Economic Issues
Economic issues affect our current and future financial well-being, and in turn our security, health and enjoyment of life. Although, as individuals, we can make many choices that will affect our personal finances, the policies of our governments and world events can improve, limit or eliminate many of our options.
For the most part, we have very little direct control over world events, and we are often at their mercy. On the other hand, we can modify the policies of our governments to help bring about the changes in our corner of the world that will help to insulate us from world events, to give us some better economic options and to protect our finances.
We each have our own ideas about what it means to be wealthy. Ask any two of us and we will most likely have different ideas about what we need to feel wealthy. Many of us might believe that we would need to have a net worth of millions or billions of dollars to be considered wealthy. On the other hand, many of us instead believe that true wealth is really a matter of having the right combination of good friends, good health, and the ability to live in harmony with nature. In fact, if two of us possessed the same things, one of us might feel wealthy and the other one might feel poor.
No matter what each of us believes about what it means to be wealthy, it still boils down to having enough of the right resources to enrich our lives. In general, we become wealthier by getting or controlling more of the things that we prize. In the case of money, this is usually about increasing our net worth. We may do this by earning money from work, investments, inheritance or any combination of these or other methods. To stay wealthy, we need to continue earning enough to offset our expenses. In addition, it helps if we spend wisely and do not waste what we have earned.
When we become wealthier, it does not always follow that our world becomes wealthier. The things that we do to accumulate wealth fall along a spectrum with respect to how it affects the world’s overall total amount of wealth. From best case to worst case, our actions go from creating wealth, to redistributing wealth, to destroying wealth.
For the world to become wealthier, our actions need to create wealth. We create wealth by doing productive work. For instance, we might produce something or manage or invest in the productive work of others. In the best-case scenario, our actions would not only make us wealthier but would also help make others wealthier without making anyone poorer.
When we receive an inheritance or win a prize, we are talking about the redistribution of wealth. In these cases, we would become wealthier, but no new wealth would have been created. For the most part these are wealth neutral activities, but they can help us to create or to destroy wealth. We might use an inheritance to invest in a business that creates wealth. A contest that awards a prize might also raise awareness of some product, service, cause or issue. On the other hand, if we receive enough money we may stop working and therefore stop creating new wealth.
Usually, if not always, criminal activity leads to the destruction of wealth. One clear example would be burning down a building to collect the insurance money. Not only could there be transfers of wealth from the insurance company to the building’s owner and from the policy holders to the insurance company, but there would also be a waste of the resources needed to put out the fire and the building would have been destroyed.
Even when there is a redistribution of wealth through robbery, shoplifting or many other types of crimes that do not directly destroy any goods or property, there is a destruction of wealth. Not only do these crimes waste the time and resources of our police, courts and prisons, but the criminals could have been doing productive work instead of committing crimes.
In addition, there are many things that can destroy wealth that are considered legal. These things can be as simple as wasting our food or breaking something that we own, all the way to complex business acquisitions or buyouts that are only used to avoid taxes or to sell off assets to make a quick profit. Many business practices also put a drain on our overall wealth by hiding and shifting their costs to others. I will talk more about these business practices in the next subsection.
There are also many things that we are required to do that do not directly or even indirectly contribute to the creation of wealth. These include such things as overly complex tax codes, redundant or ineffective regulations, and poorly designed communities and infrastructure. I will talk more about these in upcoming sections.
There are many business practices that companies use to hide and shift some costs to others. Although the owners and executives of these companies many make out a little better with higher profits or salaries, all of us end up directly or indirectly paying many of these costs. There are many different types of shifted and hidden costs. Some may be easier to understand than others, some may have a more immediate cost, and some may only directly affect some of us. Nevertheless, these business practices do reduce the overall wealth of us, our communities and our nation.
For instance, let’s start with the shifted and hidden costs of pollution. When many companies manufacture their products, they often use a lot of chemicals that are dangerous to humans and other animals and plants. When companies do not pay the costs to have the right controls and safeguards in place, some of these chemicals may leach into the ground, some may get into the water, and some may get into the air. Then the people working in and living near these factories can become exposed to these chemicals.
Depending on the chemicals involved and the level of exposer, they can make us a little or a lot sick either quickly or over many years. The various illnesses that could be caused by these chemicals include such things as stroke, heart disease, kidney disease, neurological impairment, pneumonia and cancer. We may then lose work, incur high medical bills or even die.
In this case, these companies are trying to avoid the costs of the pollution they are producing by hiding them. However, what they are in fact doing is shifting their costs to the rest of us who will pay with our poor health, our higher medical costs and even our lives. The truth is that our costs will be much higher than the costs they are trying to avoid and to hide. It would be much cheaper for everyone to prevent pollution than to deal with its aftermath.
Subsidies and tax breaks are other examples of shifted and hidden costs. We can see that our government directly pays these subsidies and gives these tax breaks, which means they indirectly come out of all our pockets. Some people may say that these subsidies and tax breaks are needed to help the companies stay competitive or to relocate to our communities where they will stimulate the local economy, which they sometimes might. However, they often just help the companies and their owners while the rest of us pay the costs.
When our governments give out subsidies, they reduce the costs for companies to manufacture their products or to provide their services. This means that these companies can sell their products and services at lower prices. With lower prices, demand for these products and services will increase and the companies can sell more of them. The people who buy them may save some money and the companies may make bigger profits. The problem is that the rest of us are paying the cost of this through our taxes. Unless we get some comparable benefits for these shifted and hidden costs, subsidies simply force some of us to help pay for what others are getting at lower prices.
We have some similar problems with tax breaks as we have with subsidies. However, when tax breaks are used to get companies to relocate, then we have a bigger problem. Companies should base their decisions on where to locate on which location offers the right mix of community and needed resources, including labor. Workers should then decide whether they want to work for these companies and live in the communities where they are located.
By giving tax breaks, companies may be enticed to relocate by the lower costs, which can allow them to make more profits in the short term for their owners, rather than relocating to a location that is best for them and their employees in the long run. Some in our communities that are giving tax breaks may get jobs and more people may move there to work in these companies. However, we will pay higher taxes to make up for the tax breaks we give these companies. In addition, the locations where these companies would have otherwise preferred to relocate will lose out. The result is that some costs are shifted to others while decreasing our overall wealth.
A better alternative would be for communities to invest in making their communities more attractive to the companies they want to entice and in making the communities better for their citizens. Companies would then want to relocate to these communities for the right reasons. That is because the communities have the amenities and resources they need and want, and their employees will want to live there because these are great places to live instead of just living there because these places are where their jobs are.
When companies donate to charities or to political campaigns, it looks like they are just increasing their costs to buy some goodwill. However, we will be saddled with some shifted and hidden costs. For instance, companies will be able to take a tax deduction for their donations. We as taxpayers will then need to make up for the companies’ lower taxes and in essence, be forced to pay part of the companies’ donations to some charities or political campaigns that we might not support. In addition, the part of the companies’ donations that are not recovered in tax deductions will be paid for in some combination of higher prices for their products and services and lower wages paid to their employees.
This means that the companies’ executives get to donate to the charities and political campaigns that they prefer, while forcing us taxpayers, and their customers and employees to pay the actual costs. Instead of companies making donations, they should lower their prices and raise their wages and let their customers and employees make their own donations to their preferred charities and political campaigns.
To advertise their products, many companies provide coupons that we can use to get discounts on their products. In the past, these coupons were mainly paper, and we received them in the mail or cut them out of newspapers. Today, many coupons are online, and we can print or scan them off our smart phones. Companies will promote these coupons as a way for us to save when we try or buy more of their products, but we may be required to do some work to obtain and to use these coupons so that we can get those savings.
One problem is that there are some shifted and hidden costs in all this. First, companies need to spend time and money to create and to process their coupons which adds to their costs. Second, buyers need to spend their time and resources to get and to use the companies’ coupons which they could have been spent doing other things. Third, while the buyers who use the coupons may save some money, other buyers will need to pay more than what they otherwise would have to cover the costs the companies are incurring with the coupons.
Companies may get some advertising, and some buyers may save some money, but none of this goes towards productive work. Since creating and processing coupons raises costs for companies, that leads to higher prices for their products. If all buyers use coupons, then prices would need to be high enough to cover all the costs associated with the coupons, which means everyone ends up paying more for these products. If only some buyers use coupons, then they may save some money, but all the other buyers would end up paying more than they would have if there were no coupons.
Many companies also offer discounts on their products and services. We have many of the same problems with discounts as we do with coupons. Companies need to sell their products and services at prices that cover their costs and earn them profits. If they always give discounts, then their prices before their discounts would need to be inflated to cover the cost of the discounts. If they only sell some of their products and services at discounted prices, then they will need to sell others at inflated prices to make up for the costs of the discounts. That means some people will need to time their purchases to get discounts or pay higher prices. Even the people who do save will not save as much as the discounts would suggest.
However, there are times when discounts are necessary and appropriate. It boils down to a case of supply and demand. When there is a much higher supply of a product or service than there is demand at the given price, then offering a discount will help to increase demand. Of course, this would only be in case of a temporary increase in supply or decrease in demand. If this imbalance in supply and demand is permanent, then the price change should also be permanent and not be a discount.
In addition to offering coupons and discounts, a company may advertise its products in many other ways. For instance, it may air commercials during television and radio shows, place ads in newspapers and magazines and on the internet, put ads on billboards, sponsor events, buy naming rights for sports stadiums and arenas, and do anything and everything to get its products known by and wanted by us.
Although advertising does not really hide the fact that there are costs associated with it, we may not be aware of what all those costs are and to whom they are shifted to. First off, advertising costs are relatively straight forward in theory. A company will decide in conjunction with its advertising department on an advertising campaign and budget that should be able to increase the company’s profits enough so that it will have a positive return on its investment. That is, the company will launch an advertising campaign that they hope will increase sales revenue enough to make a bigger profit than it would have without advertising.
Since advertising costs money, a company’s sales revenue needs to increase by an amount more than what the advertising costs so that it can make a bigger profit. To increase sales revenue enough, a company will need to sell more of its products, sell its products at higher prices, or sell more at higher prices. To do this, the advertising campaign will need to result in an increased demand for the company’s products.
If an advertising campaign simply informs us that the company has some products that we would have already wanted to have if we had known about them so that the company simply sells more of their products at the same price, then the company and we all end up ahead. However, it rarely works out that way. Most advertising subtly tries to manipulate us into thinking we need or at least want the company’s product. This can then induce many of us to buy a product that we really do not need or want, or to pay more for a product than we would have.
Overall, advertising can earn companies some higher profits, can earn various media, venues and others revenue from the advertising space they sell, and can make some media, venues and events less expensive for those of us who view, read or attend them. Of course, unless we are willing to pay extra for something that is ad free, we will need to put up with all the advertising. In addition, many, if not most, of us do not save enough by putting up with all the advertising to make up for what it costs us to buy all the higher cost and unwanted products.
Many companies pay wages to some or a lot of their employees that are somewhat or a lot below a living wage. Then, to earn enough to live on, some of these employees must work long hours at one or more other jobs or seek assistance from charities or government programs or turn to supplementing their incomes with through some illegal means.
There are at least a few reasons why many companies get away with paying less than a living wage. In many cases, the jobs do not require any specialized skills and there are a lot of unemployed workers who could do the job. This is a simple case of supply and demand. There is not a lot of demand for workers, but there is a big supply of workers, so companies do not need to pay as much to get the workers they need.
There are also some cases where a company might seek out or turn a blind eye to individuals who are not legally allowed to work so that they can get away with paying them low wages. If individuals who cannot work legally want to work, they know they need to stay under the radar. If they do not, they know that they may be found out and deported. Therefore, if they can get a job, they may not feel that they have much ability to demand higher wages.
When a company pays employees below a living wage, they can cut their costs so that they can make a bigger profit, earn their investors more and pay their top executives higher salaries. Although some of us may benefit from this, these lower paid employees and those of us who help support them through our charities and our government programs will be forced to pay the cost.
There are also many other shifted and hidden costs that we need to pay for. For example, when companies locate their offices in remote locations without mass transit, they force their employees to incur higher transportation costs, they force communities to spend more on roads, and they cover up valuable farmland or animal habitats.
Although requiring companies to stop forcing shifted and hidden costs on others would increase the costs for those companies and for some of us who buy their products, our overall costs would be less. There are a couple of key factors that will help us to reduce our costs and allow us to increase our wealth.
One key factor is that it costs less to prevent these shifted and hidden costs than it does to clean up after the fact. For instance, adding the needed pollution controls is less expensive than paying for lost wages, medical bills, funerals and all the pain and suffering caused by the pollution. Paying a living wage would reduce poverty and the need for expensive government programs and would in turn reduce our taxes.
Another key factor is that when we need to pay the true costs of things, we are more likely to buy things that are less costly for us and in turn for our community and for our society. For instance, if we needed to pay the turn cost of gasoline, we would be more inclined to look for and to buy or to use less expensive alternative means of transportation.
The bottom line is that even if these companies need to charge more for their products and services, we will have saved more than enough to pay for their higher prices by not having their shifted and hidden costs forced upon us. This will greatly increase the overall wealth of our communities, our nation and our society.
Even when we account for inflation and productivity gains, our cost of living today is much higher than it was in the past. Although some things cost relatively less than they once did, the cost of many other things has gone up quite a bit. There are various factors that have contributed to the higher cost of these things and to our overall higher cost of living. The following are just a few of the things that have risen in price faster than our wages.
Housing is an area where costs have gone up a lot between 1960 and 2020. When adjusted for inflation, median household income rose by only 39% while median house prices rose by 129%. One factor is that homes have become larger even as the median family size has declined. The biggest factor is more demand for our limited resources. Our increasing population is causing a rising demand for land and building material, which is driving up prices and further decreasing the supply of land and building materials.
Transportation costs have also increased a lot. With more urban and suburban sprawl, home, work, shopping and entertainment are now further apart. This has forced us to increase our average miles driven from about 5,400 miles in 1970 to almost 15,000 miles today. Since we are driving more, we are buying bigger cars with more safety features. The good news is that productivity gains have helped to keep the average price of a car from going up more than a modest amount when adjusted for inflation.
The real jump in the cost of our transportation has been through the higher taxes for the building and maintenance of all the roads and bridges that we now need. While the number of miles of new roads has not increased much since 1970, the cost per mile has increased dramatically. With the average number of vehicles driving on our roads and bridges having doubled, our roads and bridges now need a lot more maintenance. That has resulted in their share of our public infrastructure spending going from about 44% to about 57%. Even so, there is a growing backlog for repairs being needed on our roads and bridges.
Medical costs have dramatically increased since 1970. These costs have gone up at a much faster rate than other goods and services. The cost of healthcare has gone from about 7% of GDP to over 17% today. The inflation adjusted cost for some medical procedures is now 2 to 30 times higher. Rising medical costs have resulted in rising costs for health insurance, and in the inflation adjusted out of pocket costs having more than doubled. Part of these increases have come from more people being in poor health and an aging population. Another part comes from the rising costs of more advanced and expensive treatment options and more people demanding those treatment options while more people cannot pay their medical bills.
The cost of higher education has also increased dramatically since 1970. College tuition alone has increased by more than 3 times the rate of inflation. With more jobs requiring a college degree, there has been a significant increase in the demand for higher education. Colleges have also added a lot of new amenities, technology and dining options to attract students. The increased availability of student loans has also contributed to the rising costs and to students graduating with substantial student debt.
On average, wages have risen faster than inflation. However, this wage growth has been uneven with most gains going to individuals already earning the most while there has been a decline in the purchasing power of individuals who were earning the least. This has resulted in a growing wealth gap where the rich keep getting richer and the poor keep getting poorer. Part of the fix for this is to find ways to lower our cost of living and to ensure we can all earn a living wage. I will discuss some ways to reduce our cost of living and to give everyone the opportunity to earn a living wage in upcoming sections.
With the wages of more people not keeping up with inflation, more people are falling into poverty. Although reducing our cost of living will help, this would mainly help the middle class, since those in poverty may still not be able to afford any of the things that would cost less. One option would be to increase the minimum wage. However, the cost of living varies greatly from place to place, and it still might only help some of us who would still have a job.
What we need is to take a page from the story of our earliest ancestors. First, there was no concept of unemployment. Everyone had to work or risk being expelled from their tribal group. Second, everyone had to cooperate in their mutual endeavors for the benefit and survival of the group and themselves. Third, all productive work was considered important enough to earn everyone their fair share of the fruits of the labor of the entire tribal group.
Therefore, we need to find ways to ensure that everyone who is willing and able to work can find or be given a job. No individuals should be forced into poverty just because they were unlucky enough to be unemployed for any extended period. We will also need to find ways to cooperate with one another and through our governments to ensure we can all get the education and training needed so that we can all be ready to fill the jobs where workers are needed and to ensure that we are employed in those jobs. We must also ensure that those jobs all pay at least a living wage.
I will talk about some ways in which we can accomplish all this in the following sections.
Our political and business leaders often talk about economic growth as the road to our greater prosperity. The key measure currently used for this economic growth is our GDP (Gross Domestic Product). This is the amount of Goods and Services being produced. A rising GDP means that the value of goods and services being produced each year is rising.
Since many of us believe that a rising GDP translates into more jobs and a rising standard of living for everyone, it is considered by many to be the key indicator of a healthy economy. Unfortunately, there are a few big flaws with using GDP as an indicator of our greater prosperity.
For our GDP to grow, we must produce and consume more each year. Currently, the biggest contributor to our GDP at about 70% is consumer spending. Changes in consumer spending can therefore have a big impact on GDP. In addition, increases in consumer spending translate into increases in sales tax revenue and corporate profits. These are the real reasons why a lot of attention is paid to consumer spending when our political and business leaders talk about economic growth.
There are only two real ways to increase consumer spending. We, on average, would need to start spending more or there would need to be an increase in the number of individuals who are doing the spending. If we take a close look at these ways of increasing consumer spending, we can see the flaws with both.
In the first case, there is a limit to the amount of goods and services any given one of us can use. Once we have consumed all the things we need or want, then trying to consume anything more would only be a waste. In addition, it does not make much sense for us to go into debt to buy things that we do not need. Therefore, we cannot increase GDP this way once everyone is able to buy the goods and services that they need and want.
In the second case, there is also a limit as to how many of us our world can support. If we keep increasing our population, our limited resources will need to be divided among more of us and each one of us will need to pay more for less. In fact, we are already depleting many of our resources, paying more for many of our basic needs and ending up with less, even when our GDP is rising. Therefore, we cannot realistically use this way to increase GDP, since we are already suffering from overpopulation.
However, there is something that we can do that would allow for a big short-term increase in GDP. We can make the changes needed to employ the unemployed and under-employed in productive jobs that pay a living wage. As we make these changes and more people become employed and start making a living wage, they would start to have the money needed to spend on the things they need and want. This would all lead to an increase in GDP.
Nevertheless, basing our economic growth and prosperity on increases in consumer spending is not the best way to measure how well we are doing in our lives. When economic times are bad, we need to be able to cut back on our spending without having to worry about it making our economy worse. Even in good economic times, it is often better for us to save and to invest in the future instead of spending everything we earn.
The real key to our greater prosperity lies in creating an economic environment where we and our communities can build wealth, and all of us can balance how much we are willing to work with how much we want to spend. A growing economy would be one where productivity was increasing so that we have the option to work fewer hours, to earn more and/or to buy more. Therefore, economic growth should be based on productivity, and our prosperity should be based on our standard of living which includes an emphasis on our health and happiness.
Today, the world’s population has grown and continues to grow so large that we are using up our natural resources at an increasingly faster rate, and increasingly leaving each of us, on average, with less. Almost a billion of us do not have enough clean water or food. Even more of us live without adequate housing, clothing and medical care.
For most of us who are poor, given the state of the world economy, there is little opportunity for us to better our lives. For the rest of us, we need to work even harder each day to enjoy the same lifestyles we had the day before. Without changes to our economic system and a reduction in our overpopulation we will need to greatly improve our productivity to stand any chance in the future of enjoying the same things we have today.
In some parts of the world, there is rapid economic growth. Some individuals in these countries are seeing rapid improvements in their way of life. This trend may be good for them, but it is increasing our pollution problems and is bringing us all closer to the day when we deplete many of our natural resources. The only bright spot is that the birth rate is lower in more developed countries, and this could eventually help with our overpopulation problem.
The bottom line is that there are not enough natural resources in the world for the nearly 8 billion of us we had in 2021, let alone the billions on their way. Our limited supply of resources just cannot provide all the individuals of the world with a comfortable lifestyle, let alone, allow them to live as well as the average citizen of the United States of America lives today. Based on some analysis that was done, if everyone lived as well as the average person does here in the United States, then the world could only support a human population of about 1.5 billion.
Even in the wealthiest nations and in the best of economic times, there are still some of us who are unemployed, who live in poverty and who are homeless. Some of us may have given up any hope of living a better life, but most of us are willing and able to work hard and to do what it takes to improve our lives. Unfortunately, we are all at the mercy of our current financial conditions and our inequitable and unsustainable economic system.
For many of us, a pink slip and a few bad breaks could drain our finances and start us down the road towards bankruptcy, poverty and even homelessness. During a recession, this just becomes even more likely. Given the growing world population and the depletion of our natural resources, failure to fix our economic system could lead to a level of poverty, starvation and war, the likes of which no one has ever seen before.
We need to modify our economic system so that all of us and all our descendants will have the possibility of a good life. Along with being sustainable, our new economic system must also be resistant to numerous types of financial problems. There will always be natural disasters that will destroy some of what we have built, but good planning can mitigate their impact and allow us to recover faster. Our governments must take the responsibility to balance business and personal activities to safeguard and to improve the economic viability, wealth and health of our communities.
We also want to give everyone the opportunity to have a job and to earn a living wage. As part of this, we must keep the cost of living low enough so that even the lowest paid workers can earn enough to live on. Everyone should be able to earn enough to buy food and clothing, to rent or to buy a nice clean place to live, to splurge a little, and to have enough left over to save for a rainy day and for retirement. With all our advancements, we should not still have to worry so much about our basic survival. We should now have reached a point in time where we are free to explore all that life, our world, and our universe has to offer.
Our new economic system must also protect our environment. All life, including all the plants and the animals with whom we share this world, should be allowed the opportunity to live the best lives possible. Of course, if we will not help the plants and the animals out of respect for them, then maybe we will at least do it for our own sake and for the sake of our descendants. If we destroy our environment and its inhabitants, then we will reduce our supply of clean air and water, our recreational options, the biological sources for our medical research, and the places of natural beauty and wonder that we should be able to enjoy.
For real economic improvement, we must reduce our overpopulation and wisely use our natural resources. We must reduce urban sprawl, protect our environment and use more renewable energy sources. Not only will this mean more per person, but more for the plants and animals with whom we share this planet.
In addition, we must alter our thinking in terms of wealth and work. We do not need to spread our wealth. We must think in terms of spreading our work and allowing all of us to earn a living wage where we can build our own wealth. We can then use our wealth to make our own choices as to how we want to live our lives and what we want to buy and to do.
Labor is a renewable resource, and productive work can create wealth. When we are unemployed, our labor is wasted and the rest of us must work harder to support those of us who are not working. When our communities have the right balance of local businesses and the right balance of business and labor laws, we can have virtually full employment, we can make our economies resistant to world economic downturns, and we can give ourselves and all our fellow citizens the chance to prosper.
In the following sections, I will explain how our various types of economic systems work, and I will expand on what I believe has gone wrong with our economy and how we can fix things.
Economic Systems -
Creating a new Economic System that strengthens our economy.
|