Tomorrow We Dance To Freedom

The Economy

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When did it all begin? The crumbling buildings, deteriorating inner cities, lack of good paying jobs, homelessness, high healthcare costs, high educational costs, or basically the general decline of a once great economy. The decline can be traced back to October 1979 when Paul Volcker announced that the monetary policy he was going to enact would concentrate upon the elimination of inflation. The precipitous increases in interest rates from 1979-1982, the direct result of his draconian tight money policies precipitated the reduction in consumption spending among the 90% of the population that propels consumption within this economy. Keep in mind that the general population (or what I like to refer to as the masses) of the United States fuels a significant proportion of this world's economy. Without their consumption spending and hence their continued economic well being the standard of living for everyone including the political/business elite would start to decay as it has been doing for sometime. So the precipitous in the downward spiral of economic well being for the masses can be traced to October 1979.

The actions taken by Paul Volcker's tight monetary policy stifled growth and choked many businesses to death (especially in the manufacturing sector) during a time when this sector was beginning to face increased international competition in what was to become the global economy. Reduced levels of consumption spending reduced income and output (Y one and the same) thereby reducing the average consumers MPC (marginal propensity to consume) thus forcing firms to reduce real wages of those employed which in turn reduced overall savings rates in proportion to stagnant or reduced real wages. In effect (reference the graph below) the expected inflation (precipitated in October 1979 when Paul Volcker announced his intent to eliminate inflation through monetary policy actions) raised the real interest rate for any given nominal rate, which reduced investment. This reduction in investment shifted the IS curve downward resulting in a fall in income/output from Y1 to Y2. The nominal interest rate fell from i1 to i2 while the real interest rate rose from r1 to r2 [N. Gregory Mankiw, 1992]. So basically what all this means is that all of us had to start fighting for a smaller and smaller pie of available income. The fight was on between the masses and the power elite (being the political/business upper echelon) for who could sustain their current standard of living better at the expense of the other members of society. Given their position within society the political/business elite was in a better position to extract from the smaller pies than the masses and so took advantage of their position of power. The problem is that the political/business power elite having won the struggle didn't stop extracting from the small pie once they had maintained their prior standard of living but kept on extracting at the expense of the masses.

In addition to the policies that the Fed employed to raise interest rates in order to lower inflation, tax increases on average American's and the increase in military spending enacted during the Reagan administration from 1980 on, further choked off investment capital thus raising interest rates even higher. This occurred because investors were forced to compete for a limited savings pool.

The rise in the interest rate also made the U.S. attractive to foreign investors, which had the effect of raising the real exchange rate thus making our manufactured products more expensive than foreign manufactured products. These events that occurred during the Reagan administration; the Fed's draconian measures to eliminate inflation by raising the interest rate substantially over a short period of time, the Reagan administrations tax increases on middle income American's coupled with the largest increase in military spending during peace time resulted in the U.S. being transformed from the largest creditor nation to the largest debtor nation. The staggering and increasing national debt, and all of the above-mentioned events resulted in significantly lowering consumption spending and decimating a once great manufacturing base that is still declining to this day.

By far one of the worst blows delivered to the U.S. economy during this era was the Fed's 'cold turkey' approach toward lowering inflation that resulted (along with the other contributing factors) in the worst recession since the Great Depression. This recession added a significant scar to the U.S. economy in the form of a higher natural rate of unemployment (suggested by theories of hysteresis and thus born out in the factual data).

This higher average unemployment rate has hit the least able of our population to cope: the poor.

In the mist of these occurrences the richest 1% of the population have been increasing their proportion of the income pie at the further expense of the 90% of the working masses. The result has been increased levels of poverty and decay of the poor and their environment. The middle class is evaporating into the poor income stratum: the direct result of the 1% of the rich sucking what's left out of a feeble economy into their realm.

The continuing destruction of the manufacturing sector (that has been occurring since 1979) and the emergence of low paying service occupations that are increasingly servicing the privileged upper classes of our society is resulting in income bi polarization.

Occupational Bifurcation of U.S. Labor: A 'Low Tier' and 'High Tier' Workforce

As a proportion of new jobs created, the service sector saw an increase in employment of 5.8% while the manufacturing sector experienced a drop in employment of 5.9% for the period from 1979-1989 [Mishel and Frankel, page 104, 1991]. The share employed in the service sector relative to the manufacturing sector also increased with former middle class manufacturing employees (predominantly male) obtaining employment (after being laid off in the manufacturing sector) in expanding (low paying) service sector occupations.

While the proportion of U.S. workers employed in the service sector expands, the product differentiation that is characteristic of the manufacturing sector (innovative new products, improved designs, and quality) does not exist in the service sector. It is no longer the products that are the differentiating driving force (as exists in manufacturing) that results in a competitive advantage but the quality of a firm's management professionals. The best skilled managers and professionals are acquired at any cost since their managerial or professional talent could determine the future course of the firm.

In the past a competitive labor environment for conscientious able-bodied workers existed throughout the smoke stack industries that covered the landscape from urban to rural America. This has been replaced by an enhanced competitive environment in service sector industries that results in the hiring of highly educated and skilled workers for managerial and professional positions. The remaining positions are then filled with unskilled modestly educated (high-school or less) workers relegated to menial 'low impact' tasks. The bias toward highly educated and skilled workers is definitely not limited to the service sector but since this sector values it's upper tier of employees more highly than the manufacturing sector (which incorporates a variety of skilled and educated workers throughout their organizational structure) the service sector perpetuates more enhanced bifurcation than the new highly competitive manufacturing sector. Also since the sectorial shift is occurring towards the service sector it is only logical that the emphasis of inquiry be directed at this sector.

The unskilled laborer is only one of many vying for the limited positions within the unskilled labor market: they are not in demand by the service sector firms. So in effect, demand for these workers is 'anemic' and the supply of these unskilled 'modestly' educated workers greatly exceeds the numbers that are demanded by firms.

Since the vast majority of base service sector firms (those that don't employ professionals) don't require skilled laborers or machinists in the production of a product (were the products quality is a function of the ability and care that the laborers or machinists take in the production process) managements decision to pay it's unskilled 'lower tier' workforce subsistence wages is based on the belief that these particular workers have a minimal impact on the firm's success. Therefore the savings obtained from the marginal remuneration of their unskilled 'lower tier' workforce is used to remunerate their managerial and professional 'higher tier' workforce at a substantially higher level than the wages paid their 'lower tier' workforce. The enhanced demand in the managerial and/or professional labor market places the firm under constant pressure to continue paying these skilled workers a wage that remains competitive with other firms. This demand for skilled labor has accelerated with the unrelenting competition that U.S. companies face from an array of firms in the new international markets. Recently this pressure of locating a professional labor pool that can be exploited through paying substantially less than is typical has been eased through the introduction of H1B visa 'labor immigration'.

All of the above mentioned factors have helped lead to the currently expanding occupational bifurcation occurring within the United States (for that matter globally). Ryscavage and Henle concluded in their 1990 study conducted for the Department of Labor that occupational bifurcation is in fact occurring at an alarming rate in the U.S. economy:

It is clear from data that the higher paying white collar occupations recorded greater percentage increases in earnings over this 14-year period [1975-1989] than did the lesser paying blue collar occupations. This differential developed during the 1980-89 period. For the first 5 years following 1975, the lesser paying occupations did better, on the whole, than the higher paying occupations. For the entire period, the highest paying group (professional, specialty, and technical occupations) recorded the greatest increase. The effect of the differential, of course, is to push the upper part of the distribution even higher, while holding back the lower portion...the higher the level of pay and responsibility, the greater was the pay increase over the 28-year period [1960-1988].

[Ryscavage and Henle, pg 12-13 Department of Labor 1990]

The increase in the percentage of families that have fallen below the poverty line is more attributed to the loss of good paying (blue collar) manufacturing jobs (predominantly striking male household heads) [Bradbury, 1990].

Manufacturing Shift Towards More Capital-Intensive Operations

The increased competitive atmosphere of the late 1970's into the 1990's has resulted in a shift by manufacturing concerns from labor towards more capital-intensive operations. Prior to the introduction of robotics and improved production techniques (in the typical manufacturing production line) in the mid 1980's; the unionized factory worker was the pre-eminent factor of production in the manufacturing process. With the changes that occurred from 1979 (increased competitive pressures and other events previously described), the manufacturing industry intensified its search for more efficient means of production with the emphasis towards the utilization of a better mix of capital to labor. Those manufacturing firms that were highly labor intensive could not continue to compete in the new global marketplace with other firms that had a competitive advantage through lower labor costs or newer more efficient production facilities. Thus began the slow but certain demise of the burgeoning U.S. middle class (the blue collar workers that were the foundation of the middle income stratum) and the convergence of incomes towards a bifurcated 'upper tier' and 'lower tier' socioeconomic split.

In some cases the manufacturing concerns have moved whole production operations overseas in an effort to reduce labor costs with the effect that entire communities dependent upon a primary manufacturing employer are thus decimated, further increasing the rural pockets of poverty.

U.S. Under Capitalization

More technically the U.S. economy is under capitalized and needs to reach the "Golden Rule" steady state level of capital per worker (as specified by the Solow model) where consumption is maximized. N. Gregory Mankiw suggests that:

The high return to capital [MPK-ä > n + g; where MPK- ä = 0.08 and n + g = 0.03] implies that the capital stock in the U.S. economy is well below the Golden Rule level. This finding suggests that policymakers should want to increase the rate of savings and investment.

[N. Gregory Mankiw, 1992]

The above area will be dealt with in more detail in further revisions of this thesis draft.

U.S. Declining Savings Rates

Another area of concern is the declining savings rates within the U.S. economy. There are many factors that have lead to a decline in savings rates (some mentioned previously). Some important contributing factors leading to this decline is the increased tax burden that average American's must bear: an increase from about 38% to 48% in personal income taxes occurring between 1980 to current. This combined with a decline in the growth of real GNP from 1979 - 1991 averaging 1.94% compared to the previous 12 year period of 1966 - 1978 where growth in real GNP averaged 2.73% and it is relatively easy to visualize why private savings has declined. If private savings is composed of [Y-T-C(Y-T)], the decline in disposable income has thus resulted in significant declines in the rate of private savings. To partially remedy this problem personal income taxes should be increased to pre-1980's levels on the wealthy and taxes should be reduced proportionally on middle income American's.

In Essence

Since the majority of employees have 'lower tier' occupations any such bifurcation of the U.S. economy results in a decline in the real wages of this group of workers reducing their consumption (if taxes are held constant) further resulting in a decline in their disposable income. With a decline in consumption a corresponding decline will occur in income for all firms. Declining income or losses will necessitate that firms reduce their expenses bringing down costs. With labor costs representing approximately 3/4's of all operating expenses firms reduce employment through layoff's or the closing of unproductive facilities. As stated previously firms attempt to increase or maintain the compensation of the core element of their 'higher tier' workforce through the partial increase of stabilization of their 'higher tier' labor costs within the amount saved from the elimination of their least productive 'lower tier' workforce. This spiral of reduced consumption is a gradual process that could result in the further deterioration or elimination of the U.S. capital base has firms continually reduce output (through the elimination of both factors of production: capital and labor) in an effort to match supply with a deteriorating demand.

Factual Data Supporting Variables

Definition - A secondary sector occupation provides a level of compensation that is at or below the prevailing minimum wage and less than the median level of income (when the entire remuneration package is included). This type of occupation also employs more part-time employees than is typical for the average of other occupations and of these part-time employees there is a larger proportion of involuntary part-timers than is the average across occupations. The occupations are predominantly located in the retail trade, services (health, personal, entertainment and recreation, and business), and agricultural industries. Employee's in these occupations are disproportionately younger, unskilled, female and or minorities and have a high school diploma (or GED) or less.
Table 4.8 and 3.24 clearly shows that a disproportionate percentage of part-time employment and involuntary part-time employment is concentrated in the two fastest growing industries of our economy: "Retail/Wholesale Trade and Personal and Business Services" [Mishel and Frankel, pages 104 & 136, 1991]. The two sectors where these industries are located also had the lowest median weekly earnings in 1989 of any other sector. [Mishel and Frankel, page 104, 1991].
According to a recent Department of Labor estimate in 1992 the number of part-time employees "in the temporary help services or help supply services industries more than tripled from 1979 to 1992. These workers are disproportionately young, female, and Black and tend to be in relatively low wage occupations." [Commission on the Future of Worker Management Relations DOE, page 21, 1994]. Table 2 clearly shows that in 1983 the four industries with the highest percentage poverty rates were agriculture (26.78), retail trade (12.01), private household (22.45), and entertainment and recreation (10.75) [Williams, page 328, 1991]. There exists a direct correlation between the low wages of about two-thirds of the poor and their involvement in involuntary part-time employment or otherwise unemployment [Gardner and Herz, page 24, 1992]. In a 1987 study conducted by the Department of Labor it was estimated that "over half of all employees with earnings at the minimum wage or below were in service jobs, a field that accounted for three-quarters of the workers with wages below $3.35." [Mellor page 37, 1987]. The same study concluded that the majority of workers receiving the minimum wage or less were women or minorities concentrated mostly in sales and service occupations [Mellor page 38, 1987].

Definition - Primary sector occupations are mainly concentrated in the manufacturing sector but important primary occupations are also found in the service sector in data processing and computer oriented employment, executive, technical and professional specialties [Commission on the Future of Worker Management DOE page 7, 1994]. Occupations in this sector require a more enhanced level of skills and education than in secondary sector occupations. Among the various occupations in the manufacturing sector, supervisors and managers experienced growth in compensation while non-supervisory workers compensation fell -0.41% per year for the period from 1979-1988 [Mishel and Frankel page 259, 1991]. In fact overall compensation declined or remained stagnant in both the manufacturing and service sectors of the economy but relative to the manufacturing sector the service sector experienced the most extreme drop the result of the education/skill premiums demanded more and more of workers [Commission on the Future of Worker Management Relations page 27, 1994; Bradbury page 34, 1990].

"America and Britain saw the biggest widening in wage differentials ... highest paid 10% of workers earned 5.6 times as much as the lowest paid 10% in 1989" (the latest figure available) up from 4.8% in 1980 [The Economist July 24th 1993]. By 1984 the number of "household heads" that had low weekly earnings as a proportion of all "household heads" that were expected to work increased to 26.1 percent from 19.4 percent between the period of 1967 to 1979 [Danziger and Gottschalk, 1986].

There exists a direct relationship between the poverty rate and the unemployment rate as the attached graph 2 portrays. The structural change that characterized the shift (or decline in manufacturing employment) and the subsequent rise in the share of service sector employment results in a higher proportion of continuing long-run unemployment (structural in nature) and the withdrawal from the labor force of an increasing number of workers (displaced workers) who ultimately increase the percentage of Americans falling below the poverty line [Williams page 324, 1991]. In a survey conducted by the Department of Labor in January of 1986 it was found that approximately 1/2 of all displaced workers (these workers are not even included in the unemployment figures) had lost jobs in the manufacturing industry [Horvath page 4, 1987]. The areas in the manufacturing industry were the most job loss occurred were primary metals, non-electrical machinery, and electrical machinery [Horvath page 4, 1987]. In 1984 a Department of Labor study (similar to the one conducted by Francis Horvath in 1987) concluded that the occupations experiencing the most job loss were operators, laborers, and fabricators that were also the most prevalent occupations within the manufacturing industry [Horvath page 5, 1987].

Between 1979 and 1987 the College/high School wage differential increased by an average of 18.7 percent [Mishel and Frankel page 93, 1991]. During this same period the real wages of college educated workers increased by 8% while the real wages of high school graduates actually declined by 4% [Mishel and Frankel, page 93, 1991].
These trends are indicative of a declining manufacturing base and the shifting of lower to middle class (high school educated workers) from good paying 'blue collar' manufacturing jobs to 'low tier' low paying occupations within the expanding service sector. The steep decline in compensation that these household head's experienced as a result of being forced into 'low tier' service sector occupations could have resulted in a large percentage of them falling below the poverty line with the overall effect being an increase in the percentage of families falling below the poverty line from 1979 to current. The percentage of families falling below the poverty line did in fact increase from 9.2% in 1979 to 10.7% in 1987 [Department of Commerce Bureau of the Census]. Figure 31 clearly shows that since 1979 the real wages of high school educated workers have declined while the real wages of college-educated workers have increased [Mishel and Frankel page 99, 1991]. There exists a more enhanced demand for skilled workers relative to non-skilled workers than at any time in U.S. history and this is clearly reflected in the increasing real wage differential between college and high school educated workers. The more highly skilled of either the college or high school educated workers earned more than the less skilled within each classification [Murphy and Welch page 285, 1992]. Holding the level of educational attainment constant, the more on the job training that a worker brings to a new position the higher the worker's overall compensation. But there exists a perverse relationship between the level of on the job training a worker receives and the worker's level of educational attainment: the higher the level of educational attainment the more on the job training the worker receives. Therefore there seems to be a correlation between the increase in the college/high school wage differential (over the 1979-87 period) and the increased bias by firms for highly skilled (college educated) workers (since these workers receive a disproportionate share of on the job training) over unskilled or minimally skilled (high school educated) workers [McConnell and Brue page 422, 1992].

From 1980 - 1989 real wages for all workers fell more than 9% while compensation fell by about 10% [Mishel and Frankel, page 69, 1991]. For production and non-supervisory workers real earnings declined at an average of -0.7% from 1973-1993 which equates to an overall decline of 14% for the 20-year period [Commission On The Future of Worker Management Relations, May 1994]. In 1992 18% of the U.S. full-time working population earned less than $13,091 representing a 50% increase from the 12% that received low earnings in 1979 [Commission On The Future of Worker Management Relations, May 1994]. The Commission further noted that:

The stagnation of real earnings and increased inequality of earnings is bifurcating the U.S. labor market, with an upper tier of high wage skilled workers and an increasing "underclass" of low paid labor...A healthy society cannot long continue along the path the U.S. is moving with rising bifurcation of the labor market.

[Commission On The Future of Worker Management Relations, pages 19 & 26, May 1994]

Real earnings among our poorer members of society, relative to real earnings of the bottom decile in other industrialized nations are more reflective of a peasantry to noble relationship of divergence in societal economic terms than should correspond to a mature industrialized nation. In 1993 real earnings for U.S. male workers in the bottom decile were only 38% of median earnings while their counterpart in the industrialized countries of Europe were earning 68% of the median earnings [Commission On The Future of Worker Management Relations, May 1994]. While compensation for the less well off of our society was abhorrently low when compared to other industrialized nations the U.S. 'upper tier' workforce (workers in the top decile) received compensation that was 2.14 times the median earnings, with their counterpart in the industrialized countries of Europe earning 1.4 to 1.7 times the median [Commission On The Future of Worker Management Relations, May 1994].

Higher nominal interest rates (such as those experienced from 1979 into the 1980's) are directly related to the increased percentage of American's that have fallen below the poverty line since this period. This is because unemployment (which is directly related to nominal interest rates) affects a larger percentage of the poor because of their precarious position (relative to skills and education deficits) [Ryscavage and Henle, 1990]. Therefore when economic conditions worsen the working poor and /or low-income earners are the first to feel the effects by being the first to be laid off or terminated. The wealthy are affected quite differently from the effects of increased nominal interest rates: they benefit from the upward mobility in interest rates. That is because higher income families hold a higher proportion of interest bearing assets in the form of company sponsored non-cash benefits (stock options) or other investments [Ryscavage and Henle, 1990; Bradbury, 1990]. These benefits accruing to the wealthy in the 1980's took the form of higher interest and dividend income [Bradbury, 1990].

Continued Thoughts

Note: September 7, 2004:
Consumption is being seriously constrained within the United States due to the lack of meaningful relevant growth in good paying jobs. Continued elimination of above subsistence employment through corporate labor down sizing in this country coupled with 'up sizing' in cheap labor markets places a significant strain on available family disposable income. Whole town centers are disappearing even on well traveled routes due not specifically to large retail outlets being in close proximity but more directly to significant loss of above subsistence jobs within the community. Not only are some communities facing the complete loss of good paying jobs but also the loss of any form of full-time employment. The result being that the only jobs available week in and week out are part time minimum wage positions without benefits. The simple fact (reality) is that without good paying jobs and a good portion of the corporate economic landscape filled with oligopolies that can raise or keep prices artificially high (for longer periods of time without market corrections taking hold) the average family can only pay for the basic necessities food, shelter, electric, etc. Therefore no meaningful disposable income exists in which to purchase luxury items. In essence, the U.S. economy is not operating in a free market dynamic but a distorted multinational oligopolistic noncompetitive market where cheap labor becomes the dominate factor in companies maintaining their favorable stock price rating with the global exchanges. An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.

Note: September 11, 2004:
Other factors within the overall global Oligopolistic economic framework need to also be considered. For instance, certain firms are now reaping significant capital savings through outsourcing to less expensive labor markets. The differential between their prior capital expense outlays and their current outlays should be substantial. In an ideal market economy a portion of these saving would be passed on to consumers in the form of lower retail or wholesale prices. This is not occurring simply because the ideal market economy only exists when there are many firms competing for the same customers within any given industry. Since our global economy is more oligopolistic (with a few dominant firms in each industry) the overall price (be it retail or wholesale) becomes very inelastic. In essence, with certain industries realizing an 88% reduction in labor costs there is far more than adequate savings available to increase net income in order to satisfy the insatiable demands of the global exchanges. The additional savings is being transferred to top management (CEO's, CFO's, etc.), owner's, and the board of directors in perk's and bonuses. Instead of the price of the commodity or service declining according to theoretical market models it remains inelastic. Even when demand (or revenue streams) decline, rather than lowering price the firm just eliminates factors of production (capital in the form of physical facilities and labor) and this has the effect of exacerbating or feeding on the overall global economic decline.

In order to increase or stabilize demand for commodities and services credit to consumers has been steadily becoming easier to obtain. But with most consumers credit position already extended to the limit with the 2nd mortgage financing boom (driven by low interest rates) over, demand across all industries has been declining. The eminent economist Lester Thorow predicted over a year ago that the underlying factor stabilizing or increasing consumer demand was the capital being free up through 2nd mortgage refinancing. He suggested that if this last form of consumer capital was to dry up because of higher interest rates (currently occurring through the efforts of Alan Greenspan at the Federal Reserve) the result would be a significant downward spiral in consumer demand. This in fact is already occurring with the latest retail sales figures starting to move in a downward direction. If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).

Note: September 12, 2004:
Firms that are either small and/or not involved in shaping an oligopolistic economic environment within their industry are never the less indirectly impacted by these forces through ongoing declines in demand (reductions in revenue stream or forecasted revenue pipeline declines) for their products. This occurs for a multitude of reasons chief among them being the multiplier effect from labor force reductions and personal income stagnation (no significant or nonexistent wage increases). When even one participant in an economy loses a job or has no meaningful raises over an extended period of time this impacts an economy such that the loss of this individual's marginal income (revenue stream) at all the firm's that this individual made purchases from (exercised demand) decline with negative consequences that ripple throughout an economy. Much like waves on the ocean building slowly and reaching a crescendo. Thus, firms within certain industries where ologopolistic competition does not exist or those smaller firms within ologopolistically competitive industries are forced to reduce their factors of production (capital assets and labor force) to meet an ever increasing dwindling of demand (revenue stream) for their products or services. These firms are usually to small compared to their oligopolistic cousins to even consider outsourcing labor to lower labor cost countries and once this point is reached have already fully utilized the guest worker programs. Unlike the larger firms (those that are within or not within oligopolies) that just shift entire manufacturing production facilities or entire operations (only to leave a token presence within the host country) to lower labor cost countries, the smaller firms don't have the resources to engage in this form of economic folly. They must continually reduce their factors of production to match a continual reduction in demand. Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm's factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building 'wave' of economic decline.

Note: September 16, 2004:
The Flow of Funds report compiled by the Federal Reserve during the second week of September 2004 stated that household balance sheets increased by 1.4% in the 2nd quarter when compared to the first quarter of the year. Most economists greeted this news as a sign the economy was improving but failed to consider that a good portion of this increase was attributed to an increase in household debt refinancing that in turn decreased the household debt-service burden. It is true that a reduction in the household debt-service burden is favorable when achieved through real income infusions targeted at real reductions in the overall debt burden. What is not favorable is when the reduction in the debt-service burden is achieved through means of a 'shell-game' whereby debt is shifted from short-term debt financing to 2nd mortgage longer term debt financing. While the household debt-service burden is reduced over the longer term, the overall effect (holding everything else constant) is the spreading of a reduction in consumption over a term longer than the initial short-term debt burden. So this longer term reduction in consumption begins to systemically affect the economy.

To make matters worse not only are American consumers piling on more debt in the form of 2nd mortgages but they are still accumulating additional debt through other sources and this is reflected in the increase in borrowing which rose at an annual rate of 7.7% in the 2nd quarter. Granted this was 1.4% less than the 9.1% annual rate in the 1st quarter but any additional debt piled upon an already significant increase in overall household debt represents borrowing today to pay for tomorrow. In effect, the household savings rate will continue to decrease in order to pay each year's additional debt burden. In some cases personal bankruptcy (refer to figures from the American Bankruptcy Institute) will be the only option available once the debt burden becomes to excessive.

Other ominous signs have been a recent surge of third quarter profit warnings coming from companies, the Philadelphia Federal Reserve regional survey of manufacturing activity falling to 13.4 in September from 28.5 in August, and new claims for unemployment at 333,000 last week compared to 317,000 for the previous week. It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.

Note: September 18, 2004:
Free Trade on a global more so than at the national level does not and cannot exist in the real world simply because we dictate the holding of this or that variable constant. Adam Smith and more specifically David Ricardo (who was best known for his Principles of Political Economy) dealt with fictitious examples that lacked a solid foundation in scientific principles.

Simply put the world is not currently made up of homogenous labor, capital, and land inputs that can be utilized or transferred between nation states without real costs incurred. In the real world there exists only a marginal or zero opportunity cost associated with a nation state's determination to engage is this or that economic activity over some other economic activity. Most nation states are fully capable of engaging in a large majority of economic activities without incurring an associated opportunity cost. This is because in the modern world (not the world of Adam Smith or David Ricardo) knowledge, skill, labor (ready supply), land, and capital are more homogenous due to government supported education, training, or general support mechanisms geared towards the elimination of other nation states competitive advantage in particular areas.

In the case of labor, and capital there comes to mind no nation state that fully employs either of these inputs in any single or multiple economic endeavor. Therefore this under application of economic inputs exacts no opportunity cost from the standpoint of skill (when we consider for instance that an Indian in the country of India is at the same skill level as his/her counter part in the U.S.), capital (shifts from high cost to low cost labor nation states are readily made thus distorting the archaic economic models), and land. In effect, even without the above mentioned situations the simple fact that labor is constrained from freely moving from one nation state to another without incurring significant cost or barriers to entry (erected by the nation states) eliminates any argument that the current economic framework is based upon a free market. What exists is a distorted market that enforces and exacerbates the significant maldistribution of economic benefits. When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation states, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.


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