What is wrong with the U.S. economy?

In classic Keynesian theory (the view basically espoused here), when the typical person's daily life improves, the economy is strengthened, corporate capitalism is strengthened, and the American system goes about its merry way. Jobs. Business formation. Innovation. Ingenuity. Efficiency. Rising revenue. Rising earnings. Rising incomes. Happy families.

But when the reverse occurs, the opposite is true.

I didn't always see things this way. But in graduate school, I detected a flaw in business management theory. Namely, that when labor costs go up, that's always bad for business and corporate earnings; and conversely, when they go down, that's always good. Further research and case studies would reveal that, in fact, once labor costs fall below a certain level, indeed very bad things happen to the economy. Among other negatives, the economy runs out of citizens with incomes adequate to sustain GDP growth, including revenue growth and earnings growth. Does this sound like any economy you know?

And no, this shortcoming can't be made up by selling products and services to the new middle class in China: China isn't buying. Hence the emphasis in this space on U.S. job creation, and on its natural by-product, rising real median incomes.

In reference to the U.S. economy, the key then is, so long as the private sector is working its magic and is improving the typical person's daily life, let it work its magic. But if for some reason this should not occur, or if this should pause for an extended period of time, or even reverse, then that's when public policy has to intervene.

The conservative argument

Economic conservatives differ with the above. According to the economic conservatives, if the typical person is not doing better it's: 1) the typical person's own fault and / or 2) the government interfered with the market so much that it messed things up. The market or corporate capitalism is never at fault.

According to economic conservatives or market absolutists, the solution to the current crisis and recession is simple: 1) cut taxes, 2) cut government spending, 3) eliminate government regulations, and then get out of way for the recovery and bliss that will surely follow. (And if possible, end all welfare programs. There! That will save a ton of taxpayer dollars and give more people initiative to get out there and work for a living.)

By extension, under market absolutism, the election of a reformer, President Barack Obama, was a mistake. The existence of a permanent underclass and the concerns of the typical person (working class and middle class) either don't exist, or if they do exist, aren't relevant or don't have a legitimate claim. Further, the problem that corporate capitalism faces today has been incorrectly defined: the problem has nothing to do with executives cannibalizing the system, or mortgage lenders fudging loan application data, or lenders creating mortgage types that were untenable, or bank officials shifting risk through sold mortgage bonds, or ratings agencies granting very generous ratings, or risk monitors ignoring risk indicators, but with too many people, mostly poor and lower-income people, taking out mortgages and loans they shouldn't have had in the first place. That's all.

With the above as premises, let's conduct an experiment and apply economic conservatism to the financial crisis and the recession, and ignore any ideas from Speaker Pelosi (D-Calif.), and Majority Leader Reid (D-Nev.). We cut taxes, cut government spending, really reduce regulations, and we end welfare. What happens to the economy, and the nation, then?

Offer your comments below on what you think would happen to the U.S. economy and our nation by implementing economic conservatism.

We'll go over a few in future posts.

Financial Editor Joseph Lazzaro is writing a book on the U.S. Presidency and the U.S. economy.
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