How our economy works.

[markw]

This just makes it perfectly clear for those of us who never quite understand how the economy works. This doesn't mean I approve of it.

It's a slow day in a little East Texas town. The sun is beating down. And the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back east is driving through. He stops at the motel and lays a $100 bill on the desk and says he wants to inspect the rooms upstairs in order to pick one to spend the night.

As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher then takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer now takes the $100 and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmer's Co-op immediately takes the $100 and pays his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything.

However, the whole town is now out of debt and now looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how the United States Government is conducting business today.

[bobsticks]

At least on the surface this is totally true---though I would have included a gas station attendant and a banker--but it gave me laugh.

Gracias...

[Feanor]

....

No one produced anything. No one earned anything.

However, the whole town is now out of debt and now looks to the future with a lot more optimism.
...

This is a lesson in macroeconomics -- the multiplier effect. Gotta love Keynes, eh?

[markw]

This is a lesson in macroeconomics -- the multiplier effect. Gotta love Keynes, eh?

Well, yes and no. The fallacy of this "joke" is that that $100 was never the hotel owners to begin with. This whole exercise left hin $100 in the hole.

But, looking at the banking/housing fiasco, it's actually not that too far removed from reality.

[Smokey]

The fallacy of this "joke" is that that $100 was never the hotel owners to begin with. This whole exercise left hin $100 in the hole.

Hotel owner was $100 in the hole to begin with, so really nothing changed. And nothing changed for everybody else in town either although money did get exchanged.

For example, if money that is owed to somebody is marked as (-$100) and money that somebody owed you as (+$100), then the networth is $00. Now if the guy pay you $100 he owed to you, (+$100) get cancelled. And if you turn around and pay the guy that you owe to, then (-$100) get cancelld, so the networth is still $00.

Same thing with the Hotel owner. Although he was $100 in hole with butcher, now he is in the hole with the hooker. So nothing changed for Hotel owner either.

[Feanor]

Hotel owner was $100 in the hole to begin with, so really nothing changed. And nothing changed for everybody else in town either although money did get exchanged.
...

Same thing with the Hotel owner. Although he was $100 in hole with butcher, now he is in the hole with the hooker. So nothing changed for Hotel owner either.

On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

This story has substance and a moral to it: circulation of money helps everyone. Like I said, Keynesian economicss. The problem today in the US is that some much money is going to the wealthiest corporations and people who are not investing it or even spending it, but instead mainly saving it as cash or securities.

Keeping the rich guys' taxes low merely gives them more money to save. The thing would getting them investing is middle class demand for goods & services. But we poor saps haven't had a raise in a decade and in debt up to our eyeballs so we aren't spending either. Kiss goodbye to the economy.

[markw]

On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

Almost Everybody. The hotel owner was not in the hole until he counted that C-note as revenue and paid debts against it when it was not, in fact, revenue.

If this whole trail was done by checks, when the checks "clear" and the bounce trail returns full circle to the writer of the bad insturment, the hotel owner is in the hole for that $100, plus any associated fees the other incurred. In fact, the only ones who would come out ahead would be the banks who would rake in the return check fees from each participant in this whole trail..

This story has substance and a moral to it: circulation of money helps everyone. Like I said, Keynesian economicss. The problem today in the US is that some much money is going to the wealthiest corporations and people who are not investing it or even spending it, but instead mainly saving it as cash or securities.

Keynesian economics worked out quite well in the 30's when FDR instituted it and created tons of opportunities which trivkled down to the real people. The TVA, for example, had several good results. By sponsering the building of hydroelectric dams it not only created jobs for many people it also brought electricity to areas that never had it before. Likewise, a lot of towns were grown and expanded, which brought about more consumers for those local stores. This was true "trickle down" economics.

Today, all it seems is that money is given to banks and businesses to bail them out of bad investments while banks, in turn, tighten the screws on those who owe them money abdnd business, who realized that they can make the same or greater profit without the workers they laid off and are in no hurry to restore the jobs they cut. Not to mention that some take those taxpayer provided funds and invest them in overseas markets and manufacturing. I won't even get into the government "buying out" auto manufacturers from the bondholdes and giving them to the unions. I don't think this is what Keynes had in mind.

[Smokey]

On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

It is true everybody paid off their depts, but at same time the money that somebody owe you (which is rightfully yours) is also wiped out too. Which mean nothing is gained and nothing is lost.

[thekid]

The flaws of the argument have been stated though it does illustrate several issues with the economy.

As was pointed one of the important aspects of this scenario was that money was circulating through the economy. For whatever reasons you want to attribute it most of the people in that town were recieving money for their labor.

That was the scary part of the credit crunch a few years ago. If credit stopped flowing then money would stop circulating and the economy collapses. One of the things that helped turn the recession of the 20's to the depression of the 30's was that the government policies put into place tightened the money supply and the economy collapsed. FDR's efforts to put money into the economy were marginally successful but when the money stops circulating at such a large level it is almost impossible for the government to infuse enough cash into the system. It really was not until WWII that the government was able to put enough money into the economy to get things circulating. The wars we are fighting today are being done at a higher tech level than previous wars. Some of the manufacturing that is going towards the war is not even being done in this country. As a result even going to war as a traditional method of re-starting an economy is not working. As a matter of fact think what the unemployment rate will be as we shrink the military down as these wars draw to a close.

The June employment numbers should be instructive to both parties now negotiating the budget deal. Unfortunately from the rhetoric I have heard it did not.

The Republicans think the anemic job numbers supports their position that revenue cannot be touched because of the fragile economy. What is being ignored is that the private sector actually produced 150,000 jobs. Not enough by any means but enough to show the private sector is producing jobs despite the "burdensome taxes and regulation". The job losses that offset the private sector growth came from the public sector as states and to some degree the federal goverment cut spending by cutting workers. So trying to stimulate the economy by only reducing debt will increase unemployment especially over the short term.

The Dems on the other hand are failing to see that the public sector has become too large a part of the economy. You could increase the tax rates back to the Clinton years and while it would soften the blow, the cuts in government spending would still need to be made. Holding onto a few seats in the House or Senate because the public is on your side in not reducing the larger entitlement programs shows a lack of leadership and a lack of vision. In the long term too large a government creates a lopsided economy that cannot be supported by a smaller private sector. The looming crisis in Social Security is an example of that situation.

We need a comprimise in the short term to keep this economy lurching along. In the long term both sides need to come up with policies that will transform our economy away from being such a service based economy to one that produces goods in a competitive global based economy. That is not going to be easy while the country remains so polarized on issues that have nothing to do with economic policies. Listening to the talk this week I have little confidence we have leaders that can rise above the polarization or a Congress that do so either. If you saw the movie the "War of the Roses" then you know what I mean when I say that right now both sides are hanging onto the chandilier.

My two cents....