Sunday, September 11, 2011

...rethink "our recovery"

By kay.e.strong

Why are we so confused about the motivating force for jobs creation?

In an earlier blog, …connecting the dots, I provided a mini lesson on the simple circular flow of economic activity.  In this model we have households and businesses and resource markets and product markets.  Households are linked to resources markets because households own all the resources, that is, land, labor, capital and entrepreneurship.  The resource market is linked to businesses because businesses purchase resources and convert them into finished products. Businesses as the pass-through are linked to the product market.  The product market is linked to households because households use the income they earn from the sale of resource to make purchases in the product market.

In a diagram, households are linked to both the resources market and the product market.  Businesses are linked to both the resource market and the product market.  Tangible stuff like resources and products move opposite their payments.

At this point in class, I love to raise a kinda’ economics chicken and egg question with my students:   Where does it all begin? 

After tossing ideas around for a while, I take a poll.  If a majority has not begun to coalesce on the side of households, I let the debate continue.  Ultimately, students come to the correct conclusion that it does not matter what resources exist or what products one could create IF no one wants to buy it!

In a consumer-driven economy households jump start the reciprocating cycle with businesses by demanding products---NOT the other way around!  Sadly, even the President failed to get it right when he declared that “Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers.”

Why do households get so little press?  In August when the Conference Board reported a 14.7% drop in the consumer confidence index, was anyone listening? If it had been the stock market that dropped 14.7% over a one month period, a national emergency would have been declared.  Congress would have rushed in with a huge financial relief package.

Did you know that the Expectations Index fell 23 points in August?  What is it, you ask?  A sub-index that assesses whether consumers feel business conditions are “good, bad or normal” and whether employment and income is expected to “increase, decrease or stay the same.” Listen, please, households are speaking!

The “lethargic” state of the economy is—as systems theory describes it—an emergent property that gives evidence at the macro-level of the dissatisfaction felt at the micro-level. Any plan to jump start the economy that ignores the “current state of households” is doomed from the get-go.

In truth, our recovery will be driven by income-earning households acting as consumers creating demand for products produced by businesses.  Contrary to the President’s assertion,Washington can drive the recovery by creating an environment conducive to shoring up the bleak state of households! A TARP for households, anyone?


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: kstrong@bw.edu

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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.