnell College in rural Iowa, with 1,600 students, “nearly one of every 10 applicants being considered for the class of 2015 is from China.” The article noted that dozens of other American colleges and universities are seeing a similar surge as well. And the article added this fact: Half the “applicants from China this year have perfect scores of 800 on the math portion of the SAT.”

…instead of treating street culture as something that has no place in a [US] classroom, [rap] is being used as a vehicle to deliver instruction.

Why falling consumer confidence?

In sum, no jobs, no homes, no pensions, no education, no jobs…—another perfect feedback loop!  A bit reminiscent of Because a Little Bug went Ka-choo!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail:

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.