TJP

Lack of Liquidity Affects Consumption in Central Cities

Byron A. Ellis

August 13, 2007

Increases in liquid assets tend to increase consumption, if the increases are in the possession of the poor. If the increase in liquid assets is distributed among the rich, the consumption function will not rise as much.

Often in central cities there is a scarcity of liquid assets in the possession of the poor. Therefore, disposable income and hence consumption is low, inhibiting the ability of central city residents to engage in meaningful commerce.

Lack of meaningful central city commerce affects technological progress within those enclaves, limiting opportunities for jobs and standard of living improvements. Additionally, lack of employment opportunities tends to increase crime and imprisonment rates.

However, the lack of employment opportunities for central city residents seldom makes news. Rather, it is the symptoms of the lack of employment opportunity that politicians attempt to solve through imprisonment of young central city residents. This dissonance between lack of opportunity and crime is baffling.

Last Friday, the Federal Reserve announced that it would pump as much money as needed into the U.S. financial system to help overcome the ill effects of the lack of housing consumption. As a result, the Fed pushed on Friday 38 billion of temporary reserve into the financial system and made similar moves the day before.

Similar credit problems have been rampant in central cities for years. Central city politicians need to emulate Fed actions in responding to the spreading credit crunch in the mortgage industry by increasing liquidity to central city residents. Otherwise, crime and imprisonment will continue to increase in central cities.

One way that central city leaders can ensure that increases in liquidity get to the targeted population is through subsidies that improve technical progress of central city residents. For instance subsidies for rehabilitating the stock of decaying central city housing could improve residents skills in plumbing, electrical, carpentry and other crafts needed in the housing industry. It will also increase community income and demand for goods and services.

Targeted subsidies by themselves, however, may not significantly increase central city consumption. Therefore, city leaders need to do more. They need to lure investment to central cities and this may involve a reexamination of the city’s tax structure. Furthermore, they need to ensure that the educational system is working for their constituents.