Imagine a community. It is a small community with one large employer who produces widgets. The widgets aren’t a necessity to life; but are simply a convenience item to the consumers who buy them. A large portion of the adults in the community work for this employer.
The employees have a union, health insurance and pensions. Many are homeowners and some of their kids are going to college. Many of the young adults choose to go to work for the employer after high school and a few leave the community. Many in this community have savings accounts and are able to afford the widgets they help make.
The employer makes a profit because the total costs of his supplies, equipment and labor are less than the price he receives. He does a brisk business in his community and in some of the surrounding communities which increases his profits. He decides to expand and open a production facility in a neighboring community. He takes out a loan from a local bank to expand his business.
The business owner realizes now that some of the surplus income that would have come to him as profit now has to go to the bank in loan payments. As he tries to increase his profits to the time period before he assumed his loan, he finds another supplier for some his materials at a lower cost, but this is only temporary. Raising transportation costs start to encroach on his profit. He starts to spend money on politicians and activities to try to break the union. He is able to convince his employees that unions are not necessary to protect their rights as workers.
The employees now have health insurance and pensions, as well as new 401k plans. Their raises are fewer and lower since the union was dissolved. Most of them still own homes and many still have kids in college. Some of the kids stay and go to work in the community, but more kids are leaving the community now after high school. A slightly smaller number of widgets is now being sold in the community as wages start to stagnate slightly.
In the meantime, the second production facility has been built, and the employer sees increasing profit due to increased demand in surrounding communities; despite the fact that demand for widgets in his community has gone down slightly. He decides to expand a third time and takes out another loan. By this time his company has also gone public and is listed on the New York Stock Exchange. Because the company is now public, his company must show growth (an increase in profit) every quarter to ensure the continued increase of his stock price.
The machinery in the original production facility (in our little community) is beginning to age and needs to be replaced. The employer replaces the equipment at a significant cost which will cut into his profits and could impact the stock price. To compensate, he raise the cost of health insurance to employees by raising their contribution and selecting less comprehensive plans. The employer, along with other businesses, is spending even more money to influence politicians, elections and regulators.
Housing prices are rising and consumer credit is becoming more available. Financial institutions are creating exotic and complex products for their customers who are other financial institutions. Transactions between financial institutions are becoming more and more complex; institutions fail to indicate the extremely high risks associated with these products and with the transactions to their customers.
The employees still have health insurance, pensions and the 401k plans, although their health costs have risen. Many new homeowners are spending more of their discretionary income on mortgage payments because of the increase of housing prices. Widgets sales in the community and surrounding areas go up due to the availability of credit. Many kids are still in college, thanks to the increased availability of college loans. Very few kids now are choosing to stay in the community after high school.
The employer uses the pension fund to pay for expansion through the entire region to avoid assuming additional debt for expansion. Competing businesses are forced to close because they can no longer compete with pricing and volume; unemployment starts to rise. Increasing competition for jobs within the community causes wages to stagnate even more; as more people are forced to compete for fewer jobs at employers no longer need to use higher wages as an incentive to retain workers. To increase growth and profits, and to avoid having to pay back the pension fund, the employer discontinues the pension plan. The employer has also started to outsource production to Mexico and China where wages are cheap and labor laws are rarely enforced. Unemployment levels go up again as some of the work force of the community is permanently laid off. Due to the increase of unemployment, some of the smaller businesses in the community see a sharp decline in sales. Some of them will close their doors permanently from a lack of business. Wages continue to drop as more and more are forced to compete for fewer jobs.
The employees have health insurance and 401k plans. Health care costs are still rising. New home owners are continuing to spend more of their income on mortgage payments because housing values are still increasing. This is compounded by continuing unemployment in the regions that is keeping wages low. Widgets sales in the region decrease due to rising unemployment and most widgets are now bought using credit cards. Many kids are still in college, thanks to the increased availability of college loans. Fewer kids are choosing to stay in the community after high school.
The employer continues to outsource production overseas and spend even more money to influence politicians, elections and regulators. The government loosens regulations and passes legislation specifically designed to benefit large business.
Health insurance companies are now denying insurance to individuals with pre-existing conditions and some employers are not able to afford health insurance. Due to gutted regulations and lax regulatory oversight, the financial companies start a global economic melt-down through their exotic products and transactions causing the largest drop in the Dow Jones index since the Great Depression. The government spends billions of dollars bailing out the financial institutions who caused the meltdown to keep the credit markets open. The housing markets lose billions of dollars in value overnight due to the financial institutions and their exotic derivatives. Despite the government bailout, the credit markets still dry up and loans for individuals and small business owners become almost non-existent. Many individuals are becoming over-extended with their debt obligations. Other employers and small businesses in the region have started layoffs or have been forced to close due to another drop in consumer demand caused by the growing high unemployment rates.
The employees might have health insurance if they don’t have a pre-existing condition. Their 401k plans have lost 50% in value due to the financial meltdown. Many in the community have lost their homes to unemployment and due to the negligence and unethical actions of the mortgage and mortgage servicing companies; again from lax regulatory oversight. Some kids will drop out of college for financial reasons; their families need the economic support of having a child go to work; or because their families can no longer afford the costs associated with college. Others will stay in school racking up massive student loan debt in an economy with limited opportunities for graduates. Widget sales drop off sharply due to lack of consumer spending in all segments.
The employer has outsourced all but a few activities overseas and some of the jobs remaining in the U.S. will be cut because of the recession. The employer still gives money to influence politicians, elections and regulators in the U.S. and has started doing so in Mexico and China. The employer starts programs to gain efficiencies so that fewer employees will be required to do even more work. Due to the influence of money, government and regulators have been reluctant to take action against the financial institutions. To date, not one person has gone to jail for causing the largest economic meltdown since the Great Depression. The financial institutions continue to engage in the same activities that caused the meltdown.
There are only a few employees left in the community. Most families left the community, and the very elderly or the very poor were left behind. Some of the unemployed will find jobs, but most who do find jobs will be forced to accept lower wages and less benefits. Media reports talk of a jobless economic recovery. Consumer spending continues to stagnant as people struggle to pay off their debt. The demand for widgets in the community that once made them is now almost non-existent. The community is a shell of what it once was.
This is what capitalism is. This is what capitalism does.