Deadline fail

I didn’t like my previous post that occupied this place, so I’m rewriting it. The only part that I still like is this:

Also over the weekend, I decided that Rush Limbaugh and Karl Marx were, ironically, similar in their choice of audience and rhetorical techniques. They speak to a mass of people, and turn them against a priveleged elite. The only difference is that they are polar opposites on the political spectrum, and one understood things in general.

For the past decade or so, Americans have been living well beyond their means. While this created a problematic lending system domestically, as I previously ranted about, which is unsustainable, we also have been importing increasingly more than we have been exporting. Just in 2007, it appears that we have been running a trade deficit of greater than 100 trillion dollars. Logically, it makes sense that as aggregate income decreases, U.S. spending on both domestic and imported goods will decrease. This is one way of looking at it, at least. In that case, the countries from which we import our goods will lose money, causing their companies to record losses of revenue and adjust their allocation of funds. This will cause a decrease in incomes, and will ultimately lead to worldwide underemployment and recession.

What if we don’t decrease our spending on imports? The theory of demand accounts for changes in quantity of goods demanded given income, but also includes the availability of substitutes. What if these individuals who have been living outside of their means consider (more expensive) domestic goods as superior substitutes for (relatively inexpensive) imported substitutes? There are some items people can do without – people in troubled times won’t be buying the fancy new Guitar Hero guitar, or the illegal LED lights for the bottom of their cars; frivolous (luxury) spending will decrease. But for the items they can’t do without – toothpaste, food, etc. – they will substitute inferior substitutes. Instead of getting the unnecessarily exciting invigorating toothpaste in the shiny package, they will get the dubious, imported Wal-mart brand toothpaste for half the price (or less? Walmart is satan – I haven’t been in a while).

The general consumer is unconcerned about the ethics of shopping at Walmart – that is, the fact that their money is being transported to swindling sweatshop owners in the third world, allowing them to purchase their products at extra-strength low prices. Nor do they think about the fact that, by favoring Walmart to more expensive alternatives, they are taking their money away from U.S. production facilities and sending it abroad. If consumers are largely this complacent or desperate, more money will flow out of the U.S., causing increases in revenue for overseas firms. In the case of Walmart-style production, that money will just go to the factory owners, causing greater income inequality. Not all factories are like that, however, and in some cases I’m sure it will increase income levels at all levels of production. Either way, foreign economies that have become more competitive in international markets will increase their incomes, and therefore their demand and consumption.

Another alternative depends on government policy. The government could decide to defend domestic industry by implementing protectionist measures to artificially increase the world price of less expensive, foreign substitutes. I’m not entirely sure how this would impact the world market. I believe that it would cause consumer spending to decrease more evenly between domestic and imported goods, causing a situation more like the first scenario I described. What would that do to domestic economic conditions, however? Prices would be raised overall, and they would have to eliminate more items from their budget, I suppose. I’m not sure… inflation? deflation? you tell me! I think it’s a price effect, though, and that prices will fall as aggregate purchasing power decreases.

I think I’m also assuming throughout this entire thing that most U.S. consumers are irresponsible, and have been spending beyond their means to the extent that they have to be overly cautious. I’m also focusing on trade, not financial markets. There are altogether too many facets to rant about in one go. How would an individual representative of aggregate economic consumption decisions be characterized, I wonder? I think the savings rate has recently dropped to below 1%, so I find it hard to imagine him being that responsible… but maybe I’m mistaken.

I do believe that this is more what was expected initially. Hopefully I did not disappoint.

http://www.bea.gov/scb/pdf/2008/07%20July/0708_international.pdf

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