Economic Theories.

Many have questioned the need for health care reform. They do not see the interconnection between health care expenditures and our over all economy. We also are suffering from failures in our financial sector as well as what's left of our manufacturing sector. From what I learned in my business economics class is that economics is a theory, no different than astrophysics. In astrophysics they send space probes far out in the universe to validate or invalidate a theory. These probes may take years to decades to accomplish their task. This same law of validation is true for economics. For example supply side - trickle down - theory took over a decade to prove it has flaws. It theorized that if there was greater wealth for the wealthy, they will invest that extra capital into enterprises that create jobs. The job were not created in America but overseas. The other problem was that wages remained stagnant as inflation and health care costs increased. To offset this stagnation, more of the middle class borrowed money that was easily obtainable for necessities, as well as luxuries. Credit card debt soared, stated income mortgages flowed like water. This created a false consumer economy that eventually had to correct itself with the major drop in September of '08, but really started in 2007.

The American economy is based on three basic principals; 1) Free Enterprise, that allows anyone with capital to establish an enterprise to provide goods or services to any willing buyer. 2) The selling of instruments (normally stock shares) to raise capital from banks, individuals or other enterprises - trading. 3) Borrowing capital from a bank and giving the lender some form of collateral to secure the loan. The trading of these financial instruments have created a secondary economic market, i.e. stocks, bonds, and notes, that produces no goods or services, only equity and profit for the holder. However, companies like AIG created unique non-traditional instruments generally refereed to as derivatives that sold as low risk instruments by having an insurance policy to cover any loss. Unfortunately AIG did not fund the insurance side of the derivative and thus its collapse when the mortgage backed derivatives became worthless. The same held true of all major investment houses that held these derivatives.

There is a tendency for this financial trading sector to become isolated from the realities of the other sectors that actually make something that generates revenue and capital. You can see this disconnect in these large firms still giving huge compensations and bonuses as though no economic down cycle exists.

There are two schools of thought in economics, 1) a stabilized economy in which population growth is minimal and not necessary to maintain the economy. 2) a growth economy that requires a continuous growth in population to add consumer demand of the goods and services that free enterprise provides. The problem with a stabilized economy is with little population growth an enterprise must acquire new customers from taking them away from a competitor through quality, value and customer service. Or develop innovations in new technologies to create new markets. It also limits the ability for a new enterprise to enter into an existing market. In a required population growth economy you acquire new customers from the inherent increase in population. Therefore, an enterprise need only meet minimally acceptable quality and value to acquire customers. In the auto industry the Japanese entered a saturated market, but focused on quality and value to capture market share. The American auto industry focused on population growth to drive sales and focused less on quality and value. In the end, quality and value was the winner.

As for health care, the cost whether paid out of pocket, paid through insurance premiums or though taxes consumes large amounts of capital from all enterprises and citizens and re-directs that capital to a limited investment pool, who benefit from that capital shift. This would not be such a problem, since it part of our capitalist system, if it was not that our competitors in other countries have some form of socialized health care that decreases the consumption of capital for health care services, thus allowing more capital investment in other industries and technologies, as well as lowering labor costs. Therefore, they are able to sell their goods and services at a lower price than a comparable American company. That puts the American economy in jeopardy because foreign produced goods can be sold here cheaper and our goods are too expense for the foreign markets. Export declines and imports increase, thereby we owe more to foreign economies than they to ours. That devalues our currency. This also leads to moving jobs to other countries that have some form of socialized health care and pension system.

Governments consumption of capital is another factor in our economy. As our national debt increased, the more capital consumed by government, the less available to enterprises and individuals to borrow or acquire. But the government equation is a complex one in as much as government can also spread capital around the economy to drive higher economic activity and therefore generating more tax revenue per capita at a lower tax rate charged to enterprises and individuals. This was proven under the Clinton years. Ideally the economy would be robust enough to generate more than enough tax revenue to provide all the necessary services it provides, including social safety net services such as Social Security and Medicare for everyone.

After reviewing the invalidation of the supply side economic theory of the Reagan and Bush administrations, most economists think that by increasing wages, reducing the cost of health care & pensions that are included in labor costs, as well as stimulating the middle class to keep their money moving within the economy, we can recover faster than under the supply side - trickle down theory. Unfortunately the Republican conservatives have not learned this lesson and still demand that supply side can work, even if it has failed twice before.

Additionally, a population growth based economy is also a bad economy in as much as it increases the rate of consumption of limited natural resources, consumes more land for not only housing, but for enterprises to build plants and retails centers to deliver the goods and services this increasing population, which in turn harms the quality of life of everyone. You must wait in more lines for service or a parking space, rubbing shoulders in a mass of humanity as you walk along streets and trails. More highways must be built over wet land and farm land, and a shrinking amount of land is available for food production, only adds to shortages of food, and thus an increase in prices. Those on the top of the pyramid have the monetary strength to buy these expensive goods and services, but the middle and lower classes must pay more of their income for basic survival. In fact, most at the top highly benefit from this limited supply economic situation, as they invested capital in the supply side, thus the supply side economics the conservatives like so much.

In the health care market, there is a shrinking supply of providers as the current suppliers retire and otherwise leave health care. There are fewer new suppliers entering the market and an ever increasing population in need of health care. For those invested in the health insurance industry, supply side again, they will be the great winners as prices escalate relative to high demand and limited supply. Any of you in the middle class will suffer with ever increasing waits to see a provider or obtaining needed treatments.

So the question now is what economic system should America adopt in order to stabilize our economy? Should we study economic history and from that create an economic system that does not change with every political change? If America does not want immigrants crossing our boarders, then can we have an economy that can thrive only on internal birth rates? Can American enterprises become competitive in price with higher health care and pension costs for labor?

Or do you believe in the old saying: "Don't worry, God will provide?"