Circular Flow, Taxes and the Economy

For the circular flow of the economy to work efficiently, there needs to be an appropriate balance between capital and labor.

The disconnect between labor and the appropriate income for that labor is contributing to the weak economy today.

The irony of the current meltdown is that the layoffs are exacerbating the problems.

The Government bailouts of the banks and of main street America has not addressed the inefficiencies and the inequality of the appropriate income for labor.

Capital has a tendency to protect and insulate itself.

Labor gets compensated at the discretion of capital.

If capital does not efficiently compensate labor then the protectionism, inherent in capitalism, contributing to economic weakness, continues.

So how do we fix the problem?

First of all, there needs to be less politicization of our leaders.

For example, taxes should go up when the economy is doing well and when asset inflation takes place. A surplus from these taxes should go to form a rainy day fund. This fund should be balanced between equity and debt investments.

Taxes should go down when the economy weakens. The money for this should come from the investments in the rainy day fund.

Politicians have a tendency to get it backwards. They cut taxes to get elected and they raise taxes out of stress (as in the current environment). Their current policies are backwards from what it should be.