Wednesday, September 12, 2012

The Conservative Consumption Economy

The Conservative Consumption economy gives the consumers the financial means to consume so that the producers feel confident to produce. There are two principles under this economic model. The first one is the emphasis of consumption over production. The second one is the source of the money that allows consumption to happen.

Current major economic models have a bias on production. This is the "Field of Dreams" of economics - if you produce, people will buy it. This may be correct for the longest time when human and physical resources are scarce, but not any more. Nowadays the increase in productivity, the discovery of ever new resources and the ability to offshore makes production an easier task. Not only we can produce a lot, but  used-to-be-third-world countries like China, can also produce a lot. The problem ceases to be the production side. The problem now is to find enough consumers to consume all that production. When we cannot find these consumers, producers are wary to produce. They sit on their money instead of investing. They do not hire workers, or worst, lay them off. This makes consumers leery to spend -- and the vicious cycle reinforces itself. Now if we can find enough consumers, the cycle reverses and becomes virtuous. When more people buy, producers invest and hire to produce more. The emphasis on consumption to drive the economy is the first principle of the Conservative Consumption economic model.

In order to consumer, consumers must have the money. There are only two ways for a typical consumer to get money --- they earn it or they borrow it. (Let's not count inheritance, gambling gains, stealing, and other untypical means.) In past decades, consumers borrow a lot. This allows them to consume a lot, which translates to a booming economy, and validates the first principle of the Conservative Consumption model. Eventually the Pied Piper comes a calling, and consumers cannot borrow any more. This is the current doldrums state of our economy. Any plan to help the producers (via tax cuts or regulations) will not help. Producers, as a general group, have lots of money sitting idle. They only need consumers.

If we cannot let consumers borrow more, we need to let them keep more of their earning. We do not necessarily advocate consumers to earn more since that may be inflationary, but to keep more of what they earn. Come to think of it, you can only spend the money you have in your pocket. This is where the government steps in. Our current tax system favors the production side, with investment gains being taxed at a lower rate than earned income. We should make them balanced, or even favor the consumption side by lowering the income tax and raising the investment tax. This puts more money into consumers to spend. Since this is earned money and not borrowed money, the consumers are financially conservative. The focus on earned money instead of borrowed money to support the consumption is the second principle of the Conservative Consumption economic model.

We mentioned above one way to implement the second principle is to raise the capital gains tax so that it is at least the same as income tax. If we can lower the income tax, then as a whole, the government does not tax more -- it is just a tax re-balancing to meet the structural change of the economy where consumers are more in demand than producers. This is not a soak-the-rich scheme since we do not raise marginal tax rates. If somebody is successful and earn more, we should not penalize success by taxing more. This does not mean that the "rich" will not pay more. If somebody mostly earns via passive investments instead of active income, their tax on the capital tax gains will be more. At the extreme case, we may have progressive tiers of capital tax gains, like we currently have for income taxes. From the perception of a common man on the street, the raising of the production-side tax and lowering of the consumption-side tax solves the "fairness" issue where the "Buffetts" are taxed at lower tax rate then their "secretaries".

Another way to implement the second principle is for the government, not to step in, but to step out. Any money that the consumers earn is shared with the government. The bigger the government, the more it needs to take. This reduces the money that the consumers keep, and thus reduces the money the consumers can spend. Unless a government can earn its own money via a different mean (such as by nationalizing industries), it should minimizes itself in order to minimize its take.

Currently we debate about supply-side economics and government-spending economics. Both miss the point of the current economy, since they either emphasize the production side or take away the money available to consumers. What the economy needs help now is on the consumption side, not production; and not consumptions based on borrowed money, but consumption based on earned money. And this is the Conservative Consumption economic model.