Originally Posted by whell
How are folks spending more money? That makes no sense.
In your scenario you've created a "fixed class" who have money to buy only essentials. A number of folks in that newly created class used to buy more than essentials, even if they did it on shakey credit. Now that their income is fixed and they have no opportunity to earn more, they won't even be able to get shakey credit. Step one to a shrinking economy.
Since you've removed buyers from the marketplace of anything more than "essentials", businesses that manufacture, sell, make parts for, make accessories for, provide services for, etc., non-essential goods and services find themselves chasing after fewer buyers. Supply and demand: price for non-essentials starts to fall, businesses that can't compete lay off workers or shut down. Step two to a shrinking economy.
Finding fewer job opportunities in the businesses that manufacture, sell, make parts for, make accessories for, provide services for, etc., non-essential goods and services, you've created additional supply of workers. Supply and demand: an abundance of labor drives down the cost of labor since more people are competing for few jobs. Step three to a shrinking economy.
Some of those workers will find jobs in businesses that manufacture essentials, albeit at lower wages, or the same wage with few opportunities to see their incomes rise. Step 4 to a shrinking economy.
And yes, some of those workers will make the decision that its easier to get by than beat their heads against the wall in the job market, and opt for the "fixed class". Step 5 to a shrinking economy.
Finally, fewer productive workers supporting those in the fixed class, and a eventually the shrinking money supply and shrinking tax base will force the gov't to raise taxes - whether on individuals or business - to support the fixed class. At this point, not only do we have Step 6 to a shrinking economy, but since we're pulling additional capital out of the productive economy for tax, return to Step One. This is called an economic death spiral.
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