Does the economy work like a bathtub?

If the goal is to grow the economy what is our measure or metric unit? You cannot reach out and touch the economy. You cannot point to the economy so you cannot count it. But when we talk about growing the economy, we are talking about growing our national output, our economic pie, our gross domestic product (GDP). What is the gross domestic product? in words? What is it? It is the sum measured in the national currency of all the spending that we do, buying newly produced goods and services in each country. So, you cannot say that we need to stop spending to grow the economy. This is an oxymoron. How well an economy is performing is measured by how much money is being spent by each country in comparison to how much it is bringing in. The only way to grow the economy is to increase spending, there is no other way to do it. It is not a theory. It is not an opinion.It is a fact.

So, if you want a growing economy, you must increase spending. No two ways about it. If you think of an economy, like a bathtub, you imagine, somewhere in the tub is a line. And it is marked potential GDP or full employment, that is what that line represents. Now if the goal is to run the most efficient economy, you can get the most out of your labour and your capital to reach your full potential. You want to get that water level right up to the full employment line. Anything below that is just inefficient and wasteful. Anything above that risks, inflation, risks, trying to use too many resources more than you have capacity for. So, the trick to running a healthy economy is not more complicated than recognising that you have got a faucet and you have got a drain. And there are leakages, things that take water out of the bathtub. That bathtub is basically the GDP. Okay, so what are these leakages that take water out of the tub and move us away from the goal? One is saving. every dollar that we save and do not spend that cannot be captured by some business trying to sell its output cannot become part of its sales revenue. And ultimately part of its profit. Saving is a leakage. It goes out of the economy. Not pumping into the economy is a leakage. It basically takes water out of the tub. Every bit of money we spend buying goods and services that are produced somewhere else in the world is a leakage. Okay, it sounds severe, but this would be a big problem if all we had were leakages. We would have a huge problem. But we have many ways to put water into the bathtub. How do we do that?

One way is businesses that invest in the economy. When we say businesses invest, we do not mean share buybacks and that sort of stuff. We mean plant and equipment, software research and development businesses investing and adding to the GDP. So that puts water in the tub. Social Security, all that government stuff is spending into the economy and adding water into the tub. In addition, every time someone in some other part of the world buys our stuff, they put water in our bathtub. So, what you have are these two flows, right? You have water coming in and you got water going out. And the question is, which is bigger? Are the leakages bigger than the water going in because if they are the water level in the tub is going to go down. If you put the water in faster than you are taking it out, water level is going to go up. So, the question is, how do we figure out a way to calibrate these flows, so the water level hits the full employment mark, not below because we get unemployment and not above because we risk running inflation. You do not want the water overflowing either. That is the trick.

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