Category Archives: Economics

Burns and Allen – 05/09/2020

Get your daily news Vaudeville style with George and Gracie.

Gracie:  Great economic news this month.

George: What are you talking about, Gracie.  Unemployment spiked to 14.7%, the worst since the great depression.

Gracie: Yea but wages are up 4.7% over last month.

George:  But Gracie, average wages went up because so many low wage workers lost their jobs.  They’re not making any money now.

Gracie: Yea but they’ll be making so much more when they go back to work.

George:  Ugh…. Say goodnight Gracie.

Gracie: Goodnight Gracie

THE WISDOM OF SUNCH

Here’s a whimsical taIe I wrote some time ago to teach my grandchildren that the real value in society comes not from money but from people helping people.  They were a little young at the time so I set it aside for a while.  Now they are teenagers wondering how the coronavirus will impact their future.  This is a story of the resilience of people facing an economic firestorm.  By learning how to pull the right economic levers, the people of Tangia recovered the power that lies within each of us, the power of people helping people.  By sharing this story with your children, my hope is that it will inspire them to use that power and to believe we can make the new normal better than before.

It was an impossible fantasy because a financial loss hit every citizen at the same time.  When I wrote this, I never dreamed these conditions would ever be so closely replicated in the real world.   But we now see it with Coronavirus.

The Wisdom of Sunch

Once on a planet far, far away and long, long ago, there was a civilization much like our own.  A great nation emerged on planet’s lone continent.  This all ended when a sudden cataclysmic event struck in the center of this giant land mass, causing it to sink beneath the sea.   All that was left were two small islands, thousands of miles apart.  Survivors on the larger Island known as Porgia, recovered to populate the island with some 5,000 inhabitants; but our story begins several thousands of years after the cataclysm on the smaller Tangia, home to a mere 2,000 souls.

Cranic is a shoemaker who is teaching his son Sunch his trade as his father had done for him.  His wife and daughter prepare the meals and tend to household matters – much as it would come to be in the far distant future on a planet called Earth during its Dark Ages.  There were no schools. There was nothing more to learn than how to live and get by the way their ancestors had always done or so they thought.  There was no need to study history because as far as anyone could remember it had always been the same.  They knew nothing of the great continent that once was – nothing of the island of Porgia and distant cousins living there.  Only traces of the technology from the distant past remained.

Sunch’s ancestral line had preserved the skill of turning leather into footware just as the blacksmith across the way had learned how to form the nails Cranic used to bind the soles.  The occasional plague kept the population in check.  It never varied by more than 100.  The significance of this is an economy that never changed.  Every citizen carried a leather pouch filled with gold coins.  No one knew where they came from or as Cranic explained it to Sunch, “They must have always been here.” 

The coins had a faint silhouette of a human head on one side, but Sunch couldn’t have known the detail worn away with the years.  It was a tradition among Tangians to make sure at the end of every day that each pouch contained a full quota of ten gold coins.  There were always just enough to go around.  It’s a good thing too because the arts of mining gold and minting coins had been lost for millennia.

Every day Sunch would go to the butcher to buy meat for the table and hides for the shop. He would stop by the market for fresh vegetables, the chemist for tanning oil and the blacksmith for tools and nails.  He would return home with an empty pouch which Cranic would fill with the day’s receipts for shoes.  Somehow it always came out even.  With an unchanging economy, prices had long ago settled into a delicate balance that held steady ever since.  Accounting was not an issue.  There wasn’t even a word for it because everybody knew it would work out just right at the end of the day.  There was no greed in Tangia.  Why would there be?

They had no Congress because there were no big decisions to be made. They had no military because they had no enemies.  They had no police because there had never been a theft.  After all, having more than ten coins would be just extra weight to carry around.  In Tangia, everyone had just what they needed with no extra to go to waste.

One day Sunch went down to the fish market on the beach to find everyone looking out to sea.  They were watching what appeared to be a giant white bed sheet rising slowly out of the water.  The crowd grew as a huge boat began to appear beneath the sheets.  This boat was nothing like the hollowed log canoes or rafts used by the local fishermen.  And as it neared, the immensity of the boat became clearer and it appeared to come from the “deep.”  The deep was a zone beyond even the view from atop Mount Rumble.  No Tangian dared to go there for fear of falling off the edge.  Rumor has it that some fishermen had ventured into the deep never to return.

The boat stopped in the harbor, the sheets curled up and a man threw something into the sea with a splash.  Soon a few of the strangers paddled ashore in a small dinghy where a brave few of the Tangians greeted them.  They came bearing gifts, colored stones and objects such as no Tangian had ever seen before.  They asked the crowd to go home and gather everyone together in the morning. 

When they returned in the morning one of the strangers, the one in the three-cornered hat who appeared to be in charge began to speak.  He announced they had come to collect taxes, one gold coin from every citizen.  The crowd murmured while some vocally protested and declared they wouldn’t pay.  The leader turned and spoke to one of his men.  The man then raised the smooth stick he had been holding.  Sunch recalled that a farmer had found a similar stick buried in his field, but it wasn’t shiny like this one.  The leader raised his hand and the man then pointed the stick at a seagull flying overhear and there was a loud bang such as the Tangians had never before heard.  The seagull plummeted to the ground.  The leader explained that’s what’s in store for anyone who doesn’t pay taxes.

The Tangians complied and watched until the sheets disappeared into the deep.  The next day Sunch started on his daily rounds, but his pouch was empty when he reached the blacksmith shop.  When he told the blacksmith about the problem, the blacksmith suggested a revolutionary idea, “Raise your prices so you will have enough when you come back tomorrow.”  But we need the nails so we may have shoes to sell.” The blacksmith said, “Everybody needs to meet in my shop tonight.” 

So all the merchants gathered at the blacksmith shop that evening.  With no schooling in math, they all thought the blacksmith had a good idea and unanimously agreed to raise their prices.  Of course, the next day things didn’t go so well.  Sunch’s pouch was empty before he got to the chemist’s shop.  Despondent, he returned home with food, but no supplies for making shoes.  Cranic consoled his son saying, “That’s okay because few of our regular customers showed up to buy shoes today.”  That meant he had enough shoes left over for tomorrow.  The whole family was supportive, but they all knew they were in trouble. 

Sunch went into the woods to think.  He thought and thought.  He thought raising the prices only made things worse.  Leaving prices where they were didn’t work either because no one had enough gold coins to buy what they needed every day.  If raising prices made things worse, maybe lowering prices would make things better.  So Sunch called for another meeting at the blacksmith shop.

“Everybody needs to agree,” Sunch explained. “Otherwise this plan will never work.”  The blacksmith, the leather smith, the clothier and the chemist quickly agreed because they too had emptied their pouches.  But the farmers, the fishermen and the butcher refused to go along.  They never had it so good – their pouches were overflowing with gold coins.  People still needed food so they were willing to pay the higher prices.

A dejected Sunch retreated again into the woods.  How could he convince the farmers, the fishermen and the butcher to give up this windfall?  What would become of the tradesmen who would soon be unable to buy even food?  What good is it for some people to collect all that gold if there’s no place to spend it?  “That’s it!” he thought, and called for another meeting.

This time he explained how the farmers, the fishermen and the butcher would soon have all the gold coins, while the tradesmen would have none to feed their families or to make the goods needed.  No blacksmith to make the plows for the farmers, the hooks for the fishermen or the knives for the butcher.  There would be no more saddles for the farmers, no more canoes or oars for the fishermen and no more clothing or shoes for growing children.  Gold coins would be worthless when there was nothing to spend them on.

Sunch’s argument must have been a good one because everyone agreed to go with the lower prices.  In fact, they went a step further and redistributed all the gold coins so that everyone had exactly nine coins in their pouches.  With that their community returned to normal and every citizen realized that nothing of value had been taken from them after all.  In fact, they were better off because they were all just a little bit smarter.  And so they all lived happily ever after.

That seems a good place to end a story, but I have to tell you the rest because it didn’t work out so well for the island of Porgia.  The Porgian pirates returned home with 2,000 gold coins.  Of course, they were just fishermen when they started their journey, but they became pirates when they saw how easy it would be to take the gold from the Tangians.  They divided the booty between the crew who all went on a spending spree the moment they returned home.  The Porgians were a more advanced society, and their economy was more complex.  The increased spending sent prices through the roof, sending their economy into a tailspin from which it never recovered.  The Porgians never figured it out.

The moral of this story is all value in any society comes from its people, like potential energy stored in each one of us begging to be released.  Economics has no meaning without people or more aptly, without our labor.  The point is when we come out on the other side of this coronavirus crisis, we will still have the same value locked up inside of every one of us begging to be released.  Call it labor, call it GDP, or call it money in motion, we have to find a way to get it moving again lest it grind to a halt.

What Sunch taught us is that money or gold is just a place marker, a universal IOU that keeps track of our good deeds.  It’s mobile in both time and space; but perhaps from time to time, it needs to be recalibrated.  When it gets recalibrated, all our metrics get shifted. 

The Tangians of course, had no concept of metrics – like gross domestic product (GDP).  To them, their economy seemed constant.  With a little help, it was the same after the pirate raid as before.  Had they measured GDP (in gold coins), they would have seen that it had gone down by 10% because they were spending 10% fewer coins per day.  This decrease in GDP may have concerned and confused them.  It may have lead them to make mistakes, in turn causing a downward spiral in the economy as happened with the Porgians who did rely on GDP metrics.  We see they were all buying the same amount of goods and services for less gold than before.  This upward revaluation of money or gold is what saved their economy.

Now I don’t imagine that we’d have much luck today getting everyone to agree to divvy up the money.  Fortunately there are other ways in a complex economy to redistribute wealth.  Our response to the coronavirus crisis is to put money in the hands of those who are likely to spend it, increasing demand.  In accounting terms, we put money on one side of the ledger without putting labor on the other side.  This would mean the ledger doesn’t balance.  The rational is that increased demand as we emerge from the crisis, will raise prices, attracting investment and creating jobs.  In other words, we expect to balance the ledger as people fill these jobs, go back to work, and spend the money. 

But where did the money come from?  Didn’t the government just print new money?  In effect, yes they did, but it didn’t come without a price tag.  So who paid the price?  To answer this, you have to think of money as shares of the economy – like pieces of a pie that add up to the whole.  When we come out of this crisis, the wealthy “investor” class will still be holding most of the shares while the much larger “consumer” class will have little or none left to spend. 

Giving everyone a fixed amount of $2,000 wouldn’t change the size of the whole pie:  it just cuts the pie into more pieces – smaller pieces.  Unlike the Tangian solution inflating the value of gold coins, gifting money to everyone simply devalues the dollar making prices got up.  So anyone holding a lot of dollars will see their share of the pie shrink.  Like the crisis in Tangia, redistributing wealth to those who are likely to spend it is the crucial factor.  Whether we inflate or deflate our currency doesn’t matter.  This massive redistribution of wealth to the consumer class is the right move.  I know you will hear otherwise because it won’t feel much like a boon to the average consumer. 

During the Great Depression of the 1930s the world was slow to find this solution.  Bread lines and soup lines served a humanitarian role, but did nothing to spur discretionary spending (money spent by consumers on things other than necessary things such as food, clothes, and fuel).  Eventually infrastructure projects like the Hoover Dam and the Tennessee Valley Authority (TVA) followed by WWII were able to accelerate spending producing a boom in the late forties and the fifties.  Interestingly neither the projects nor the war resulted in any consumer products for us to spend money on.  It was full employment and fair wages that created the demand for consumer goods. 

Eisenhower’s interstate projects in the fifties and sixties extended the boom.  Since then our economic profile has been dominated by lobbyists for big business.  The prevailing theory is that only the sale of consumer products bringing profits to investors that matters.  At the same time businesses invest in ways to replace labor forces through cheaper advance technology, as they should.  Greater efficiency benefits us all.  The problem is it starves the consumer class through low employment or low wages.  This reduces demand for the very products they want to sell.  This in turn demands more low-cost technology to replace more of the labor force.  The cycle continues. 

Individually these companies are doing everything right (microeconomics).  What they don’t do (and in fact they can’t do unless every business in the country agrees) is finance the infrastructure needed to make all business and the economy as a whole run more efficiently (macroeconomics). 

“Everybody needs to agree” Sunch explained “otherwise this plan will never work.” 

Tangia had no central government to make these types of decisions so everybody had to agree.  We not only have a central government but we have lessons from our own history to show us how.  If we do this right this crisis could lead us to the next infrastructure boom. 

Since the early 1960s big business has been cast in the role of the bad guys exploiting low-wage workers.  The poor are criticized for not working hard enough and claiming benefits they don’t deserve.  There is little justification for either criticism because the system is rigged.  And it’s rigged against both the rich and the poor. 

Imagine your company manufactures a product for retail sales.  When your warehouse is full you lay off workers until there’s room again for more product. The same thing is happening to other companies across the country.  Laid off workers stop buying product because they don’t have the money or they have lost confidence in the economy.  Companies and workers would both benefit if there were a way to put more money in the hands of workers without overflowing the warehouses.

Giving out money to consumers eventually just gets offset by higher prices.  Instead we want to give out jobs that do not produce immediate consumable goods.  That might include the military which provides long term security.  We already have that so let’s look instead to infrastructure to streamline transportation, communication and energy.  Like the Hoover Dam, TVA and interstate highways, these projects benefit everyone and we will reap the benefits for decades to come.  Let’s look to green solutions to head off global warming, the next great crisis. 

While we must morn the toll of coronavirus, we must also find a way forward.  Why not solve this economic crisis by solving the next one?  The extra income will raise the standard of living for the consumer class and raise profits for the investor class. 

As for the “happily ever after” part, that depends on you.

“USE IT OR LOSE IT” ECONOMIC RECOVERY

Spend it quick

I’m not an economist, but even I can see it all boils down to one thing.  The only thing of true value is labor.  Without labor nothing happens.  The way out is to create jobs.  During the Great Depression under FDR it was jobs to build infrastructure like the Hoover Dam and the Tennessee Valley Authority (TVA).  If you watched “Walton’s Mountain” you saw how in West Virginia a system of localized labor exchange emerged.  Neither of these solutions were a “quick fix”, so recovery drug on slowly.

Today we’re talking about immediate cash infusions, direct cash payments to individuals and cash to businesses to continue paying employees while they are laid off or idle.  Corporations might use cash to buy back stock or pay dividends.  Prudent individuals will hoard as much of this cash as they can, preparing for the worst.  Neither of these solutions contributes to GDP.  Without labor there is no output and only output and jobs will provide the traction needed to pull us out of recession.

It seems to me these are not the right solutions, but they are close to the right solutions.  Suppose instead of doling out cash (which probably means cash cards anyway), we divided it into biweekly coupons.  It’s still money, it’s still on a cash card but it expires after the two weeks and is lost if you fail to spend it.  You can’t hoard it, you have to spend it. 

Spending it produces demand and demand inspires hiring and hiring produces legitimate income.  Nothing gives us the confidence to spend more than a reliable and “continuing” flow of income we get from a job.  Receiving a single cash payment does and should make us cautious; make it last as long as you can.  With a job you only need to know it will last to the next payday.  Consumers need to be forced to spend it. This becomes all the more important as business are coming back on line.

We can provide an option for those who don’t need it and don’t want to spend it.  Use it to buy government bonds that cannot be cashed out for five years.  You can’t complain folks; it’s a gift.  The government could use this for badly needed infrastructure projects meaning more hiring.

Economics is not just about money, it’s about money in motion. ed

Is an Unfavorable Balance of Trade Really Unfavorable?

You probably think an “unfavorable balance of trade” is a bad thing.  But would you feel the same way if it were called a “favorable balance of goods and services.”

The definition of “unfavorable balance of trade” is when the value of imports exceeds the value of exports meaning we receive more goods and services (real value) than we give.  Of course that also means we pay more money (virtual value) to other countries than we receive.  Many people worry that this as an unsustainable and temporary advantage.  Seen as a continuous drain of cash from the American economy, many of my conservative friends compare this to their household budgets and what happens when they consistently spend more than their income.  This analogy seems to make sense; it just doesn’t match the facts.  The American economy has seen tremendous growth since WWII and we have never once seen a favorable balance of trade in that period.  By that theory, after a seventy-year “drain of wealth”, we should be dead broke.  The largest trade deficits have occurred since the year 2,000 yet the nation’s wealth has more than doubled in that same period.  Whether you personally realized this growth probably depends on your income bracket.  But the fact remains we are not seeing a drain of wealth to other countries even as wealth is redistributed to the top here at home.   Continue reading

My letter to Joni Ernst – “Put insurance back in the American Health Care Act”

June 14, 2017

 

Senator Joni Ernst

111 Russell Senate Office Building

Washington, DC 20510

 

Re: American Health Care Act – let’s get it right

Honorable Joni Ernst,

I became a registered Republican in 1966 because I believe private enterprise can solve most any problem and the only role for the government is to give us a fair playing field conducive to the goal.  There has been little else the party has to offer to keep me in the fold.  I am now confronted with a new generation of Republicans who have lost the faith.  They believe they have a duty to rig the playing field to generate profit for profit’s sake, while ignoring the goal altogether.  Profit should be the reward for solving the problem (which the AHCA doesn’t) and forgetting this only erodes the cornerstones of capitalism. Continue reading

How Not to Fix Obamacare: Part 4

They should have known how a kamikaze mission must end.

In my September 26, 2013 letter to the editor I characterized the Republican attack on the ACA or Obamacare as a “kamikaze mission” because of course the fate of the pilot is the same whether or not he succeeds in blowing up Obamacare.  But Republicans have exceeded my wildest expectations!  Whatever happens with today’s vote many political careers are going down in flames. While Obamacare has substantially reduced the number of uninsured, it has had little effect on the overall cost of healthcare at around 18% of GDP, which is expected to rise with the aging baby-boomer population. 

The fact is that healthcare costs in the U.S. have risen far faster than inflation over the last fifty years (not just since Obamacare) while other wealthy nations provide the comparable or better health care at half the cost.  Of 17 high-income countries studied by the National Institutes of Health in 2013, the United States had the highest or near-highest prevalence of obesity, car accidents, infant mortality, heart and lung disease, sexually transmitted infections, adolescent pregnancies, injuries, and homicides. On average, a U.S. male can be expected to live almost four fewer years than those in the top-ranked country.  A 2014 survey of the healthcare systems of 11 developed countries found the US healthcare system to be the most expensive and worst-performing in terms of health access, efficiency, and equity.  The only conclusions we can draw from this is up to half of cost of health care in the U.S. is a result of waste and somebody’s getting richer at our expense.  And from the number of wrong-headed ideas I’m hearing out of Washington, Congress remains oblivious to the back-door deals creating this waste. Continue reading

The Surprising Role Independent Voters Can Play in Changing the Course of American Politics

Independent voters have no say in selecting candidates.  It doesn’t have to be this way!

 In my previous post,” What Really Explains Polarized Elections?” we discussed other voting methods both in practice and in theory including one I called the “bad apple sort.”  You can think of this a going through the apple basket throwing out the worst apple until only the prize apple remains.   

Now if you’re an independent voter, you may feel the two major parties already sorted through their respective baskets, handed you the worst from each basket and asked you to choose. 

Continue reading

What Really Explains Polarized Elections?

It has been said that the 2016 election gave us the worst pair of presidential candidates the two major parties could have found.  Whether or not that’s true, all the mudslinging certainly made them seem this way.  Beginning with the primaries every candidate’s strategy is to fire up his base and to hell with the rest of us.

We tend to blame social media and fake news stories for the polarization and lack of civility, but I think we are overlooking the obvious culprit, our voting method.

Continue reading

How Not to Fix Obamacare: Part 3

You picked the wrong insurance plan.  No, I picked the wrong Congress!

 On Sunday HHS chief Tom Price said, “I firmly believe that nobody will be worse off financially (under the GOP’s health-care replacement bill).”  We’re getting used to listening to what this administration says only to learn later that wasn’t what they really meant, so let’s figure out what he meant.  As an economic conservative and long-time Republican I find fewer and fewer things I have in common with the party, but trying to duck responsibility for their own actions makes the top of my list.  We know Price didn’t really mean what he said.  It must be obvious even to him that if you choose not to buy insurance and then suffer serious medical problems you will be financially worse off.  When this doesn’t work out he won’t be able to blame the Democrats.  He needs someone else to blame so he’s setting it up to blame you for picking the wrong plan.  What he really meant was; 

Nobody will be worse off financially,… if they picked the right plan.

Continue reading

Is an Unfavorable Balance of Trade Really Unfavorable?

Are “unfavorable” and “trade deficit” just words economists use to describe what they are measuring or should we heed the negative connotation attached to these words?

Certainly President Trump thinks an unfavorable balance of trade is a bad thing.  You probably do too.  But what if we called it “favorable balance of goods and services” instead?  Would you still feel the same way?  Continue reading