Money Flow Dynamics in a Disequilibrium Economy

Static equilibrium analysis is insufficient for understanding and controlling our economy. Our economy does not transition smoothly from one well-defined equilibrium to another. Rather we experience periods of dynamic disequilibrium which require more careful analysis.

Moreover, the nature of the USA economy has changed fundamentally since the nineteen eighties. Earlier the economy was occasionally subject to bouts of strong consumer demand and constrained supply that led to excessive inflation. This was countered with tighter fiscal policy and higher interest rates in monetary policy which sometimes produced recession. The challenge was to keep inflation in check while providing enough stimulus to maintain full employment. During that period the Phillips curve with its trade-off between inflation and unemployment was a useful device for understanding the policy challenge. But this relationship has fundamentally changed in recent decades.

Many authors have documented our transition to extreme income and wealth inequality. Both pay-to-play politics and advances in technology have greatly increased the return to capital relative to labor. What has been less discussed and understood is how this has contributed to a disequilibrium state where consumer demand is constrained while money has piled up in financial markets driving up stock and bond prices while depressing interest rates. Money is readily available for investment but investment opportunities are limited. Investing in an additional production line doesn’t make sense if you are unable to sell all of the product from your first production line. A combination of rapid and extensive automation and massive global supply has overwhelmed consumer demand and driven prices down or at least greatly constrained potential price increases. Inflation has fallen below and stayed below our monetary policy target of two percent.

One aspect of this situation has proven to be especially important. The very low interest rates has discouraged savings and encouraged consumer debt. Little or no savings has greatly contributed to economic instability. Consumers have taken on massive amounts of debt in the form of mortgage debt, credit card debt, home equity debt, student loan debt and, in conjunction with our aging population, medical and health related debt. In fact, in our current state of economic disequilibrium the middle class can no longer afford to buy back the value of the goods and services it is creating.

With virtually no savings, members of the middle class are operating paycheck to paycheck with no safety net. This turns income and wealth inequality into inherent economic instability. Any accident or unanticipated medical issue, not to mention job loss, could mean a sudden drop in consumption of ordinary goods and services.

To compensate for what would otherwise be a shortfall in consumer demand, the Federal government has stepped in with unpaid-for tax cuts and increased expenditures that have substantially increased the Federal debt. The proponents of new monetary theory who generally dismiss the importance of this ever increasing national debt have implicitly understood the growing and essential role of the Federal government in supplementing the otherwise inadequate consumer demand.

But it is monetary policy that is partially to blame for this situation. The practice of buying Treasury securities in the New York financial markets has greatly contributed to stock and bond price bubbles, but, more importantly, to lower interest rates and the over-indebtedness of the middle class. In this way, with the help of the mathematics of compound interest, monetary policy exacerbates income and wealth inequality by making the rich even richer (higher stock and bond prices) and the middle class poorer (deeper in debt).

Forthcoming book “Optimal Money Flow” proposes creating “My America” Federal Reserve smartphone bank accounts for everyone with a Social Security number. When the economy slows, money can be injected directly into these accounts to avoid recession. This would be much more effective in reviving the economy and require much less money than the enormous amount of money given to Wall Street bankers, which is a waste of time when consumer demand is inadequate to justify adding another line of production when companies can’t sell all they are producing with their first line of production. Instead, Wall Street bankers just buy more stocks and bonds. Giving the money directly to consumers makes much more sense.

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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Money Flow paradigm

The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.

Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.

We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of Neoclassical, Monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.

Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.

The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.

The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important.  Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.

For additional details see 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS

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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Thousands of Small Colleges to go Bankrupt as Birth Rates Decline

Is there a small college or university near where you live? Declining birth rates threaten to cause it to go belly up in coming years unless more students are found. Do you want to see a vibrant campus become a bunch of empty buildings? That would just attract illegal drug dealing and become a possible hangout for street gangs.

How about giving more financially challenged students a chance to attend college? We like to call our country the land of opportunity, but children who happen to be born into poor families cannot afford the high cost of college without financial assistance.

Let’s make a major effort to make it possible for financially disadvantaged students to attend college. Basically this means contributing money, both directly as individuals, and together as a community, to student scholarship funds that pay for tuition and college expenses such as books and student housing.

Many people are concerned about extreme income and wealth inequality, but they don’t seem to realize that economic inequality is just as extreme between the most well-known and highly-ranked big universities, and the less well-known, but highly-respected, smaller colleges and universities. The large, well-known universities are in great demand and have very large endowments of over a billion dollars, whereas the smaller, well-respected colleges and universities may have less than 10 million dollar endowments, which will have to be tapped, and will be consumed quickly, as enrollments drop off.  As with people, the well-to-do are well-to-do indeed, while those with little to start with are struggling to get by.

It’s great to say we live in the land of opportunity, but let’s make it a reality for those who didn’t happen to be born into financially secure families. In thinking about tax write-offs for charitable giving, why not include giving some money for student scholarships, especially at those smaller, less-well-known, but highly-respected colleges and universities?

Lawrence C. Marsh, the author of “Optimal Money Flow: How a Dynamic-Growth Economy Can Work for Everyone,” has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Poor Money Flow Has Produced Our Dangerously UnstableTriple Bubble Economy

=> Understanding the origin of our very unstable triple bubble economy: the Middle Class Debt Bubble, the Federal Debt Bubble, and the Wealthy-Savings Bubble. <=

Too often our economic textbooks describe economics as a simple transition from one static equilibrium to another without a full understanding and explanation of the accommodative or disruptive forces that drive us toward or away from such an equilibrium state. We need dynamic analysis to better understand the underlying forces that contribute to or disrupt optimal money flow in our economy. This involves population dynamics, technological innovation and the role of globalization with the increasingly interdependent world economy.

In 1839 Thomas Carlyle declared economics to be “the dismal science” because of Thomas Malthus’ argument that the supply of food could never keep up with demand, because population growth would always expand demand to more than absorb any increase in supply. For centuries demographers and economists have warned of the unsustainability of the world’s population growth and all of the economic and environmental problems that would follow.

Full stop. Rather suddenly, the dynamics have reversed abruptly. Population growth has dropped dramatically and many advanced economies have populations in decline. Japan, Germany, Italy, Russia and many other developed countries have been losing population. The United States would have a declining population if it were not for immigration.  Even China is destined to see its population peek and then decline partly as a result of China’s one-child policy, which was introduced in 1979 by Chinese leader Deng Xiaoping.

In my economics class at Notre Dame at the start of class on a Monday morning, right after an exciting football weekend, I was trying to get my students’ attention. After several failed attempts to begin our discussion on international income distribution, I suddenly announced: “Today we are going to discuss birth control.”  My students immediately blurted out: “Birth control. This is a Catholic university. We can’t be discussing birth control.” I persisted. “What is the most effective birth control method in the world?” I asked.  The students were shocked and incredulous.  Finally, I said: “It turns out that the most effective birth control method in the world is per capita income.  When per capita income rises above $6,000 US dollars, birth rates drop like a rock.”

The problem is not just fewer people, but fewer young people. Other than more medical care, most older people don’t need a lot of things. Typically, they already have accumulated too many possessions from clothing to pots, pans, tools and books. And old people tend to be more conservative and want to hang on to their possessions. It is hard to convince them that they need a whole new wardrobe or a new style of furniture in their old age. At the same time, young people are expressing a desire for experiences (often involving international travel) instead of acquiring lots of possessions. This also reduces the demand for goods and services in our economy.

Now consider the role of changes in technology in driving a transition from a primarily variable cost (labor) economy to a primarily fixed cost (capital) economy.  ………………………….

While demand slows with declining population growth and the aging of the population, the supply of investible capital has grown exponentially. Extreme income and wealth inequality has provided a small segment of the population with way more money than they know what to do with. This wealthy-savings bubble has led to a build up of investible funds in financial markets driving up stock and bond prices. Large corporations often use the excessive pool of cash to buy up rival companies or buy back shares of their stock.

At the same time, middle class people are up to their eyeballs in debt. People have credit card debt, mortgage debt, college loan debt, home equity debt and ever more debt from rising health care costs. With so much debt the middle class cannot afford to buy back all the goods and services they are producing. To counter this middle class debt bubble, the federal government has filled in for otherwise inadequate consumer demand by providing unpaid for tax cuts and expenditures. This has produced an ever increasing federal debt bubble.

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Lawrence C. Marsh, the author of “Optimal Money Flow: How a Dynamic-Growth Economy Can Work for Everyone,” has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Summary of Marsh’s new book: Optimal Money Flow: A New Vision of How a Dynamic-Growth Economy Can Work for Everyone

Optimal Money Flow
Marsh’s new Optimal Money Flow book from Avila University Press at www.avila.edu/aupress   release date: June 16, 2020

 

One of many ideas in Lawrence Marsh’s new book, Optimal Money Flow, is his My America” personal accounts, into which the Federal Reserve Bank could inject money as a way to get the economy moving when growth is slow.  This provides a new policy tool that can serve as an alternative to the Fed buying US Treasury securities in New York financial markets.  A “My America” Fed bank account would be created for every American, where money could be injected directly to provide consumers with cash to stimulate demand when the economy slows and recession threatens. Highly secure, block-chained “My America” accounts would allow direct smartphone transfer of cash from account to account to pay for leaf raking, lawn mowing or any other service or product.  In a similar program, but using fiscal instead of monetary policy, President George W. Bush provided direct $600 payments to individuals under the 2008 Economic Stimulus Act.

Conservatives will like the idea of allowing the people instead of the government to decide how to spend the money and that this approach does not increase taxes or add to the national debt while avoiding excessive inflation. It also uses less money and has a more direct and immediate impact on consumer demand than the purchase of US Treasury securities. Giving the money to Wall Street just boosts stock and bond prices with little impact on the real economy. Buying US Treasury securities requires too much money and takes too long to impact consumer demand, because the marginal propensity to consume of Wall Street bankers is much lower than that of Joe and Jane Sixpack, who are much more likely to spend additional money on new goods and services right away.  Inflation can be kept under tight control by raising “My America” account interest rates as well as interest rates on US Treasury securities whenever necessary.

Marsh believes government can contribute to the efficiency of the free enterprise system by better aligning marginal costs and marginal benefits. Negative externalities such as excessive pollution require taxes as in carbon taxes or trading in carbon credits while positive externalities such as vaccinations for highly contagious diseases require subsidies to align marginal costs with marginal benefits. Government investments in infrastructure, education, national defense, health and basic research also promote and enhance efficiency, productivity, and economic growth by appropriately regulating natural monopolies and overcoming the free rider problem which inhibits the private provision of such core investments.

With higher levels of globalization, low levels of unionization, and more rapid technological change, a new type of business cycle has emerged—one in which rising middle-class debt and stock market bubbles have replaced price and wage inflation as the source of economic instability. Marsh introduces his innovative Money Flow paradigm, which sees government as the heart of the free enterprise system—and where it does and should play an active part in maintaining economic stability and ensuring efficient and equitable resource allocation in an economy. Previous economic paradigms viewed government as an external, alien force outside the system, but professor Marsh promotes a very different approach. While he acknowledges there is efficiency in the market for ordinary goods and services which converge toward equilibrium with negative feedback loops, he sees contagion effects and inefficiency in many financial markets with their positive feedback loops that contribute to irrational exuberance as prices rise or exacerbate downward spirals as prices fall.

Optimal Money Flow’s important message and unique proposals deliver a fresh view of the interconnectedness of the globe and an updated understanding of the underlying economic forces that shape our lives today—including international trade and how one country’s decisions now impact the rest of the world. From business travelers to university students, readers will rethink their basic assumptions about the nature of economics and the role of government.

The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh