The money flow paradigm explains key aspects of the American economy. Why does deficit spending prevail even though almost every politician complains about it? Why has our economy grown a glacial rate of less than 3 percent a year while the stock market has been growing for many decades at an average rate of 10 percent a year? How has the perverse incentive structure of our “free enterprise economy” been undermining and suppressing productivity and economic growth? Why have corporate boards become so focused on CEO pay and the maximization of shareholder value at the expense of innovation and creativity, and incentives for rank-and-file employees? And, finally, what does the money flow paradigm tell us to do to correct all of these problems?
(1) WHY DEFICIT SPENDING PREVAILS:
The American people haven’t been receiving enough money to be able to buy back the value of the goods and services they produce. The wealthy can only wear one pair of shoes at a time, drive one car at a time, and eat out at just a few fancy restaurants each day. Rich people can bid up the price of Picasso paintings and exclusive properties, but that isn’t enough to maintain full employment. Many Americans are deep in debt. Yet, without government help, they are unable to create enough demand to avoid recession. Politicians love to complain about our national public debt, but Republicans pass unpaid for tax cuts to stimulate demand and Democrats pass unpaid for expenditures, because, otherwise, we would be in a permanent recession, and those politicians would lose votes at election time.
(2) WHY PRODUCTIVITY AND ECONOMIC GROWTH ARE SO LOW:
The financial economy exists to provide money to invest in the real economy. For many decades the Federal Reserve has pumped so much money into the New York financial markets that stock prices have risen at an average annual rate of 10 percent. Under these circumstances even non-financial companies have come to realize that they can make more money in the New York financial markets than in investing in their own businesses. This has caused a reverse money flow with money flowing out of the real economy and into the financial economy. Consequently the real economy has been growing at an average of less than 3 percent. This reverse money flow has suppressed productivity and economic growth in the real economy with big increases in stock share buybacks and dividends. The Federal Reserve needs to stop pumping up the financial economy every time the money flow into the real economy is weak and instead inject money directly into the real economy via “FedAccounts” for everyone with a social security number. Again, the fundamental problem (as explained by the money flow paradigm) is that so much money is being diverted to the top ten percent of wealthiest people (who own 84 percent of the stock market) that the American people cannot afford to buy back the value of the goods and services that they are producing.
(3) MANY CORPORATE BOARDS HAVE NO IDEA OF WHAT IS REALLY GOING ON IN THEIR COMPANIES:
CEOs often get fellow CEOs and other corporate leaders (their golf buddies) to serve on their corporate boards. The CEO provides reports revealing what a great job that CEO is doing. This helps maximize CEO compensation and motivates short-term stock price manipulation and maximization, which is rationalized under the maximization of shareholder value mantra but does not incentivize long-term innovative physical and intellectual investments in the long-term health and profitability of the company.
SOLUTION: Follow Germany’s example and require that 40 percent of corporate boards be elected directly by the company employees in product development, production, marketing, sales, and product distribution. ALSO: Require that all stock buybacks be immediately given to the company’s rank and file employees and not set aside. Company stock ownership will motivate employees both individually and as a team to work hard and do the very best for their company. Redistributing stock buybacks to a company’s employees will help make the transition from companies owned by outsiders (passive investors) to companies owned by insiders (company workers).