When People Can’t Buy…

Consumer

We keep talking about how to improve the economy for Americans. My friends on the left of the political spectrum are concerned about the concentration of wealth into fewer and fewer pockets. My friends on the right are concerned about re-distribution of the wealth that has accumulated in those pockets. The re-distribution concern is usually code for taxation.

I would suggest that we are trying to solve the wrong problem. Taking money from the wealthy is not going to solve a long-time imbalance in the American economy. Our problem is not re-distribution, which would probably be a very short-term solution. Our problem, rather, is circulation.

 According to the World Bank, The United States leads the industrialized world in consumer spending as a percentage of Gross Domestic Product. For the US it is 69%, for Scandinavia it ranges from 40% in Norway to 49% in Denmark. Germany, France, and Canada all weigh in at 58%. There is nothing pejorative about this statement. It is simply a fact that in this country we have decided base our economy on the purchase of a huge amount of personal “stuff”.

The problem is that when you base an entire national economy on people’s ability to buy “stuff”, and then restrict their ability to earn enough to make the purchases necessary to drive the economy, we run into a roadblock to continued economic expansion. This is the problem with the unemployed and the unemployable. With no income, they are not able to participate in the economy. The government’s decision to eliminate long term unemployment insurance further exacerbates the dilemma.

Customers’ purchases at Walmart, Costco, Target, Food Lion and any other store contribute to circulation of money. It creates profit for the store, jobs for the employees, tax revenue for the various governments involved, payment to vendors, transportation companies, advertising agencies, etc. ad infinitum. Without the original purchase, nothing else happens.

In times like we are currently experiencing, not enough money is circulating. There is no lack of money in the system. Indeed, corporate profits and savings have never been higher. According to TechCrunch, Apples boasts $145 billion cash on hand. And they are not the only hoarders.

 According to the Wall Street Journal:

U.S. non-financial companies held $1.48 trillion in cash as of June 30, according to Moody’s review of the more than 1,000 companies it rates. Cash stockpiles have grown by about 2% from $1.45 trillion at the end of last year, and up 81% from $820 billion at the end of 2006.

Corporate cash is still concentrated in just a few hands, with the top 50 holders accounting for 62% of the total.  The companies with the five largest cash holdings – Apple, Microsoft Corp., Google Inc., Cisco Systems Inc. and Pfizer Inc. – held more than one quarter of the cash.

My concern is not with the amount of profit companies earn. I am all for efficient, productive, and profitable workplaces. Indeed, I have helped grow a number of them myself. My concern, rather, is with the short-sightedness of American companies’ failure to reinvest. We have grown an economy based on consumer spending, and now withhold the very fuel of the economy from the only people who can help it to function.

We who work in and believe in the free enterprise system have a vested interest in assuring that people have access to income. Without it, our companies and the economy cannot continue to grow. We have chosen this system, and need to find a better way to support it.

One method that comes to mind is the European system of apprenticeship, where young people agree to a three-year work/study program to qualify for employment in their chosen industry. Another might be a privately managed job corps for high-potential, under-utilized youth. Well-positioned companies could also take a much larger role in rehabilitation, training, and employing returning veterans.Shaking Hands - Self-interest

As we have seen, there is no lack of potential funding. There does seem to be a lack of willingness of some companies that have benefited most from an unbalanced economy to reinvest in it. 

We don’t need to wait for government initiatives. We don’t need to wait for tax breaks. We need to believe in our own ability to correct a system that is preventing its own growth.I would like to see a truly qualified dialogue on this subject. By truly qualified, I imagine that we can exclude the politicians. I personally have not seen much academic contribution to a fruitful conversation. I think it is up to us in business to solve this quandary…in our own interest as much for the good of the country. 

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