Conventional economic wisdom is that the world suffers from a lack of [aggregate] demand. In plain words, people and businesses are not willing to purchase as much stuff as can be produced.
There are many suspected causes. Past debt may be causing people to not take on new debt. Stuff purchased with borrowed money is also stuff purchased so reduced borrowing reduces [aggregate] demand.
Another suspected cause is wage stagnation. Wage earners are more likely to spend whatever they get in a paycheck. Wealthier people might save or invest extra money. Less in wages, more in investment returns leads to less spent and more saved and invested.
If these are indeed causes, the proposed solutions are things like asset purchases by central banks to put money in the hands of banks (TARP), or lower interest rates to encourage borrowing, or even negative interest rates to cause savers to spend. A higher minimum wage will place money in the hands of people who have a propensity to spend.
Still, I can’t help wondering: how did we get to a place where demand is lacking, after so many decades where there was lots of demand supporting the creation of great industries? I mean, human wants are infinite. Introspection shows me that I have lots of demand. Well, I guess it is not demand unless I have the dollars to do something about my wishes. The 2008 stock crash ruined my plans. My assets are returning to 2007 levels today, nine years later. By normal growth expectations my funds would have doubled in nine years. I certainly don’t want to borrow since I have so much less today than I reasonably expected to have. At current projections I have many more years to work after age 65. Looking at things “from the other side” so to speak, my lack of demand is merely a lack of assets/income. If I had more money I would demand more stuff.
So let’s look at ways I could have more demand, i.e., get more money. As I previously said, more borrowing is out of the question, Americans are leveraged up to the hilt.
I could drive for Uber on my days off. People around here actually make good money driving late Friday and Saturday nights so that other people can enjoy a drink or two in the evening safely.
Maybe it is a lack of opportunities to make more money that limits my demand. Why are there a lack of ways to make more money when people all around me desire things and services?
Uber is an example. Uber fills many people’s desires or needs, and allows others to make money doing it. Obviously where Uber operates more people use it than use cabs where it does not operate. I laugh at the idea of getting a cab in the suburbs at a private house party where I had a few drinks. It would be an hour or more from calling a dispatcher to seeing a ride, if they arrived at all. Yet local governments are waging an ongoing war against Uber in many areas. The existing cab companies have a monopoly and give poor service at low cost, skimming the most valuable customers while ignoring all the others. Millions of dollars of potential commerce are stifled in preserving the monopoly rent of a few established players. Millions of dollar value units of demand are never created because the potential providers are prevented from providing value to other people.
Those people around here who are making good money driving for Uber could never get a job with the local cab company. The demand for the crappy service they give is limited. The pay is poor (I don’t know why, when the Uber pay is good for a hustler). The positions are not just when you want to work but you need to fit schedules and shifts and maybe give up other employment opportunities.
There are many other ways to make money that are effectively banned. Peter Schiff reports that financial regulation has become so oppressive that he today could not form his financial firm. I started an ISP in 1987 with a Unix server and a dozen modems in my basement. There were very few regulations applying to someone who wanted to run a computer in his basement and allow other people connect to it over a public telephone line with a modem. I closed down my ISP when the federal government created a law that required me to keep copies of every email my friends and neighbors sent through my system for some months in case they wanted to spy on them. Could you imagine starting an ISP today? What are the net neutrality requirements and where do I get software to implement them? Only a giant corporation could follow the rules.
Right now, in America, it is very difficult to compete with any established business. Big companies are C corps and pay a top tax rate of 35%. A small business or start up is an LLC and pay as an individual at a top federal tax rate at 39.5% A big company can have an HR and a legal department that allow it to navigate regulations. A small business is often a one or two person shop. A big company can get a special tax deal on pain of moving jobs out of the community. A small company does not get its phone call returned.
Main Street, small business, local start-ups are all suffering under our current political system. There is less growth and innovation, which comes mostly from small business and start-ups.
So I think a contributing factor to the lack of demand is the smothering of competition against entrenched interests.