Sunday, November 4, 2012

Under-Utilizing Resoures, and the Paradox of Thrift [EBP 3].

Cryptic, yes, but read on.  Source.

My posts often fall into one of two categories: there's something I've learned about and wish to inform/discuss with others, or something that irritates me and I want to rant.  I suppose this post will be a partial mix of the two.

It's hard to say exactly what is happening in the economy right now.  There are constantly indicators which look promising (and Canada's Government makes great strides to ensure you know this), but at the same time we face persistently high rates of unemployment, with the 18-35 demographic particularly hard-hit.  I personally found myself unemployed for the entirety of last year (though for four months, I was a part-time student), and was particularly discouraged when I could not even get a call-back for a job loading and unloading trucks.  Luckily, I found a job.  It's round-the-clock shift work, but I have a steady paycheque, and that puts me way ahead of most of my peers.  That said, shift work is certainly not my ideal career end-game, and I work with a lot of people who are not chemists by education.  I don't want to work there forever and ever, but with the job market the way it is, I can't fathom leaving.

The job market is currently a tough place to find yourself in, and most economic indicators still put us in "challenging" territory.  You'll also hear a lot of corporations and government talking about belt-tightening, reigning in budgets and taking austerity measures [exactly what the first two terms meant, but it sounds fancier].  However, and feel free to correct me, this appears to be the exact opposite of what everyone should be doing.

After gaining a casual interest in economics, I have come across the concept of the Paradox of Thrift.  You see, times are tough, and our base instinct is to save money.  We put off buying that shiny new tech item, new vehicles, and men's undergarments [I'm not kidding, it's an important economic indicator].  So people throw money away into savings accounts, fearing a rainy day.  Corporations too, will keep large sums of money, fearing the worst.  Governments which spent heavily on stimulus cut back on spending in an attempt to balance budgets.  It all seems perfectly reasonable, and it is helping no-one.  After all, saving money only keeps it out of circulation.

When considering the general population, saving seems a little more understandable.  These are individuals, and in challenging economic times it seems reasonable that jobs could be lost and with it, one's entire revenue stream.  It also seems reasonable with corporations, though the problems become more pronounced.  The Guardian has published an article which is very much par for the course when reading about corporate wealth in 2012.  Corporations are currently sitting on historic* amounts of cash.  Some of this is being paid out to investors in the form of dividends.  Unfortunately, since most people invest in companies as a form of savings and not income, this money doesn't end up in circulation.

[* - I have no idea if this figure is historic, I think I heard this used at one point, though it may have been exaggerated or misremembered in my own mind.]

So what does this leave us with?  Governments spent, and are still spending, large sums of money in hopes to kick-start the economy. In my post on Government stimulus, I gave an example of how Government spending can mitigate downward economic trends and help recovery.  I have since learned that this can be somewhat compounded by the Keynesian concept of the multiplier.  When the Government injects cash into an economy by way of spending on public works, the workers now have money which is spent on goods and services, mostly locally.  Those secondary beneficiaries of Government spending are then free to spend more, creating tertiary beneficiaries of the stimulus, and so on.  Keynes [or rather, his protege Kahn, I think], originally estimated that in Great Britain, at the height of the Great Depression, each dollar of government spending would represent two in circulation because increased monetary circulation.

So corporations have benefitted from government stimuli, and are reaping in large amounts of cash.  Now, normally one might assume that the corporations could then invest that money in hiring new employees, who then have money to spend.  This is the way to recovery, and the current reality may be the reason the global economy is still sluggish.

Having just recently graduated, I can see the effects of this corporate stinginess first hand.  I know both people with what I would regard as a more general skill-set [Arts majors who are then qualified to work in almost any business environment], and those with very specialized skill-sets [STEM jobs, Science, Technology, Engineering, Math].  These people, all of them, are capable of generating vast amounts of wealth with their expertise.  This may be through their unique skill sets, their dedication [evidenced by a Bachelor's degree] and work ethic, or all of the above.

So where are these potential wealth generators?  I know, and have heard of, advanced degree holders working at Denny's and Lululemon.  I know a receptionist.  I know several people who are unemployed outright.  I know others who have retreated back into graduate school in order to earn a paycheque [and it's a trend, see this comic]:
As an aside, this is a really excellent comic strip.

When I see this happen, I see an under-utilization of our nation's resources.  These people are ready, willing, and able to do more.  These people are capable of generating new wealth for the private sector. These people can balance troubled government budgets with increased personal and corporate tax revenue.  By sitting on these vast piles of cash, corporations are causing the very uncertainty they are trying to protect themselves against.


P.S.  "Code Red" by Delhi 2 Dublin was an excellent song to listen to while writing that final paragraph.


  1. Like? More like love! I often wonder about even more school.

  2. IMHO, what's happening with the economy is a realignment in the wealth distribution between makers and servers:

    Not much is made in the developed world anymore. And this makes sense because costs are so much higher in the developed world.

    Over the past couple of decades, the western world has been able to handle this decline in makers by creating servers (that is, a service based economy of accountants, lawyers, finance, doctors etc) but like the term implies, a service based economy is there to serve. The servers are supposed to be serving the makers. The weird thing is that sometime over the last 100 years or so, the servers started to get paid a heck of a lot more than the makers, those who they were serving.

    As a small example, why do patent lawyers get paid 2-3 times more than scientists/engineers inventing the patents? Yes I know supply and demand, but really, why is the supply of scientists/engineers much greater than the supply of lawyers? And the supply/demand argument breaks down in some weird ways: Why do surgeons get paid so much when there is an OVERSUPPLY of surgeons?

    Having servants collect all the wealth obviously isn't right and the pain that we're going through right now is an adjustment that will see wealth equilibrate between the makers and the servers.

    This adjustment will happen locally and globally. Locally, those folk who make (and invent and create) will fare relatively better in the wealth adjustment than the servers. Globally, the same will happen.

    The real problem for the west is that as this process equilibrates globally, it will hurt everybody locally, even the makers who will be better off in the long term.

    What this also means though is that because we've shipped most of the makers out (but not all), much of the wealth in the western world will leave as the wealth is rightfully equilibrated.

    Unfortunately, I have a feeling that this will be a long process.

  3. Thank you for speaking highly of arts students. That never happens. Ever...especially by STEMs.

  4. Also, your captchas are really difficult...