Jon Cowan and Jim Kessler, who run the think tank called the
Third Way, co-authored an article under the title: “Economic Populism Is a Dead
End for Democrats” and the subtitle: “The de Blasio-Warren agenda won't travel.
Colorado is
the real political harbinger.” Published in the Wall Street Journal on December
3, 2013, the article essentially uses economics as a springboard to advance a
political argument.
In choosing to present their case the way that they did, the
authors have relied on a few nuggets of the economic sort to push forward their
political argument. It may have been convenient for them to take this approach,
but they also created a useful vehicle for something else to happen. In fact,
what we can do with their construct is strip the politics away from the
argument, and discuss the economic issues that they raise, free of all other
considerations.
And that's not all because we can do something else. Given
that when they talk economics, the authors of the article do so the
conventional way – which means they talk the language of money – we need to
translate this into the language of practicality. This means we need to talk in
terms of goods and services because in practical terms, wealth resides in the goods
and services that we produce and consume, not in the banknotes that we hold in
our wallets or the deposits that we maintain in our bank accounts. This
suggests that we should call our new language: Practicalese.
Getting back to the Cowan and Kessler article, we see that
after an introduction laden with politics, they talk money. They do so as they
describe what they call the left-wing populist fantasy by mocking the idea like
this: “If we force the wealthy to pay higher taxes, close a few corporate tax
loopholes, and break up some big banks, we can pay for, even expand existing
entitlements … we can invest more in K-12 education, infrastructure, health
research, clean energy and more.” Needless to say they view this plan as
impossible to achieve.
They call it fantasy, but instead of tackling it head-on,
they bring up the subject of Social Security, and attack the premise of this
entitlement instead of attacking the plan. They go on to say that the way
things stand at this time, the formula for payout under Social Security is
increasing faster than inflation. And they warn that this practice will result
in the fund being devoured by the year 2031, a development that will force a
regime of reduced payment to future recipients.
The authors then bring up the subject of Medicare which is
another entitlement program, and give it the same treatment. This leads them to
conclude that they have seen this movie before – the movie being: “the promise
that unrestrained entitlements won't harm kids and public investments like
infrastructure, public schools and college financial aid.” In fact, this is how
they link the subject of entitlements with that of public spending, and argue
that you cannot have both. They posit that there can be enough money for only
one of them, thus society must chose between the two.
To buttress that point of view, they remind the reader that
in the 1960s the federal government used to spend $3 on public investment for
every $1 it spent on entitlements.” They add that the ratio has now flipped,
and predict that in 10 years, America
will spend $5 on Social Security, Medicare and Medicaid for every $1 it will
spend on public investment. They do not explain how this can be detrimental to
the economy but leave it to the reader to figure out.
Well then, if we translate all of that into Practicalese,
what would the translation show? It would show that these people foresee a
demand for goods and services that will outstrip the nation's ability to
produce them, except that they probably don't understand it. You see, fiat
money exists only to facilitate transactions that take place between parties.
It does not produce what is transacted, nor does it consume it. Thus, if a
trillion dollar economy runs with a supply that meets the demand, it will run just
the same if ten trillion dollars were printed and distributed in the same
proportions as before. It is just that the price of everything will be raised
by a factor of ten. No one will notice the difference but for an extra zero
that will accompany every transaction people do. And the economy will hum as if
nothing had changed.
What can change the situation is the imbalance that might
creep into the economy. That is, if there is more supply than demand or the
other way around, the economy will suffer a side effect. It could be
stagnation; it could be inflation or even a stagflation that will deteriorate
the economy further and make it worse. This can happen because the printing of
fiat money allows a small number of people to accumulate more than they will
ever need for their personal consumption.
This will have the effect of leaving a surplus of goods and
services on the table that no one will consume. It will happen because the
people who have a high propensity to consume will lack the means to pay for what
they need. Thus, the conundrum where the capacity to produce goods and services
will sit idle while money remains parked where it is not put to work or used to
consume. This will create bottlenecks in the economy, culminating in the
formation of a bubble, a tailspin or both.
Some people say that this is the inevitable business cycle
which is necessary to renew the economy, and prepare it for the next cycle of
growth. But in the language of Practicalese, real growth can come about only
when there is a change in one or more of the following areas: (a) there has
been a pronounced demographic shift in society, (b) a major technological
breakthrough has occurred, (c) the discovery of a large natural resources
deposit has been made.
Anyone of these occurrences has the potential to create the
demand that will stimulate the supply, or create the supply that will stimulate
the demand. The two will then go hand in hand, and as long as the balance will
be maintained between the supply and the demand, the economy will remain
healthy.
But that balance can be disturbed with the invention of
financial instruments that will concentrate money in the hands of people who
create neither goods nor services. Their activities will make it look like
growth is happening but that will be true on paper only, not in the language of
Practicalese. It will be a phony sort of growth that will require a remedy lest
it crash the economy.