by Rich Schiffer, Weichert Realtors
Many people have asked me about the current economic crisis, and what I think about the proposed $789B economic stimulus bill.
They have trouble understanding why things got so bad, so fast.
I have to admit to them that I have no answer - at least not one that will improve things as quickly as they declined. In fact the answer that I do have for them is not one that they typically want to hear: We caused the problem ourselves - essentially through a lack of awareness of the consequences of our actions.
The movie, "The Butterfly Effect" made many people aware of a complex concept that is part of Chaos Theory. Simply put - a seemingly innocent action can contribute to a spiral of cause and effect that can ultimately become catastrophic. The classic example is a butterfly flapping its wings in Sri Lanka in November leading to a Tornado in Oklahoma in February.
In applying that theory to open economy macroeconomics, and looking at the spiral of cause and effect, we can begin to grasp the severity of the crisis. Consider this:
How many people in total are employed in the construction of a home?
Factor in not only the construction workers and architects, but you must also consider all the workers that produce the materials that the contractor uses, the truck drivers that deliver the material to the job site, the gas station attendant that filled the delivery trucks fuel tanks, and the workers that built the trucks themselves. How many people does it take to make the nails which hold your roof on? How many workers were employed to produce the cut lumber that your walls are framed with? Now factor in the mine workers that dug the ore that the foundry workers used to make the steel and copper that was used in the construction. Don't forget the workers that made the power tools used at the construction site, the retail clerks and cashiers that sold them to the contractors. The heavy equipment was built by someone somewhere, with parts made by someone somewhere. All the people involved throughout this chain eat somewhere, so we have to also include the grocery store clerks, waitresses, cooks, dishwashers, and lunch-truck caterers who provided service to them. Then there are the farmers that produce the raw materials that go into our food, and the distributors that get it to market. Don't forget the auto-workers that built the vehicles that all these people drive to get to their respective places of business.
Economists and statisticians have estimated the number of people whose work goes into building a single home to be over 64,000. That number goes up almost exponentially when we consider all the people employed by the homeowner in the first year of ownership - furniture makers, carpet installers, appliance manufacturers, lawn-care workers, painters and the people that make those cute little garden gnomes.
Once we have a clearer picture of the vast interconnectedness of the economy, we can see that a slowdown in the housing market bleeds into many other industries. Businesses that were over-leveraged or under-capitalized were hit harder than they could bear, resulting in bankruptcies, layoffs corporate downsizing, and emergency bailouts.
The spiral of cause and effect then picks up a head of steam. The workers who are laid off, or have their hours cut are then forced to cut their personal spending. This further strains the businesses who had survived the initial slowdown. They then have to cut back on staffing to match the new decreased demand for their services. This then creates yet deeper economic shrinkage and we get plunged into Recession or even Depression. Without an intervention in this vicious cycle, any economic recovery would be a long-time coming.
Think of the current economy as if it was a person bleeding to death - the longer the bleeding continues, the harder it becomes for the body to function. The extremities stop functioning first as the body's systems try to maintain heart, lung and brain activity. Eventually, the body shuts down entirely. What is needed is intervention to stop the bleeding, and an introduction of new fluids to enable the body to recover.
This is the ultimate goal of the current $789B economic stimulus bill. Stop the bleeding (job loss) and introduce new fluids (money) to enable the body (the American Economy) to recover.
Whatever their politics, whatever their personal views of such massive government spending, most people will admit that a recovery is better than a continued accelerating downward spiral.
But as I said initially, we caused the problem ourselves. We can prevent a similar situation in the future if we heighten our awareness of the consequences of our actions, and take actions that will create a chain of cause and effect that acts as an uplifting force.
The end effect of the butterfly's beating wings does not have to be catastrophic. A positive spiral can similarly be put into motion,
Here are 5 things you can do to help start an economic recovery.
- Produce something others need.
- Buy something others produce.
- Hire someone to do the things you can't.
- Whenever possible, frequent local businesses.
- If you borrow, pay back what you owe.