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“Our downtown is disappearing; local businesses are struggling; local residents are shopping elsewhere; non-residents are earning incomes here and taking that money out of town; there is too much ‘leakage.’”
Sound familiar? Welcome to Whittier, Calif., where the leakage problem was the central issue in the 2006 city council election campaigns.
For the past years we have heard a constant drum-beat about “leakage,” the money earned in Los Alamos, which leaves Los Alamos. Supposedly this is problem number one.
Well, every town has this problem, because they are open economies. For the past few decades, communities have been trying to solve the problem by focusing on the consumer demand side of the economy, particularly because it would seem that is the source.
The emphasis has been on trying to increase sales of final goods and services, and there have been many strategies and policies implemented to accomplish this.
Essentially, all of these have boiled down to two basic approaches: “Build it and they will come” and “Build it and they won’t leave.” There is a matrix, a web, a Gordion Knot of elements here and the examples are as numerous and varied as the communities and policies that have pursued these approaches.
A complete description and exploration of the Gordion Knot would require a paper worthy of a doctoral candidate. Just as numerous are the examples of how the consumer driven policies have failed or are failing.
In point of fact, these policies could never have succeeded because they have been the result of looking through the wrong end of the wrong telescope.
Economic policies are creatures of government. Since government earns its money from taxes (which are, themselves, a source of “leakage” from the economy) the tendency is to assume that the amount of tax revenue generated for a given tax rate is indicative of the health of the economy being taxed.
Well, maybe, but probably not. There is some modicum of truth to this, but that truth is the source of the fallacy as well. Most policies live off of property taxes and sales taxes, both of which are taxes on consumption be it consumption of land or final goods and services.
These may tell you something of what is being spent, but not where the money is coming from. Income taxes are non-descriptive as well — they tell you the amount of earnings to individuals (personal income tax) and businesses (business income tax) as a measure of what is available for consumption but, again, they don’t tell you where the money being taxed is coming from.
Increasing consumption to increase taxes is like trying to build a superstructure on a dinghy. The dinghy will sink but you won’t know it has sunk until the superstructure starts to sink.
President Kennedy described fiscal policy as a tidal basin with boats in it: raise the level of the water and all boats rise equally. That may as be but raising the level of the water doesn’t change the size of the boats. And where is the water coming from? Where does the income come from for increased consumption? Where does the increased population come from to increase consumption?
I would strongly urge policy makers, and others interested in such matters, to turn their attention in a different direction. The essence of economic activity is Trade. In a closed economy this means trade within the economy; in an open economy it means trade between economic entities. If you have an open economy, then in what way does it make sense to operate as if you have a closed economy?
Doesn’t it make more sense to look at economic fundamentals of the open economy, for instance models of “foreign” trade? In this regard, perhaps the “leakage” from the Los Alamos economy is not the problem, it is the symptom — the symptom of a serious trade imbalance or, more to the point, a lack of actual trade entirely.
Fiscal policy (at all levels of government, not just locally to Los Alamos) has been emphasized Consumption and ignored Production.
Fortunately, there are a lot of good books on the following, and Mesa Library has them so: 1) What is the production possibilities frontier, how is it derived, how is it expanded, and how does this apply to Los Alamos? 2) What are the five factors of production? What is the factors market and how does this apply to Los Alamos? 3) What are the fundamentals of open economics?
•In the “Treatise on Taxes.” Sir William Petty, considered the “father” of fiscal policy, wrote that an economy which was more than 50 percent service oriented/based must fail. • Steve Jobs didn’t get where he is today by consuming Apple products; he got where he is by producing Apple products.