Internal and External Economies, Simplified

My earlier post had drifted from pure economic comments, and so I think this might help. The concept seems important enough to justify a post that is limited to economics.

In a recession or a depression, a nation must invest. They do this by putting people to work and paying them; not bankers, but middle class people who lose jobs in a downturn. Those people will earn a living, build infrastructure, buy houses and cars and kitchen appliances and furniture and so much more. Every dollar paid in will come back in increased economic activity.

What you’re doing in this case is turning your economy ‘inward’. It works like this:

Modern developed economies have excess workers. Simply put, machines are more efficient and more productive than humans in many cases, and so they displace the human workers who once made our widgets. The only way to employ such when the economy is doing well is to employ them making goods for export or to service travelers, tourists or business people who bring in foreign money. This is the ‘external’ part of an economy that employs excess labor working for other nations in order to earn foreign credits. A tractor built in Ohio which is exported to China benefits both China and the USA.

In contrast, when an economy turns down, exports fall. Other nations generally follow whenever this happens to a major linked economy such as that of North America or Europe or China/Asia. People in such instances can’t afford to buy our exports. They retrench, repairing and reusing instead of buying new. This is where the ‘turn inward’ option becomes so important.

By investing in infrastructure, a government uses that ‘excess labor’ to build things that will make the nation stronger when the economic recovery finally happens. Things like the national highway system, or the system of water collection and storage that has supported the development of the American West (think Boulder, now Hoover, Dam), or the National Parks system. Things like the Rural Electrification Agency that strung power lines to isolated people across the South. Or the space program, or the information exchange system that has grown into the internet, or the research initiatives that will produce cars that can drive themselves (they can already park themselves better than most humans can) and possibly recharge from powered roadways. So much more.

Simplified: a robust, functioning economy that is growing at a rate of perhaps 3% annually can employ excess workers ‘externally’. When growth drops below that, unemployment rises and government should invest and thereby turn the economy ‘inward’ by funding the hiring of unemployed workers to address needs in the nation’s infrastructure.

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