Monday, February 2, 2009
Good health truly comes from natural sources such as exercise and healthy food. We can make ourselves feel good by obtaining a high blood-alcohol content, but the next morning sucks. A quick-fix, feel-good solution doesn’t achieve truly healthy results. The same is true for the economy. A healthy economy comes from the natural interaction of supply and demand, not through heavy doses of government intervention. Here’s how it works.
Consumers use their wealth to purchase the goods and services they demand. Necessities will naturally have the highest demand, so the consumers will first spend their wealth on such items. On the other side, the producers first spend their resources to supply the goods with the highest demand. The interaction of supply and demand will result in the greatest quantity of goods that can be produced at the lowest sustainable price. Then, some producers will get smarter and make the goods more efficiently, increasing supply. A larger supply will drive market prices down and force other producers to adopt more efficient strategies or close up shop. This more efficient means to production makes the consumers wealthier by increasing their purchasing power; consumers can buy the same amount of goods with less of their wealth. In an all-natural economy, the aggregate result is an economy that produces what the consumers demand by the most efficient means, thus maximizing wealth, or health.
American economic policy has not followed the all-natural approach for some time, if ever. Congress, the Federal Reserve, and the Bush and Clinton administrations all thought they could do better than supply and demand. They intervened in the housing market. The Federal Reserve lowered the price of lending by increasing the money supply. Congress and presidents steered the price of homes by forcing increased demand via the “Ownership Society” agenda. The result was artificial home equity and an unnaturally low interest rate. We thought we had wealth, so we borrowed against that wealth and bought plasmas, iPods, Xboxes, and lots and lots of coffee. The increased demand for these goods built coffee shops, Wal-Marts and factories that employed Joe, Jan and Jimmy. This price controlling couldn’t go on forever and it didn’t. The market saw the excess supply of housing and started a very violent correction, one that wiped out all that home equity we used to by plasmas, iPods, Xboxes, and lots and lots of coffee. Now that we can’t buy all that stuff, Joe, Jan and Jimmy are sent home.
Essentially the economy got drunk and ended up in a strange bed. Then the sun came up and nothing was as beautiful as it seemed last night. Years of artificial economic growth was built by government manipulation of housing prices and interest rates. Huge increases in GDP were built on this artificial wealth. Now that the fake wealth is gone, our economy cannot sustain that high GDP, so it’s coming down.
We can become healthy the natural way, or we can put off the pain with another bottle of liquor. Natural policies will let consumers and producers determine supply and demand. On the other hand (or in it) is a trillion-dollar bottle of liquor, a debt-driven stimulus package of more government manipulation of supply and demand.
— Davidson is a Tonganoxie senior in economics.
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Davidson: Our economy was drunk
Well done Mr. Davidson. You made a good point and articulated it well.
Davidson: Our economy was drunk
Now THIS is an analogy about the economy I haven't seen. Very good job explaining the reasoning against government interference in the market for those who haven't had much training in the area of economics!
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