It's the Economy, stupid - Languishing & Lingering after the Great Recession

But the issue is that consumer demand is the activity that's required. Without it, you have no reason to hire and keep employees.

No, I'm counting consumer spending as a whole, but I will also acknowledge (as is outlined in the article) that the spending of the rich is different from the spending of the not-so-rich. A single guy earning $9 million will only spend so much of it vs. an equal $9 million going to 9,000 employees. The rich guy will likely save or invest, which is an important feature of a capitalist system, but also important is that huge chunk of the $9 million that will be ploughed directly into the consumer economy. These are very different $9 million values. When things are out of balance, that's when the economy starts to fail.

This is an oversimplification. The point is that consumer spending growth is what will spur job growth. The problem is that consumer spending growth is often hampered by external factors that cannot be fixed by business owners (who are consumers themselves). If consumers don't spend increasing amount of money, there is no reason for companies to hire more people. In retail, they often say "the till tells the tale." Well, if the till is telling a tale of woe, people won't get hired. If the till is telling a horror story, people get laid off. If the till tells a tantalizing tale of success, people will get hired. (It's tragic not having enough people to serve your customers, but it's painful when you have employees standing around an empty shop.)

Of course, different spending has different effects (see above), but the point of the article is that weak consumer spending is a huge factor regarding employment. The two are closely connected, but it won't be by the goodwill of business owners that hiring will commence. As a business owner, do you hire employees when you don't need to just to help the economy?

You're missing the point again. Basically, people who hire and pay people won't hire and pay people unless they need to. Now who makes it so they need to?

The truth is this: The environment for job creation for those who believe "rich people create jobs" currently exists. Taxes are relatively low (and businesses can create jobs even in higher tax environments). Historically, profits are really high, but wages are really low. What we have is an environment that is counterproductive to encouraging consumer spending, which is why job growth is low.

Consider this from the article: "[...] if most American families were taking home the same share of the national income that they were taking home 30 years ago, every family would have another $10,000 of disposable income to spend."

It's about consumer spending. Consumer sentiment is still as low as it was for much of the early 2000s recession. For much of the past five years, it's been lower than it's been since 1990.

Until people spend with as much confidence as they normally do, there will be little reason for companies to hire long-term employees.

 

Trucks are a product; consumers buy them. A manufacturer of trucks won't produce an increasing number of trucks unless consumer demand calls for it. A truck manufacturer doesn't need to convince most potential truck users that he or she needs a truck. They will decide that for themselves. (For the record, a truck manufacture has never convinced me that I need a truck. Why is that?) What a truck manufacturer will do is encourage a consumer to purchase one from them specifically or at a certain time (e.g., sooner rather than later).

I don't want to get into a discussion on rudimentary economics, but consumers will buy trucks at a rate in large part dependent on a certain range of prices, and manufacturers will in turn produce a number of trucks based on the demand created at this range of prices. They're interconnected, but there are other factors. Manufacturers of trucks will struggle to create a consumer of trucks where there is no need for trucks. Manufacturers of trucks will struggle to create a consumer of trucks where the trucks are unaffordable. There are external factors dictating much of this, outside of the manufacturer's control. What is within the manufacturer's control is how many trucks to produce at what price, and things such as features and benefits that will entice a consumer to choose a particular product over another (whether in the manufacturer's line or in a competitor's).

Regardless, a weak consumer demand for trucks cannot be rectified by truck manufacturers creating consumers of trucks. They will have an impact if they can reduce prices or in creating certain features or benefits that are highly desired or needed, but you seem to be neglecting the external factors that have a big impact on the success and growth of truck manufacturers: consumer demand and the ability to fulfill it economically.

I'm not sure what you mean or how this applies. "Obamacare" wouldn't exist if there were no unfulfilled consumer demand for health care. The free market failed to fulfill the health care demand of millions of uninsured Americans, so the federal government took action to do something about it. (This is why most universal health care systems came about, including Canada's.) It's a work in progress, to say the least.

Are you assuming the rich save at the same rate as other classes? They save substantially more, actually. Many of the wealthy are sitting on large amounts of cash. This is a large part of the problem. The wealthy have cash sitting around doing little, while much of the middle class have pent-up demand because they're struggling to get enough money. This is the core of the issue in America right now. This is the point of the article.

It's no secret that the middle class spends a much higher percentage of their income than the rich. America's prosperity was built by the middle class, not the rich. As evidenced by the financial status of both classes, the rich have "too much cash" and the middle class doesn't have enough. What impact do you think this has on the economy?

It's rather obvious. A struggling middle class is why job growth is stagnant. The wealthy are performing swimmingly and are laughing all the way to the bank. Where the fuck are the jobs?

 

Why doesn't an entrepreneur produce 1 million trucks? Is it because there isn't enough capital? There are over 300 million people in the United States. Someone is dropping the ball.

No one is saying that $1 isn't $1. We're talking about how the money is actually spent and how many people are spending it (or not spending it, as the case may be).

 

People only need trucks because truck manufacturers say so? You're presenting an existentialist conundrum. You're saying consumers don't need trucks except when they have needs that can be fulfilled by trucks. Do you read what you type?

But who paid for these trucks? Or were they given away?

Hummers aren't obsolete.

And I thought you said rich people spend money too. What gives?

Maybe it's a case of consumer demand waning because: a) lack of affordability (like you said), b) lack of perceived need (vs. want), c) aging consumers moving on to more practical vehicles, etc.

You must think consumers are pretty stupid, buying simply what companies tell them to buy. It's not the '50s anymore.

The law was created due to the failure of the free market. The website is a service provided in lieu of the (failed) free market. People can't afford inflated health care prices. There is pent-up demand for health care and the free market failed to capitalize on it.

What is this "cash to work" thing you're talking about? Is it money simply running around and multiplying on its own? Capital investment is wasted when consumer spending isn't up to par. You're thinking in binary terms (capital vs. consuming). It's not about what's better than the other; it's about realizing how each fit into the bigger puzzle. You seem to lack an understanding of basic economics, re: supply and demand, consumer confidence, and changes in real wages. You seem to view capital investing as a universal solution to economic problems. Well, any venture capitalist worth their salt will understand the implications of consumer spending, and an economist worth their salt will know what factors influence consumer confidence. There are varying arguments about what to do or what the real problems are regarding consumer confidence, but the fact remains: Your harping on about "entrepreneurs creating demand" is without any weight, because there is all sorts of stagnant capital out there and there is a lot of cash just sitting around. Why? Are people tired of making money?

The average wealthy investor is currently sitting on 40% cash and only 25% stocks. Why? Why aren't they "creating demand"? Why aren't they "creating jobs"?

Why do they hate America?

We're talking the difference between high net worth families vs. the middle class. There are way, way more middle class families, and they spend, as a percentage of income, at a much higher rate. There are many in the middle class right now who are holding back on spending on necessities, let alone nice-to-haves.

Warren Buffett is a pretty modest and frugal guy. Let's say, for the sake of argument, that his annual living expenses total $100,000. In 2010, his taxable income was something like $40 million. He paid around $7 million in taxes, so his net income was around $33 million.

This means that in 2010, Warren Buffett's savings rate, based on $100,000 subtracted from $33 million, was approximately 99.7%. In September 2013, the average rate was recorded at 4.9%.

That's quite the difference, no?

 

Small is a relative term. I'm willing to bet the list of human needs is much larger than you give credit for. An understanding of consumer behaviour ensures one doesn't undermine or underestimate their needs.

You're not supposed to have a conceptual understanding for something that doesn't exist. You need to break away from facile binary thinking before you can understand how the world really works. We're getting close to not even remotely talking about the same thing.

I'm not going to continue along this line, because it would require spoon-feeding you.

You seem to think it's the manufacturer who decides what the consumer needs. You seem to negate the power (or powerlessness) of the consumer from the equation. I studied consumer behaviour and economics at the post-secondary level, and I also have several years of experience on both the sales and the production side of industry. Maybe I take my experience for granted and assume too much about the knowledge level of the layman.

You mean like Texas? California? Try starting a shipping company in one of those states without buying, leasing, or otherwise hiring out drivers for any sort of vehicles.

Hunter-gatherer societies operate differently than ours. I get it. What's your point?

They perhaps can be, but I think the net impact is minimal and perhaps even counterproductive. It likely depends on the situation. I don't think it's a universal tool for stimulation. There isn't much data supporting its impact as a positive correlation. It's a balancing act between what a government needs to do with immediate reduced revenues and what taxpayers may (or may not) do with the extra money (and whether its effects will be stimulative). The jury is still out, regardless.

Middle class taxpayers, for example, will likely spend extra money on paying down debt or extra purchases that they would otherwise not afford. This would likely have a stimulative effect on the economy, as lower debt levels free up cash flow for other things, and extra purchases are direct infusions into the economy.

Wealthy taxpayers are much fewer in number, so tax cuts going to them won't have the same overall impact. You might see nominal increases in capital investments, but it won't have a big impact at a time like this when the wealthy are sitting on so much cash as it is. All it will do is increase their cash holdings, which is bad news if we are at risk of a deflationary spiral.

So while you say $1 is $1, in the hands of the middle class, a typical dollar is a dollar spent, while in the hands of the wealthy, a typical dollar is a dollar saved.

What would be better for the economy right now? Dollars spent or dollars saved?

I'm assuming he reinvested most of it.

The $100,000 I mentioned included all his consumer consumption. It's already been deducted in our example.

Do you mean he will increase his wealth through investing? I don't see why not. The guy is Warren fucking Buffett!

My disagreement is how you parse the economy. You seem to think that all that an economy needs to grow is capital investment. Well, something doesn't make sense to me, and you have thus far failed to even acknowledge the problem despite my touching upon it multiple times now.

There is no shortage of capital; stock markets are hitting all-time highs. There is no shortage of cash; businesses and wealthy investors alike are essentially hoarding it. Why isn't there more economic growth? Why isn't there job growth?

Could it be....

...a lack of consumer spending?​

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(Don't make me post another link to data.)​

We've come full circle now. Please either address what I've presented here or move on to something else. You continue to avoid key points and cherry-pick aspects of the subject to support your skewed view of how an economy works.

Why won't you address my key points?

 

You're now speaking about something else. (The truck was invented 117 years ago.)

Are you trying to change the subject?

None of this is really that difficult if you analyze it. Feel free to ask me any questions.

 

Dude, they're all dead!

This is another topic, really. We're talking about consumer impact, and the challenges of consumer sentiment, and how increases in consumer spending will push companies to create more jobs. (At least that was my impression.)

People are going to invent shit, yes, but whether or not there is an actual market for their new shit will depend heavily on the market's ability to pay for it. If I were an American inventing something today, I would target products for rich people, because they have all that cash sitting around. I wouldn't risk targeting the middle class ( with, e.g., products outside of necessities that cost between, say, $50 and $100). This is because it's a bad environment for new products of this kind. (Well, perhaps until recently, if you've been reading the news.) It certainly was a bad environment for launching shit between 2008 and 2010, no matter who it was targeted at.

We're talking about job creation. What's best for job creation, when people spend more or save more?

Which is why he's lucky his savings rate is so high. He has the ability to use his wealth to generate more wealth. It's the same for many wealthy folks. They have high savings rates because of high incomes compared to their expenditures. It's pretty clear: If the middle class has a savings rate around 4 or 5%, this means that they're spending a vast majority of what they earn. If middle class incomes were to grow, the savings rate might grow as well, but not likely by a directly correlated ratio. My guess is they'd spend a larger portion of their increased income than they would save it. Conversely, additional income for the wealthy tends to have a lion's share ending up as savings, which goes towards investing. A lot of wealthy people are wealthy because they know how to keep their expenses in check. It's not that the middle class don't, but there is a lot of pent-up demand amongst the middle class because there has been years to suppressed incomes, a problem not to any degree the same among the wealthy. This is why it's rather obvious that job growth is stagnant. You may wish to ignore this like the other things (such as why there is little job growth despite all the capital and cash floating around).

I'll assume that your decision to ignore certain aspects of my posts is related to your inability or unwillingness to discuss the wider issues. You seem to want to narrow the discussion to things you understand, or maybe things you're more passionate about (entrepreneurship, it seems), but you see, entrepreneurship is only one piece of a much, much bigger puzzle.

Ask any entrepreneur today what they think about consumer spending and its effects on their projects, and they'll likely tell you that they're looking forward to people being more confident with their money. In other words, despite your appearances of supporting entrepreneurship, I think many entrepreneurs would scratch their heads at what you've been saying (and not saying).

We're talking about a specific impact though. Today, $1 extra to the middle class will likely be spent, on average, close to 100%. Today, $1 extra to the upper classes will likely get divided into $0.40 cash holding, $0.25 stocks, $0.15 bonds, $0.20 other types of investments. You could argue that some of it will be spent, but considering that the average wealthy family already has so much cash, I'm not sure they'd bother spending much of any new income. Even still, you'd be lucky if they'd spend even a quarter of it, on average.

So it's at least a difference between over $0.90 of that $1 being spent among the middle class vs. less than $0.25 being spent by the wealthy.

So a $1 isn't simply $1. It's used very differently in different hands. (I'm surprised you don't acknowledge this simple difference.)

Now play the numbers game. There are far more middle class families than wealthy families. What would be better for the economy right now? Millions of households spending over $0.90 of every extra $1 they get, or thousands of wealthy families spending less than $0.25 of every extra dollar they get? (For the record, I think the numbers would be closer to $0.95 vs. $0.05.)

You may argue that the $0.75 (or more, like $0.95) of every $1 as saving/investing is just as important (or more) as consumer spending. But is it right now? There's tons of capital out there. Tons of cash. It's not moving. It's not moving because there isn't enough spending.

Do you think the American economy has enough spenders right now? You guys are running the risk of a deflationary spiral (it should worry you). Spending is the problem right now, not investing or holding cash.

Though, again, recent news suggests things are getting better, at least modestly. Do you even read the news? Why do I know more about your national economy than you do?

You don't seem to know what organic growth means. Innovation for products or services boosts organic growth. Without organic growth, a company will die unless it is bought out or merged with another company. Organic growth relies heavily on business cycles. Consumer spending is a big factor.

I will keep repeating myself if I have to: These things are all connected. Why are you trying to separate things out to support your narrow view of how an economy works?

You mean like rear bumper cameras and things? Look, my point is that you're talking about creating markets that don't yet exist or are virtually untapped. I'm talking about existing markets that may or may not expand based on consumer needs, innovation, R&D, etc. The health of the economy is not heavily dependent on stuff that doesn't exist yet. Sure, it's great when people like Jobs comes along, but the computing industry already existed and today it has much more to it than what Apple produces, and there are other industries out there. Without a stable set of industries, and a stable wider economy, Apple Computers would have been impossible.

I'm trying to look at the economy as a whole, and you're trying to look at inventors who are dead (and who may perhaps come one day).

How is my view narrower than yours, and how can I expand my view of the whole economy so that it's wider? Should I include politics? Socio-economic issues? Cultural criticisms?

Should I wait for you to catch up first? I probably should. You can't seem to get the big picture, so I don't think we should make it bigger.

One step at a time.

Autotrader.ca has over 330 Hummers listed for sale.

Autotrader.com has over 3,200 Hummers listed for sale.

Some are priced at over $100,000.

"[P]eople do not buy obsolete products even at heavily discounted prices." —Aceventura

obsolete: definition of obsolete in Oxford dictionary (British & World English)

I went with the "no longer used" aspect, but I wouldn't consider them "out of date," if you keep in mind that some vehicles being produced today aren't really that different. I realize they don't make them anymore. I still see them all the time here in Toronto. (Your area probably varies compared to here.) If someone told me they saw one driving by every day, I'd believe them.

That doesn't strike me as an obsolete item. There still exists a secondary market. People are still making money off them directly and indirectly.

(The advantage of understanding a wider economy is that you can see things like this, which is especially useful when seeking opportunities.)

 

No. I acknowledge the roles they played in the economy. But Ford wouldn't have been nearly as successful as he was if he didn't go out of his way to pay his employees higher wages so that they could afford to buy the products they were making.

Jobs left a company behind whose frontline retail workers make well above the average retail wage. They make more than school teachers in many states. (Crazy, I know.) If you go to the head office, the average pay doubles or triples that. As for Apple's products, they understand that to sell more and more, they need to reinvent what already exists. It's not really innovation technologically speaking so much as sales and marketing innovation, which is available to any company at any time. Apple is actually an outlier in terms of their success, and therefore not a good example because it's not typical and not easily reproduced.

Edison? Well, he wasn't actually the father of the electrical age; it was Tesla. Several others are credited for developing ideas for the light bulb itself. The only thing Edison deserves credit for is figuring out how to make it marketable. The lesson? No one will pay for something if a) it doesn't work right, and b) it's unaffordable or not a good enough value.

The lesson among all these examples is that each of these folks understood that ideas aren't feasible without customers, and you don't have customers without the three keys: 1) an ability to pay, 2) something to pay for, and 3) a willingness to pay for it. If you're missing any one of these keys, an idea will never make money. You seem to place too high a priority on one, pay lip service to another, and completely undermine a third. I, on the other hand, realize that these are all important. The men you listed realized these are all important. One problem right now in America (and elsewhere) is that too many potential consumers are struggling with at least one or two of these keys.

This is, once again, my point. When these three keys are geared up, jobs will be created. Not before.

No, no. You're misunderstanding my point. I'm not arguing that consumers drive innovation. I'm arguing that consumers drive job growth. If no one was able or willing to buy trucks, they would have gone nowhere. There would have been no job growth among assemblers or salesmen of trucks. There would have been no job growth among mechanics and gas attendants. Luckily, consumers saw how trucks could fulfill their needs, and luckily they were able to and willing to pay for them. Once they spent money on the trucks, this income fuelled organic growth that allowed companies of all sorts expand their business (i.e., add more jobs).

The innovation was great. Trucks are pretty amazing, but you continually miss something: consumer spending makes everything possible.

You know what happens to good ideas that don't catch on? They fail. They fail because consumers don't spend money on them. Innovation in and of itself is pointless unless it fits into the bigger puzzle.

This is another one of my points: I'm a big picture guy. I understand how thing work together. You seem to think things work in microcosm. When you look at the information that's readily available to either of us, your arguments don't make sense. If the world worked the way you say it does, job growth wouldn't have been an issue over the past year or two.

Or do you think job growth has been satisfactory?

That's fine.

What happens to new businesses that can't find enough customers?

The demand for small business loans has been soft for a while now. This correlates to soft consumer demand. Small businesses aren't looking to expand as much in a down economy as they are looking to save on costs and, as you say, doing more with less.

This also comes back to my other point: There is a lot of capital and cash out there among the rich, and despite that job growth has been low. If you conversely look at consumer sentiment, retail figures, etc., you will see that it's low as well. There is a correlation because it's all connected.

Back to the original article: Innovation and investment create jobs. I don't deny that. But this is only a short-term thing for the most part unless consumer spending responds to it. A steady increase in consumer spending leads to steady job growth. (There is a ton of data out there, and it's free!) Innovation and investment, on the other hand, is coupled with high risks and high failure rates, which often lead to ups and down in net jobs.

Without both innovation/investment and consumer spending increases, an economy will not be stable and will not grow. An environment that places too much pressure on the middle class (that cripples their ability to buy, and that discourages their willingness to buy) will put downward pressure on job growth. It's also a large factor in the kinds of job losses you see in recessions. Do you know how recessions work?

 

Things weren't too bad under Clinton. Then again, most of us already knew that.