Saturday, July 9, 2011

How does a fiscal stimulus work these days?

It seems logical in this time of high unemployment and increasing poverty to be talking about stimulating the economy; for the federal government to throw money into the general economy and let businesses and consumers take up the slack.

In my hometown in the 1950s a bit of extra money received by families would have improved the lives of many people. There were - at this time - plenty of resources from which to draw to expand the production of food and other commodities and services. (An energy shortage was a concept we didn't give a moments thought to.)

In the middle of the 20th century a large range of economic activity was locally based. The milkman three miles down the road (and the father of a family friend) delivered his product to the back door as did the local baker (my aunty and uncle). The wheat was grown in the paddocks surrounding the town and bread was baked in a small central shop in the main street and so were the pies and cakes we gobbled up for school lunch. The local butcher obtained his meat from grazing farmers just outside of the town boundary. Cuts of meat were prepared onsite, usually only few hours before the townsfolk purchased their weekly supply. My mother preserved many jars of fruit for the winter from fresh supplies of pears and peaches obtained from orchards in a nearby town. As I walked home from school I passed the local cordial factory and the enterprising neighbourhood bottle recycler. At the local picture theatre my sisters and I spent money in the intermission between the two movies at the owner-operated fish and chip shop.

At home, eggs were often purchased from a neighbour across the street.

Today, all but one of those small local businesses have disappeared. The bakery remains. The milkman, butcher, many farming graziers and local orchards have been replaced by the provision of pre-packaged food in a supermarket owned by investors that probably live in a different country. The products we buy are not made locally and their origin and quality is often impossible to trace. A fish and chip shop was replaced a few years ago by a McDonalds restaurant and the last picture show in the Sanger Street 'flicks' happened sometime in the late 1960s.

More money spent at one of Australia's oligopoly supermarket chains and at McDonalds would mostly flow straight out of the town and go to absentee investors somewhere else.

So how does a stimulus work these days?


Myrtle Blackwood said...

Dr. Steve Auerbach comments on the nature of the recent 'recovery' quoting the following:

"Between the second quarter of 2009 and the fourth quarter of 2010, real national income in the U.S. increased by $528 billion. Pre-tax corporate profits by themselves had increased by $464 billion while aggregate real wages and salaries rose by only $7 billion or only .1%. Over this six quarter period, corporate profits captured 88% of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1% of the growth in real national income. The extraordinarily high share of national income (88%) received by corporate profits was by far the highest in the past five recoveries from national recessions."


[Taken from the comments section of:
Net Lending By Domestic Business. Paul Krugman
July 2, 2011, 4:18 pm

Ralph Musgrave said...

Can’t for the life of me see why less locally produced stuff is a problem. If bread, beer, etc etc is made 50 miles away rather than one mile away, the number of jobs created by $X of demand for bread and beer is exactly the same (assuming for the sake of simplicity that productivity in the more distant bakery / brewery is the same as in the local one).

Re the final paragraph of the above article, the fact that stuff is made at a greater distance does not of itself mean that profits take a higher proportion of GDP. The trend towards “production at a distance” has been taking place gradually for the last century or more, while the share of GDP taken by profits bobs up and down. Profits are high at the moment, but for reasons other than “production at a distance.”

Myrtle Blackwood said...

Re: "Can’t for the life of me see why less locally produced stuff is a problem..."

Peak oil will pose real problems for production at a distance.

Re: "the number of jobs created by $X of demand for bread and beer is exactly the same..."

The number of jobs created would not appear to be the same if the economy is structured so that spent wealth is almost immediately siphoned off out of the local community and also directed to a small minority who control the means of production.

Re: "the fact that stuff is made at a greater distance does not of itself mean that profits take a higher proportion of GDP."

Perhaps my expression has been a bit tardy and hasn't elaborated enough on the consequences of the concentration of productive wealth. It's not merely about distance (as mentioned above)

TheTrucker said...

Much more of the "profits" from consolidation should be redistributed to those who have been (due to the consolidation) denied the opportunity to contribute to the common good. This is best accomplished with a high degree of social insurance funded by a highly progressive income tax. But that mechanism is destroyed when the production moves outside of the tax jurisdiction. And this is where tariffs and exchange rates must enter the political economy.

Myrtle Blackwood said...

Home production and local currencies is a means by which production can be moved back to where it belongs - within our communities.

No matter in which time in history we live it has always been true that the most productive, thriftiest households fare much better than others.

The 'consumer economy' has always been a mirage for the great majority. Because basic needs of the mass of people continued to go unmet.