Category Archives: Economics

Basis of Economics

In mathematics a basis is the minimum set of vectors needed to describe a space. Give me a ruler and I can use Up/Down, Left/Right and In/Out to describe any point in space. Add time elapsed and I can describe the world, and we often do. This happened at this address at this time. London, Whitechapel, late 1800s = Jack the Ripper.

Bill Clinton famously use the phrase “It is the Economy Stupid” for is first election. He was right in 1992, he is right today, he will be right twenty years from now. He is right in two ways, if you want to fix any problem having a good economy is essential, and we are very stupid when it comes to the economy. Good economies help you change: giving you money for change, giving people hope to change, giving opportunities  and jobs for change, reducing government expenses and obligations allowing focus on the future and changes.

So what does a good economy have? What is the basis or basic rules to have a good economy? It is not Keynesian, spending 1.6 trillion dollars on bailouts and stimulus did not create a healthy economy. It is not austerity, Europe’s economy is worse in some ways than ours. I see three basic rules that are part of an economy. Accepting these rules is essential. These rules exist whether or not you accept them. They are like gravity, they form a foundation. Good economies respect them, bad ones flaunt them at their peril. Here they are:

First: You must have a reasonable expectation to keep what you earn.

It you work 80 hours you should expect 80 hours of pay. Of course we don’t. Government takes 7.2% in payroll taxes, and the company pays 7.2% as well. That is money they cannot pay you because the government takes it, but perhaps it is reasonable. This is before Income Tax, Sales Tax, and Property Tax. What if the government tried to balance the budget by taxing? That would be a 25% increase in taxes at least.

Companies are also a problem. Remember that bailout? Those companies got an unreasonable expectation to keep what they earned. Risk is real. When the government says a company is too big to fail, they are saying they failed to regulate it. Government needs to let companies fail, or at least hold them accountable when they bail them out. GM and Chrysler were good examples. The first wad of cash was a bail out and did not work. They used up the cash in a few months and came back for more. The second wad of cash was part of bankruptcy. This time courts ordered changes, stockholders lost equity, the board of directors and the financing partner (the government) sacked the CEO and changes came.

It is not just Governments that make this mistake and take away this reasonable expectation to keep what you have earned. Circuit City wanted to save money and decided a layoff was in order. The executive staff thought “Let’s fire the top wage earners in the store, this way we lose 5% of our staff and get 10% saving!” Brilliant, but not, they should have fired themselves. They would have saved more money and kept the top 5% of the staff hired. Word got around fast, if you wanted employees who really knew electronics, phones, computers, and people, hire these guys who just got pink slips. Walmart, Target and Best Buy all did this and grew. Circuit City went out of business, destroying shareholder equity at the same time. Why mention this? An employee who is a top performer has a reasonable expectation to keep their job. Circuit City flaunted that expectation and it destroyed them. Imaging how many people those employees knew, what they said and what moral was like after the exodus.

Second: There is always competition.

Governments forget this. They say this is just unexpected consequences of good legislation. They say thing like, “No one could have expected that …” It is their job to expect this. For example, raise minimum wage and products made in America have a smaller margin of profit. Jobs making items can be sent to foreign countries. Sure you spend more on shipping to bring the items here, but you can make it up. You lose control of the workers in some ways and it is harder to manage. Quality may slip, but apparently it is more profitable in America to be cheap than good. Remember, we are not just competing with the next guy in the employment line; we are competing with the world.

Health care is mandated – great. Now if I am a big company my policy will be ‘Under 30 Hours per Week and Buy your Own Damn Benefits’. I get to pay less per hour too. Competition, not corporate greed is what is going on. If I have a small business that has 50 people and I now must comply with a complex and expensive law, I will lay someone off and drop below the limit.

Businesses also forget competition. They forget that the customer is making choices. When you outsource your call center how does that impact your business? Most look only at the savings and what shareholder attitude will be. Stock up, bonuses, CEO happy! But happy customers that can hear the Indian head bobble as they try to understand a heavy accent may go elsewhere, and often do.

They also forget that there is competition in locations. Moving production to Mexico sounds great, unless you find you have no control over your workers, plant, equipment and organized crime is shaking you down. Yes, it happens, I’ve seen it. One company I know moved the plant to Mexico because they feared US Immigration laws. They followed the law, but suspected many workers were really undocumented. The move was a disaster, unexpected expenses, officials who expected bribes, officials who applied ‘laws’ in unexpected and even illegal ways. Then the mob moved in a just took over. Shipments were suspended and the plant was selling product under a new competing name. Prices were then set by the “Union” which had never been organized or elected.

Mexico is not the only economically dysfunctional state. Many states are running on ‘Pirate Economics’.  When you see someone yelling that the One Percent should pay their fair share this is demand for pirate economics. Hitler started this way, he stole from Jews, communist, socialist and homosexuals. When he ran out of victims he expanded, Austria, Czechoslovakia, Poland, etc. They became experts in theft, the war in some ways was a competitive response of nations protecting themselves from a pernicious economic model.

Third: Economies work best when grass roots runs them, not top down.

This is counter initiative. We must remember that after the depression and World War II the world was largely a top down command and control model.  In 1968 the US government decided when refineries would shift from fuel oil production to gasoline production. Getting this decision wrong would be very inflationary. All aspects of the oil industry was heavily controlled by government, prices were often officially fixed, even in so called open market countries.  Deregulation solved this problem using market forces. Other problems were also solved by market forces, including fracking which has dramatically changed the energy picture in America. It was some innovative small businesses working on high risk processes for twenty years, not government policy or Big Energy that emerged to create a solution.

Airlines were regulated and subsidized. I flew to San Francisco when I was eleven with my sister. Round trip was about $600 if I recall. Two tickets were a tenth of an average household income. The last time I flew the round trip cost was well under $200. Three tickets is less than 1% the median family income today. Airfare is 10% of what it was when I was a child. Deregulation worked.

Phone service was a government granted monopoly. Breaking up ATT didn’t just drop prices it created new services: Cell phones and the Unix computer were pioneered in ATT labs. Small businesses created a boom using these technologies, not ATT. The internet grew out of digital phone lines, technologies that ATT created. Battery technologies, wireless, networks, pc’s and smart phones, all of the cool things we use to drive our cool economy have roots in ATT labs, but they did not make it fly. The break up did.

Ironically, medicine and health care insurance has become increasingly regulated in my lifetime, it has also become too expensive for many Americans. Our solution is more of the same regulation. I expect it will fail. Centralized economies fail: Communism failed horribly in every country that tried it. China is a communistic political system with a capitalistic economy. Socialism has lead Central and South America into a malaise that has lasted decades. By the year 2000 it was obvious to everyone Capitalism had won the economic wars, yet today we see a resurgence of Socialism and even Communism in some of our legislation. A far greater concern is not what is legislated, but what is regulated and how. Judges legislate from the bench and corrupt laws from within, Presidents use Executive Orders, and bureaucrats use policy and procedure to impose a Social Welfare vision of fairness that is rarely fair, often abusive and occasionally illegal.

Education is the other expense that is grossly outpacing inflation. Universities were once models of austerity. Now they are opulent temple to a secular god. I took classes in old Army barracks at the University of Utah, now those sites have multimillion dollar buildings there. Students graduate with debts that are higher than a mortgage are taking jobs that are half what they hoped for. I would say that Universities should be regulated and students protected from the predatory practices of the lenders, except they are. The first principle is violated, students are expecting a great education, and a great job to pay for the debt. The reality is they are not getting the promised rewards.

Universities are not the only problem in education.  Every new school is nicer and bigger, they have high ceilings, huge open spaces, glass walls and great views. I recall my grade school not having air conditioning. We struggle to pay teachers but find money through bonding for overpriced buildings. Yet, teachers have unions and every lawmaker wants to portray themselves as a friend of education. We are paying for these building with long term bonds. One day our bond rates will go up and needed infrastructure for roads, damns, power or sewer will have to wait while we pay down the principle on an overpriced school buildings. Maintenance cost can overwhelm a community paying for buildings that are expensive to heat, cool, clean and run while demographic change and taxes run short.

What can we do with these difficult problems? Health Care is easier than Education. Open markets and grass roots decisions can really help here. My company could put the same amount of money into an account and I could also put in my share. From that account I could buy insurance I need and pay my medical bills. Companies could be allowed to sell across state lines increasing completion. The problem is the person insured is never the customer. When I call my insurance company I am not the customer, my company is. They pay the bill. When I go to the doctor I am not the customer, the insurance company is, and they pay the bill. When the doctor orders a test I don’t care how much it cost, I’m not the customer, I don’t pay the bill. All of this increases cost.  This can be fixed with market systems. No one complains about car or home insurance, my state requires both for me. I can call an animated lizard at Gieco or a woman named Fran in white smock and get low prices in ten minutes. If it works for this kind on insurance it should work for health insurance.

Additionally the most expensive parts of our society are already covered, the old under Medicare and the poor under Medicaid. This should help keep prices low for those in the market. Would markets fix it? No, but they would slow expense growth to around that of inflation, not three or four times that rate.

Education is not an easy market fix, but local communities do a better job of controlling cost. A big state University will have much higher tuition and fees than a small community college. The small school often are better at teaching too. Unless you are aiming at graduate work you would be better served at the small school, yet we all love the big ones with big sports teams. Having students pay now instead of later would curb much of this excess and prevent the crippling student debt that hobbling our current economy. As communities we need to do a better job of limiting the growth of these institutions and hold them accountable. This is a regulatory, not a market response. The market is where the students go. When that changes, it will be too late for the big schools who are “Too Big to Fail.” How do we do this? By using better debt models for students we will improve our schools and help graduates throughout their lives. Limit debt and you limit the University’s ability to abuse student debt. They are forced to compete for the students and the money the students have.

In conclusion, this is not a simple formula of do this and fix that. It is a basis that explains problems and offers hope to improve the situation. Buy understanding these principles and applying them we can improve our economy and then use the revenue to build the shared systems, like schools, roads and sewers that serve us all. This is an attempt to take a big complex model and make it easier to understand.

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