When does the economy become unstable?

It all depends on how many people are creating wealth and how many are living off the wealth created by others

I have done nothing but study law, economics and finance since I retired twelve years ago, and wonder why so-called experts don’t see the economy in simpler terms. Basically, a portion of the population (the “working population” or “Workers”) create the goods we need to live - food and clothing, energy, housing, transportation, infrastructure, etc. (collectively “goods and services”). The rest of the population (the “supported population” lives on the distribution of those goods and services through a number of mechanisms:

1. Children in families supported by one or more working parents

2. Retired people who are no longer part of the working population but receive social security, pensions, health care, etc. taken from the working population, even if paid for by savings or pensions earned while working

3. Unemployed people who receive insurance, welfare, food stamps, etc. while not actively part of the working population

4. Disabled (including those not retired but requiring long term care people) who receive support which augments any savings or income they can earn through the work they are capable of performing

5. Government employees who are paid by government but produce nothing

6. Total consumption (“Consumption”) comprises that of the above groups and that of the working population who provide the goods and services making up Consumption (“Workers”).

7. Consumption by those not Workers is funded directly (pensions and other savings) and from taxes paid by Workers, a system of income distribution typical in Western democracies and fundamental to the orderly progress of our free societies. Taxes include income taxes, wealth taxes, value added taxes, royalties on resource companies, and all forms of revenue received by governments from the activities of Workers regardless of where those activities take place -manufacturing, resource extraction, government, health care, education, retail and all forms of commerce.

Economies are relatively stable when the money left to Workers is sufficient for them to both continue to create the necessary goods and services and defray the costs of their own consumption and the amounts received or spent for the benefit of others is equal to or less than Taxes.

Since income cannot be created out nothing it is tautalogical that income equals expenditures absent savings and borrowings. If governments borrow to increase benefits to non-Workers, Workers’ savings must increase or the loans must come from foreign sources.

Canada has a workforce comprising about 20 million people, about half the population. If all members of society had the same needs, Taxes would be 50%. Higher taxes implies those receiving support get more than Workers who created the goods and services they received.

This is an obvious oversimplification but it makes important demographic point. If the percentage of the population comprising Workers is much larger than the Consumption categories combined, the economy is stable, but if it is much less the demands of the Consumption cannot be met by Workers. Productivity does not alter the situation since the point is aggregate amounts, not relative amounts.

Marx solved this conundrum by saying that in a Communist society everyone contributed to their extent of their ability but received to the extent of their needs. In a Marxist society, the people creating the wealth have to be satisfied with a smaller share of the pie than those they are supporting if the demographics are not equal. This problem has led to unstable societies embracing Communism.

The world is heading towards a demographic problem. Population is both ageing and beginning to decline. Older people need more and produce less. Western democracies see the growing demographic gap and try to fill it with immigration, exporting their problem to other countries, mostly less well-developed countries, exacerbating income inequality worldwide. This may become unstable as well.

Equilibrium will only exist if Western democracies eschew growth in consumption that exceeds national income, that is, stops borrowing from future generations to buy votes from the current electorate. As John Maynard Keynes theorized, periods of deficit financing followed by periods of surpluses can smooth out wide swings in business cycles, but persistent borrwing to fund growth without any thought of how the burden of that debt will ultimately be satisfied is unstable.

Biden and Trudeau love to spend recklessly. Trump was just as bad. The temptation to use taxpayer money to fund “pork” to buy votes benefits those in office regardless of how much damage it does to others. Society in Western democracies will break down if this unstable situation is perpetuated, a choice left to the electorate. Vote Democrat or vote Liberal and you are voting for worse longer term outcomes unless these parties change their preferred policies.