Thursday, December 26, 2013

Economics is a science filled with special words and acronyms.  To a trained economist they each have specific meanings, although they often feel licensed to misuse them.  In some cases, the words are used to describe a situation, while in others the same words are used to obscure or confuse a situation.  Using big words is not limited to economists, and misusing them certainly does not belong solely to that profession.

However, the guts of economics is actually pretty simple.  While you can argue the effects of monetary policy, or the value of austerity, the facts remain pretty simple.  With that in mind I'm going to discuss two of the most basic...perhaps even THE most basic...terms in economics.  And...I'm going to explain why they no longer mean what they have traditionally meant.

The two words are Supply and Demand.

In the simplest examples these two words, and the balance point between them, should represent how an economy functions.  Today, however, especially in the United States, that is no longer true.

Supply made simple

In simple terms, Supply simply means how much of something is available.  "I have a six week's supply of napkins."

In the marketplace, it typically relates to the amount you can sell during a period of time.  "We have a 5 day supply of milk."

Clearly supply can be affected by lots of things.  If the factory that makes your widget burns down the supply will dwindle until you can replace that production line.  If the weather creates a poor harvest, your normal supply, designed to last until the next harvest, may be inadequate.  If your widget is replaced by something better, you may end up with an over-supply.

Demand made simple

Demand is the polar opposite, and is expressed by how many people want your product and how much are they willing to buy.  However, that market is somewhat fickle.

For example, you can anticipate demand to be present at special times.  Selling fruit cake in the summer is pretty tough, even if it's really good fruitcake.  On the other hand, during the Holiday season at the end of the year demand is more robust.

Demand can be affected by other things too.  If word gets around that the chicken you're selling is contaminated, it's likely the demand will dry up, not because people no longer wish to eat chicken, but because they decide that they don't want to eat your chicken.

Demand also fluctuates due to market forces.  If you're selling widget 4.0 and your competitor introduces his Widget 5.0 that includes more features or a lower price, the demand for your product will likely drop.

The Relationship is the Key

For nearly forever, the relationship between supply and demand was straightforward, and the effect of those two elements upon price was pretty simple to understand.  Let's look at typewriters as an example.  NOTE: If you don't know what a typewriter is (or was) I can't really help you.  I was tempted to use sliderules, but that would be even more difficult to understand.

In theory, the whole thing works like this:

When there is an adequate and stable supply, and a relatively stable demand, prices will be stable.  The only real effect on prices will come at the local level...a store wants to have a sale and they pick your product to discount.

The other thing that will affect prices...in the long run...is your cost to manufacture the typewriter.  If your raw materials cost more, eventually that will have to be reflected in the product.  The same is true if you are granting your employees raises.  The effect of those things we call Inflation, but for the moment I'm going to just ignore that.

So...how does this relationship break down?

So, business is good.  You make typewriters.  Now and then you introduce a new model that looks sleek and shiny, and maybe you add a new feature.  The market responds, and perhaps over time you stop making the older models.  Your factory is humming and life is good.

However, down the street somebody else has discovered a way to hook an automatic typewriter to a computer, and he's selling printers.  This is a whole new product, and it's not clear what it's going to do to typewriter sales.  Over time it becomes clear.  As dot-matrix printers are improved to make laser printers companies begin to decide that they no longer need typewriters.  This new "printer thingy" can do it all, and they can cut down their labor force because they don't need so many typists.  Demand for your typewriters is falling.

Fast forward a few years and we discover that the only place you can buy a typewriter is at Goodwill.  The theory of Supply and Demand worked.  When the Demand dried up, the Supply was similarly effected.  Now you don't make typewriters any more, you've shifted to making really expensive coffee makers and you've been able to create demand.

But...things are different now.  Here's how.

In the old (pure) system, supply was based upon demand, and demand was largely based upon workers having enough money to buy what you wanted to sell.  That's no longer true.

The difference is that Making Money is more important than either Supply or Demand.

Let's say I'm making widgets.  There's a stable demand.  I make good money at the current price.  There are no competitive widgets on the horizon, so Life is Good.  I can go to my stockholders and they are happy.  I get a Big Salary and a Really Big Bonus.

Since I want to keep that going, I can start to ignore Supply and Demand.  Let's say I make a new widget...widget 6.0.  It's really cool, with a bunch of new features and a really snazzy marketing pitch.  I've priced it high enough to make some Really Good Money on each one.

Now, demand ramps up.  In the past that would mean I would increase my work-force and maybe even build a new factory.  But doing those things costs me money.  That means less for me, even though it's a long term investment in the company.  I only care about short term.  I want the next quarter to look good, and I don't want to explain that earnings are down a little because we chose to expand production.  Stockholders don't care about that.  In short, demand doesn't drive me to supply.

So, I'm looking at the situation by simply asking "What makes the most money for me right now?"  Adding employees costs money.  Even if they add to production I'd still have to train them.  I could run the factory with a second or third shift, but that costs money too.  I could pay overtime, but that's an added expense.

So, since everything would decrease my bottom line (in the short term) I don't want to do that.  I'm left with only a few options.

First, I can push my employees to be more productive.  Run the assembly line a little faster.  Since unemployment is high and jobs are hard to find they'll put up with that for a while.

Second, I can stop giving raises.  Well, not to everybody, but at least I can freeze the wages of the production workers.  They'll grumble, but they're too weak to do anything about it.  I don't really care too much about them anyway.    Heck, I could increase their co-pay for medical insurance and blame it on the government.  That would save more money for me!

Third, I can raise prices a little.  Just a small nudge.  Maybe I'll raise them $10 but I'll throw in a spiffy widget case that only costs me $2.  High demand will just make my product seem even better, and if you have to wait for the next shipment that won't stop you from buying it.

As long as I make more money all the rest of that stuff doesn't matter.


So...Supply and Demand are no longer a pure link, and the most important element in any such conversation is "what's in it for me" which means MONEY!  Don't think the 1% doesn't think that way...because it's the only thing that matters to them.

Thursday, December 5, 2013

It's called Representative Government for a reason

This idea is something I've advocated for a while.  I don't claim it's unique to me, and someone else may well have proposed it long ago, although I've not heard about anyone doing so.  It would solve a number of problems, and perhaps even point the way to our collective future.

First, just a little background:

The Congress of the United States is composed of two bodies...the Senate and the House of Representatives.  It is sometimes said that those exist because the English government, which many colonists knew, had a House of Commons and a House of Lords.  Assuming that has at least an element of truth it might explain why terms in the Senate are longer than those of the House.  It might also explain why there are two restrictions on function included in the Constitution.  Only the Senate is allowed to approve treaties, albeit by a 2/3 majority, and only the Senate is allowed or required to confirm Presidential appointments...both of which were things thought of as being "Lordly" level duties.  Perhaps as a trade off, only the House can initiate revenue bills.

In any case, that's not the complete reasoning behind the structure.  As Federalism was being hammered out, the smaller States wanted to be equal, and in the Senate they are.  However, the big States felt that based upon population they should have more representation, thus the proportional distribution of House seats.  It may or may not be a perfect system, but it makes some sense and it can work when properly implemented.

Now, however, the whole system is screwed up.  The cost of running for election is so high that few common people could ever do it, and it takes raising huge sums of money.  That, in turn, requires two things.

First, a candidate must effectively quit working at whatever job he/she has to become a full-time candidate/fund raiser to run for office.  Obviously that cuts down the field significantly.  Given that the 2014 races are already in full swing, it's pretty easy to see that the ordinary candidate must take at least a full year off from a regular job, and few could ever afford that.  The result is that the pool of candidates is often trimmed to the rich, and they do not have a corner on intelligence or good ideas.  In fact, I would argue they have no idea how the rest of the people actually live...and recent comments have tended to support that notion.

Second, to raise money candidates accept donations from lobbyists and others with a strong agenda.  Most of this money comes from the rich and powerful, and that money completely distorts the idea of Representative Government.  House and Senate seats are openly for sale, and the so-called 1% can effectively buy them.  Heck, I'm surprised Wall Street hasn't found a way to make money by doing that.  Maybe there will be House Futures traded soon, and short selling a Senate seat in a swing state could be a big investment.

So, how do we remove the distorting influence of money in politics?  Actually, it's easier than you might think, and it would pass Constitutional muster.

A candidate for Federal Office can only accept campaign donations from people eligible to vote for that office.

There it is, plain and simple.

Now, for some details.  Let's say you live in Oregon.  You could contribute to candidates for your House district, for anyone running for one of Oregon's Senate seats, and for the President.  That's it.  Even if you have money to burn, you can't contribute to somebody running in Arizona or Maine or Maryland.  Why should you?  They don't represent you, they represent their own districts and states...at least they're supposed to.  It's true they might have great ideas, but that's not the point.

Without outside money, they answer to no one but the people who elect them, and that is the way it ought to be.  They should be considering legislation based upon "is this the best thing for my constituents" not "what is best for the Wall Street people who support my campaign."

Now, someone is going to object, saying that the big money will just be funneled through local donors.  Nope, there's an easy fix for that too.

Let's say somebody on Wall Street wants to give money to a candidate in Oregon.  Since they don't live in the state or that district, they can't.  So, they give money to "Bill" and he then contributes.  Sounds simple.  However, under this proposal, Bill must declare that money as income...and he must pay income taxes on it.  Also, the candidate must report the donation.

So...Bill, who makes $50,000 per year in his job is suddenly going to pay taxes on that plus the $350,000 that some bank gave him to pass through.  Bill's not going to like that.  Also, someone is going to be looking at the donor list and ask the obvious question:  "Where did Bill get that kind of money to donate?"  Bill's going to end up in court, explaining where the money came from, facing some sort of "money laundering" charge, and the Wall Street folks are going to be in similar trouble.

A couple of other subtle details that cover other situations.

Notice carefully the wording of the proposal.  It says "PEOPLE."  That means only People, not corporations and not other groups like PAC's or unions.  It means the candidate is running to represent the People.  It doesn't matter if the company operates within the state or district, they're still not allowed to donate.  It doesn't matter if the union is comprised solely of people who live in the district or state, they're not allowed to donate as a group.  They are, however, free to donate as individuals.  The candidate can represent them.  The candidate should not be expected to represent the Union or PAC.

Now, one last observation.  The proposal says "people eligible to vote.  You don't have to be a registered voter, nor do you have to vote in the election in question.  I suppose we could also specify what happens with people who live in the district or state but aren't eligible to vote...namely undocumented immigrants or possibly convicted felons who have lost voting privileges.  Personally I'm almost inclined to simply ignore those folks because they generally aren't a huge influence in the first place...but if somebody wanted to include that provision that's fine with me.

In short, this would do two things:

It would take money out of politics, mean the cost of elections would plummet and common folks with a nice supply of common sense might be able to run for office again, and

It would remove the power of money from elections, preventing the rich from buying the Congress they want.

In the end, I think it would bring us much closer to the intent of the Constitution...that we have a government "of the people, by the people, and for the people."  What we have right now certainly isn't.

Monday, December 2, 2013

Economics for Challenged People

Economics is generally considered a Social Science.  That means that like Political Science it attempts to identify rationale thoughts and ideas which, because they involve people, must automatically include irrational actors.  While various economic schools of thoughts have mathematical models of what should happen, or what might happen, or what could happen, there are always stray situations that cause prediction errors.

However, like many other fields of human endeavor, there are players in this game that make predictions based upon questionable data and then cling to those predictions even after years of having been proven wrong.  Economists attempt to predict the future...or explain the present...using examples from the past, and it often seems that the past was somehow different....just enough to matter.

However, some people in positions of power, continue to believe that things that have never happened before will suddenly happen now, apparently because they would like them to happen.  So, let's look at a couple of ideas and see why they are fundamentally flawed.

The first thing we need to understand is that a government, and I'm speaking of the Federal Government, is not the same as a household or business.  Because people know the "rules" for their household they often attempt to apply them to the government, and it just doesn't work.

A household has a set amount of income.  It may vary from month to month, and it might even change dramatically as a wage earner gets a new job or loses a job, but it is a set amount.  They cannot conjure additional money, so they have what they have and can only supplement that by borrowing.

Borrowing is not necessarily a Bad Thing.  Borrowing makes it possible to purchase a home or perhaps an automobile that would otherwise be impossible.  However, borrowing is not without danger.  You are expected to pay back the borrowed amount plus some interest, and there are penalties if you don't.

The rules for the Federal Government are different.  The income (Revenue) is variable and can fluctuate wildly.  The overall state of the economy has a huge effect, and the Government has only limited ways to affect that.

The most direct control is through the establishment of tax rates, and clearly those are a political issue.  There is an element of Science involved, but politics will trump science every time in this discussion.  For example, history has demonstrated multiple times that our economy has operated well when tax rates on the rich were high, much higher than today.  That may seem counter-intuitive, but it's true.

In any case, the point I really want to discuss is something else, so for the moment I'll just leave that where it is and look at the most fundamental question.

In Bad Times government revenue falls.  Since the whole economy is faltering people don't buy as much, more people are unemployed, and therefore tax revenue falls.  As a result, the government is spending more than it takes in.

There are always two schools of thought about how to fix this.  The options are simple:


  • Cut spending to match the lower revenue available
  • Borrow to continue spending at the current level, or even expand spending to support recovery

This seems simple, especially if you're working with the household model.  If a wage earner loses their job they immediately cut all unnecessary spending.  No more eating out, no movies, no vacation, and such.  That's the household model.

However, the Government model works differently.

Let's suppose you like the first option.  It is certainly true the Government can cut spending, and probably should regardless.  However, the impacts are not as clear cut.

When the Government cuts spending it means that less product is being purchased and the Government has fewer employees.  While the costs for those things go down, so does the tax Revenue.  Every employee who was laid off is no longer paying taxes...because they have no income.  So...cutting spending also means cutting Revenue.  In addition, whatever products the government was buying supported more jobs, and those people will quickly be laid off also, compounding the effect.

That doesn't happen in the household model.  You have the same income, albeit smaller, regardless of how much spending you cut.

Now, not only does cutting spending have that revenue effect, it also, ironically, increases spending!  All those people who aren't working are now going to be showing up for unemployment benefits, food stamps, and perhaps even "welfare."  The Government is now paying more to keep people unemployed...but getting nothing for it.

So...when you cut some money from government spending, you don't realize all that cut.  You increase your other expenses and decrease your revenue.  The unemployment you created also impacts the entire economy meaning companies that make consumer goods are seeing softer demand and are less likely to hire new people or maintain current production levels.  Cutting government spending has a multiplier effect that ripples through the entire economy.

Okay, if cutting spending seems bad, it's easy to think that increasing spending would be worse.  The government is borrowing to spend money it does not have, and that can't possibly be good, right?

The answer is Yes...and No.  I'm going to over-simply a little, but the idea should remain clear.

First, borrowing is going to go up.  That's true.  For the moment we'll park that idea...but I promise to return to it.

Now, if spending is increased here's what happens.  The government gets "something."  During the Great Depression, unemployed people were put to work building public works projects.  Today the easiest place to have a big gain is in "infrastructure"...which means doing the maintenance we've put off since forever.  Replacing faulting and failing bridges, improving road surfaces, rebuilding crumbling buildings, and similar things are projects that put people back to work AND yield a tangible result.  We could also restore some funding for education and return more teachers to the classrooms.


All those people who are now working not only have money to spend...which helps the overall economy...but they're also paying taxes!  That means a portion of what the government is spending is coming back in revenue.  That same multiplier effect works here too, with people who now have jobs eating in restaurants, attending movies, and spending on consumer goods.  Other people get to keep their jobs and maybe some additional folks are hired, taking them off of unemployment and allowing them to pay taxes too!

So...things get better.  More people are working, more people are paying taxes, and the economy operates closer to capacity.  Life is better.

Now...what about that borrowing?

The time to pay down the accumulated debt is when you have a surplus, not when you're broke.  In 2000, the Federal Government actually was operating with a surplus.  The economy was stable and we were actually paying down the debt.  It wasn't growing, it was shrinking!

Since that time things have changed.  While the changes are many, complicated and interrelated, there are three things that stand out as the major issues.  Again, in no particular order:


  • The banking system collapsed, primarily due to risky business practices that were not regulated
  • We entered into two wars without bothering to provide money to pay for them
  • We cut the tax rates, especially for the rich

In short, we decided to collect less Revenue at the exact same time we decided to spend more, carefully keeping the war costs out of the budget so they wouldn't show what was really happening.

Like it or not, those are the FACTS.

Now, when you hear someone say the solution to the problem is to cut governmental spending, consider the truth about how that impacts the current situation.