Money Drives the Economy

I heard a news report last week proudly announce, “The economy improved last week fueled by consumer spending.” Consumer spending, or lack thereof may be an indicator of economic strength, but it doesn’t drive. It doesn’t fuel the economy.

Military bases weren’t always welcome in some communities. When signs begin to appear saying, “Dogs and soldiers keep off the grass,” the Army would frequently pay their troops in two dollar bills. This flood of two dollar currency was supposed to demonstrate how vital the base was to the local economy. It was estimated that the bills would pass through seven hands as they made their way from the gas station to the grocery store, barber shop, etc., until they finally found their way out of town. They were consumed as they were used to purchase new equipment or to restock store shelves. It wasn’t, however, the passing around of the two dollar bills that fueled the local economy. It was the influx of cash. For the community to thrive, the money that leaves town must be matched by the money that comes in. The analogy is true of America today.

If we are to continue our national shopping spree, we must match the money that comes in to the money going out. Money coming in doesn’t necessarily have to be foreign. It is possible to add money into circulation by using our national resources. Farming, fishing, and mining doesn’t require money to flow out of our community. Not only can we feed our families, we can provide the materials required by our industries. When we buy goods and services from other countries, however, wealth flows out of our economy into the economy of other nations. We have had a negative international trade balance every year for the past 43 years! The money leaving the country is not being matched by money coming in.

When I listen to the news on almost any given day, they bemoan the impact of tariffs on the American consumer. I read an article recently about an American manufacturer who was feeling the hurt of the President’s tariff war. The company had a factory in China and had to pay duties to bring their finished goods into the US. The story went on to say that these companies couldn't make their products at home because of the cost of labor. The American consumer was portrayed as the victim because they shouldn’t be forced to pay any more than they absolutely had to. Thus, the company would probably relocate to somewhere else in Asia.

When I lived in Japan, rice and fresh produce were labeled with countries of origin. Japanese products demanded two or three times the price of foreign grown products. Japanese national pride is alive and well. What happened to the “American Made” label? Made in the USA needs to be more than the name of an old country and western song. It should be an anthem of national pride.

President Trump may be wrong about a lot of things, but he is right about the dangers of trade imbalance. We cannot continue to focus exclusively on the consumer. We need to focus on the strength of our economy. As more money flows out, our standard of living slowly declines. We need long term rather than short term thinking.

(Frank Watson is a retired Air Force Colonel and a long time resident of Eastern Washington. He has been a free lance columnist for over 18 years.)