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In diagnosing the problems with the weak American economy, most Republican talking points center around the need to please the ever-so-important “job-creators” who make up the top 1% of the economy.  

They are overburdened. The regulations on their conduct need to be reduced. If you raise their marginal tax rates, they might decide not to work anymore. They might "go Galt."

The essential problem with this philosophy, and Republican efforts to fix the economy in general, is that it misunderstands how jobs are actually created. What good is it to make a product if no one can buy it? Individual entrepreneurs are at the mercy of the overall economy, which encompasses the actions and desires of every American, not just CEOs, small business-owners, and investors.

Bill O’Reilly employs people. The demand for a televised news show with a Republican slant and a colorful personality creates those jobs. O’Reilly might be better positioned to exploit that demand than Sean Hannity, but he can’t create that demand out of thin air. If he quit, Fox News would give his job to someone who might draw fewer viewers, but the jobs to film that show would still exist.

Or consider Steve Jobs, the most revered “job creator” of his generation. From the iPod to the Macintosh, the products his company sold satisfied Americans' desire for personalized MP3 players and computers. But if fewer consumers could afford his products, if he had to charge thousands of dollars for an iPad, it wouldn’t have mattered how innovative his designs were. Apple took advantage of a need in the marketplace. As the old saying goes, if the company didn’t exist, someone would have had to invent it.

The problem with the American economy isn’t a lack of people interested in creating jobs; it’s a lack of demand for those jobs to exist in the first place. That’s why Apple is sitting on cash reserves of nearly $76 billion; they don’t see any reason to expand, with or without Jobs, because overall consumer demand is so low.

When the housing bubble collapsed in 2008, Americans, and their banks, discovered they didn’t have as much wealth as they thought they did. The banks control the flow of money in the economy, so the U.S. government intervened to save them. But while the flow of money in the economy is important, the average American household is the economy, and the government did not do enough to help them.

Three years later, the banks are healthy, but the American economy is not. Americans have had to re-evaluate their level of personal consumption, lowering the overall amount of demand for goods and services in the country.

Fewer people can buy products, so fewer products need to be made, so fewer people need to be employed to produce those products, which means there are even fewer people who can afford to buy products in the first place. It’s a nasty cycle of deleveraging, which costs jobs and wipes out personal wealth throughout the economy.

As a result, investors are less eager to spend money. Banks don’t want to extend loans to companies with business plans that rely on consumers who don’t exist. In a telling metaphor for the state of the American economy in 2011, Proctor & Gamble’s best-selling soap products are the ones aimed at the richest and poorest consumers. America has gone from a country of JC Penney to a country of Neiman Marcuses and dollar stores.

Nervous investors would rather park their money in a safe 30-year U.S. government bond. That’s why the price of American treasury bonds is at an all-time low, even though this country’s long-term fiscal situation isn’t very heartening. At one point, there was a negative rate of return on those bonds, which essentially means that investors were paying the government to take money off their hands.

But governmental efforts to add more demand to the economy have been shelved because of fears of debt. The worry is, if we continually run huge structural deficits, investors will one day stop giving us money, leaving us in a fiscal crisis like the one Greece is facing now.

Yet the government could not run huge structural deficits if investors were not enabling them to do so by demanding to purchase so many U.S. treasuries. The long-term deficit is mostly a function of the rapid inflation in health-care spending; it’s a concern, but it’s a bit like focusing on the cholesterol levels of a patient who might not recover from open-heart surgery.

The housing bubble injected a lot of capital into the American economy and some level of deleveraging is inevitable. Yet, as the Great Depression proved, that process can have a lot of undesirable side-effects. That’s why governments try to intervene when the economy collapses and do what they can to make things better.

When Richard Nixon said that "we’re all Keynesians now," that’s what he meant. The most relevant debate about government spending to help the economy isn’t whether it should be done or not, it’s about which part of the economy that money should go to. With the $14 trillion the U.S. government spent to bail out the banks, they could have purchased every home mortgage in the country. It would not have been any fairer to help out speculators as it was to help out investment bankers, but it would have done far more good.

If the level of household debt in the U.S. were lower, personal consumption would rise and companies would start to expand and add jobs. At that point, it might start to matter whether job-creators feel their industries are too over-regulated. They need more Americans who can buy their products, not fewer regulations or lower tax rates.

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