Tyler Cowen co-authors Marginal Revolution with Alex Tabarrok - it is a fantastic blog; I read it every day. In a recent interview, Tyler said that one of America’s biggest problems is a lack of economic mobility. People are stuck in their economic stratum because they don’t have access to better schools, particularly in their K-12 (primary & secondary) years. Sure excellent people will succeed no matter their background or school, but the vast majority are immobile because the only education available to them is not good enough to help them rise.
They’ve also written that the US government’s approach to stimulating the economy (spend $trillions) is ineffective. I agree, and think it’s for the same reason - immobility.
Effectively executing the latter, might also give us the answer to the former:
When an economy falters, we must increase the flow of money -- get people and businesses to spend, this creates monetary mobility. That movement of money causes goods to flow, inventories to be replenished, and people to be hired. It’s not just about increasing the money supply, the added money must actually do work -- if it is put in the bank or invested, the effect is diluted or eliminated. So, who is most likely to very quickly spend every penny they get? What also is the most efficient approach - where there is little or NO leakage of funds to bureaucracy or other interests?
First who: In a shrinking economy, businesses will lower operating costs (layoffs, other efficiencies), grow profits through savings, and ONLY spend if they see sustained proof that customers are buying. They will not (and should not) create capacity when there is no demand. The result is profitability growing much faster than employment. Companies are NOT spending. They will only act when people buy. So not business.
People? If you already earn enough to meet your needs, any incremental income may not all get spent - you might save, pay down debt, or invest it instead. The richer you are, the less likely it is that a new dollar is spent. This money is least mobile. Poor people on the other hand, can’t afford to save money; they will spend whatever they have to subsist, if they get a bit more, it means they can afford to buy more necessities, not save more. There is also no overhead to their spending; they don't commission research, or conduct needs analyses, or consult McKinsey, they just buy food or clothing or whatever.
A thousand dollar bonus to someone earning $20K or less represents at least a 5% increase in income. If this person were the sole breadwinner of a family of four, they would still be $1,350 below the 2011 poverty line, and every cent would be spent. At that income, savings is not an option. There are 82.6 million people in the USA who earn $20K or less; giving each of them a $1K bonus would require a stimulus of $82.6 Billion.
When the lowest wage earners are spending money, their inertia creates a ripple effect that accelerates money flow, drives capacity creation and reinvestment, and thankfully (!) also enables the not-so-poor to buy new cars and drink mojitos in the Hamptons.
Then, how: Fighting the urge to form a task force, hold 735 meetings over three years, and create a 3,000-page manual, filled with absurd crap, let's just issue a $1,000 check to everyone who whose total W2 income (box #1) was less then or equal to $20,000.
In a commitment to failure, Presidents Bush and Obama chose and continue to choose a trickle-down approach with their stimuli, believing that giving $$$ to bigger companies will cause them to invest to create more infrastructure (manufacturing and service capacity), and in turn employ more of the middle/lower class.
Why? Perhaps because America doesn't like the idea of giving people a handout (though we have food stamps, welfare, jails, etc.). It is more palatable to give a business money because that feels less like charity.
But I don't think of this as charity as much as low-overhead-high-efficiency investment.This same view applies to education - the goal is simple, but instead of acting, we analyze; instead of inspiring students, we measure them; instead of empowering teachers, we oppress them.
This is not an argument against business, or the rich, or for charity; it is instead a plea for us to learn from nature, which teachers that the nimblest, most efficient, and most directly-aimed things prevail, ...and perpetuate.