The Affluent Society

As the government announces today that special tax rebate checks will be delivered early this year, I can’t help worrying about what a fiasco the whole thing is shaping up to be. I understand the intention behind the policy. But given where we are with the economy, where Americans are with debt, where industry is with regard to decreasing productivity, etc. . . I just can't see how the Fed thinks these rebates will do anything but make things worse.

I'm certain that the economists the Bush administration is listening to HAD to have read John Galbraith back in their graduate school days. As Galbraith said over 40 years ago:

• Economy is production-driven. Production drives consumption; not the other way around as we're told to believe.
• Industry has manufactured artificial demand for products we don't really need (therefore possessing zero marginal utility). Reference my quest for a Wii as an example. Or tennis shoes that cost $12 to manufacture and ship and sell for $200. Manufactured demand for goods with zero marginal utility.
• This artificial demand for valueless items is what has sustained production (and the economy) in the 20th century.
• Industry and the country have cashed in on the economic benefits of heightened production by driving that production past all points of reason.
• American consumers have supported this production via over consumption, and they have over consumed by saving zero and leveraging credit.
• Collectively, Americans have maxed out their credit and can no longer support the given levels of production.
• They can definitely NOT support the ever increasing levels of production needed to continue economic growth.
• Consumption has flattened and will begin falling.
• Industry will back off production, staunching the flow of money that the production pumps into the economy.
• Private incomes will fall further, making even less money available for consumption.
  

We know we’re in for a hurting with the whole economy thing, right? It might be just a short slow down. Might be a small recession with a quick recovery. Might be a long recession with a slow recovery. But it'll be something.

Americans can no longer turn to credit expansion as a way to support their consumption and the economy as a whole. So what does the Fed do? They hand maxed-out Americans some money. . . money that Americans are borrowing from their own future selves. . . so that Americans can spend that borrowed money now and continue to artificially support production by increasing debt.

But instead of Americans spending their own credit dollars gotten from unsecured credit card debt, Americans will now be spending borrowed money secured by U.S. Treasury bills. It’s a debt that can’t be wiped out with Chapter 11 bankruptcy or a windfall from an insurance settlement. It’s debt (along with a few trillion other dollars) that our kids and grandkids WILL HAVE TO ACCOUNT FOR.

Don't get me wrong. I'll cash the check when it arrives. But I'm not chipper about it.