American Business—Wringing the Goose’s  Neck.

When one considers the macro business decisions that have been made in America over the past few decades, one has to wonder about the wisdom of the movers and shakers of our business community.

It is well known that the engine that drives the American economy is consumer buying. As a matter of fact, the Economist (April 23^rd-29^th 2005) writes that the “world’s economic growth now rests” on the American consumer. Yet the American business community, with the help of Republican national policy makers, continues to make it harder and harder for Americans to carry this burden.

The vast number of American consumers are the working people of America. Their consumption depends entirely on their wages. Yet the America Right, whose business interests are entirely dependent on this consumption, has traditionally advocated anti-labor policies. Tax revenues in states such as Texas which rely on sales taxes are always coming up short and will continue to as long as policy works against raising the income of working people. Legislatures, when faced with shortfalls, resort to raising rates. But that is counterproductive. The higher the rates, the less money working people have to buy things with. Not only is state revenue not significantly increased, businesses experience fewer sales. How anyone can call such policies pro-business is very difficult to understand.

But the recent revision of the nation’s bankruptcy law looks like a blunder on the part of our financial industry that may do in this economy which is already on shaky grounds. Again the Economist (op. cit.) writes that “the domestic economic news is beginning to point to an unhappy combination of lower growth and higher inflation,” and it cites figures on unemployment, retail sales, manufacturing production, and housing starts to support this claim.

But now think about this: Consumer debt currently totals $750 billion. Since minimum payments on credit cards is around two percent, $15 billion is taken out of consumer’s pockets every month. And we know that this has pushed many households to the brink.

The new bankruptcy law will push minimum payments to around four percent. That means thirty billion dollars of consumer income will be unavailable for consumption every month, and that adds up to a lot of products and services that are not going to be sold by American businesses.

Furthermore, when people understand the requirements of the new bankruptcy provisions and the higher price they are going to have to pay in bankruptcy, a good many of them are sure to reduce if not eliminate entirely purchasing on credit. The $750 billion in purchases made over the past few decades made a huge impact on the prosperity of the 1990s. What is likely to happen if this if this additional $15 billion is taken out of the economy monthly? What is certain, products and services will not be bought with it.

Anyone who thinks that consumer spending can continue to fuel this economy, and in turn fuel the world’s economy, is incredibly stupid. Anyone who does the arithmetic knows that it can’t possibly be so.