Engineering The Economy
How to Engineer the American Economy to Improve Standard of Living?
Popular laissez-fair economic theory holds that minimal government intervention in all aspects of the economy will produce the most impressive outcomes. It has been the most popular economic theory in use in America for most of the past hundred years, but given where we are today (with huge national debt and slow growth) it appears something has to change. But what can we do to improve standard of living?
The Economy Does Not Exist in a Vacuum
In the first place, we must remember the economy does not exist in a vacuum. What ties us all together in a national (and global) economic structure is that fact that we all buy, sell, invest, and save in similar ways. The job of an economist is to look closely at the production, distribution, and consumption patterns within society and attempt to optimize the system so that it works most efficiently. It is meant to be a hard science looking at all the possible inputs and outputs, but unfortunately, economics today is far more art than science. Why? Because we do not control all the inputs. Without controlling all the inputs (government tax system, Federal Reserve policy, welfare, grants, tariffs,) it is impossible to accurately assess outcomes. As such, economic policy is more an art of interpretation and prediction than a hard science of monitoring and assessment.
How to Make the Most of Taxes?
One of the inputs we can do a better job of controlling is taxation. The welfare state and unemployment insurance are positive forms of government intervention. However, they are taken from taxation each year and thus contribute to the national debt. This leads some laissez-faire economist to call for the end of the welfare state, which, in reality, would only slow national growth even more!
There is a better way to make use of our taxes and still provide a social safety net. But the solution is not to cut corporate taxes and give investment benefits to the rich. They already have money, and they will not be the ones to bring us out of a recession. It will be the average American going out and buying things again.
We need to get more creative in our approach so that our national debt gets reduced AT THE SAME TIME as we provide access to a safety net. Increasing taxation on the top corporations and investment firms offers a great revenue stream for the government without taking away valuable spending dollars away from the middle class. And yet it has not happened.
The Federal Reserve Must Expand Its Reach
Think of the American economy like a farm. Everyone has their plot, and at the centre of the farm is a big lake that is meant to water each plot. Now imagine that the irrigation system is broken and can only water the plots around the lake.
In our economy, the Federal Reserve is the farmer, and the pond is much like the corporations and financial institutions. When the Feds decide to lower interest rates during a recession, it is primarily this wealth class they are focusing on. The goal is to give rich people more incentive to keep borrowing rather than getting to the source and giving average Americans the cash they need to buy everyday items. Average Americans are, after all, the one’s most hit by inflationary pressure in the first place. A recession is marked by a lack of spending, and it is the average individual who cannot afford to buy when the currency becomes devalued and items become too expensive — not the other way around. One solution is to offer direct deposits to individuals during a recession instead of putting out huge stimulus packages to corporations.
To really optimize America, the financial and government elite need to look at the economy like a hard science and spread prosperity and growth evenly across the income spectrum.
How to Optimize the American Economy?
There are a number of ways to optimize the American economy and improve the standard of living. As with any system, optimization comes from changing the inputs to produce better outputs. Changing the inputs into the American economy can only happen once we understand the issues with our current system. The biggest issue today is that the Federal Reserve is forced to play a minimal role because it’s in the best interest of the bankers. Redesigning the federal reserve and using optimization techniques is the best way to engineer the system to work for all, not just the bankers.
Federal Reserve and the Banking Class
The Federal Reserve System was set up in 1913 to act as the central financial body regulating the economy. Duties of the Federal Reserve have always been to set moderate interest rates, create jobs, and stabilize prices. Since the housing crisis of 2007, the Feds have paid more attention to regulating banks, but nothing concrete has come of it. This should come as no surprise, given the Feds have always worked in tandem with the big banks.
Lending is at the basis of our current economic system. The federal reserve wants to keep the interest rates low so that more people borrow money (thus also keeping the banks happy). However, eventually the low interest rate creates inflation as wages start to increase. This is where we find ourselves today and the federal reserve has no choice but to raise interest rates which will hurt the poor people who are finally seeing their income go up. The wealthy people who borrow money can just choose to not borrow money.
The first thing to do is expand the purview of the Federal Reserve. There are so many areas of monetary policy they are not regulating because of influence from the banking class. One important area of regulation is lending practiced by banks. The Fed requires bank to hold 10% of their deposits on site each night, but the rest of it they can lend out. It was this practice of lending high-risk credit that lead to the housing crisis when thousands of hard working Americans lost their jobs. The lending practices of banks must be curtailed to avoid another meltdown.
Other Approaches to Restructuring the Economy
There is far more to be done than just changing the Federal Reserve monetary policy. We have the ability to make small incremental changes to our economy– to engineer the structure of credit, supply, and demand — but that has never been done. Just like Henry Ford, who spent years making incremental changes to his first engine model, the American people need to fight for design optimization of our economy.
The economy can be made incrementally better by challenging it to supply more goods and services without causing inflation. This can be done by having the federal reserve provide liquidity directly to people. People would demand more goods and services which would allow the federal reserve to raise interest rates without hurting the economy. Today the federal reserve is raising interest rates for the very purpose of curtailing the wage gains made by hard working people. A better way is now possible that puts people’s jobs and wages ahead of low cost financial products.
Restructuring is Done Incrementally
Our economists should take a lesson from Henry Ford and introduce new input variables into our economy that do more than just re-assert the status quo. We know the status quo is creating income gaps and expanding inequality, and we have the ability to change that through design optimization techniques. With 250,000 dying every year from starvation and poverty in the United States alone, something must be done now. Technology is so advanced that we can not say in good faith that it is the fault of the invisible hand of the markets.