Wednesday, July 11, 2012

Water and Money

Money is like water. It only has real power when it is in motion.

I grew up near the Mississippi River, but I also grew up near a swamp. The swamp just sits there and grows stale. The Mississippi River is constantly flowing with millions of gallons of water. One might wander where all that water comes from. It comes from a bunch of smaller rivers and streams, which are fed by rain water. And rain comes from clouds which come from the ocean evaporating. But the ocean is filled by rivers like the Mississippi. You’ve heard it all before. It is just one big cycle.

And so it is with money. Big corporations pay their workers, who go out and buy things from store owners, who buy things from big corporations. We use terms like trickle up economics and trickle down economics to address the question of whether money flows from companies to the people or from the people to the companies. Usually, we are asking the question of whether it would be better to give corporations money or to give individuals money, if our goal is to grow the economy. Maybe neither.

Imagine, if you will, that the economy is a garden hose with both end connected together. We don’t measure how much water is in the hose but how much water passes a certain spot in the hose. If we put a clamp on part of the hose, it isn’t just that section of the hose that has a reduction in flow, but the flow slows down for the whole system. To increase the flow, we have to remove the blockage.

In the economy, handing out money is not always the best solution. Instead, our focus should be on reducing the blockage that prevents the flow of money. Roads are a good example of this. If people are willing to spend money but it is difficult to get the product to the people then there is a blockage. Communication is another example. People won’t spend money if they aren’t aware of products to buy. And the confidence that more money will be available is another issue. If people aren’t sure that more money is available then they will put a clamp in place so they can hold back on the flow of money.