06. May 2016 · Comments Off on Double Standards and an Argument Against Minimum Wage · Categories: Economics, Politics, Social/Culture · Tags:

While searching for arguments against minimum wage I found this article by Tim Worstall published by Forbes. It’s about 1100 words that essentially says one thing… that minimum wage is immoral. I gotta say, I was pretty disappointed in the explanation. I was expecting some creative interpretation of scripture or something but all he actually said was this…

“As I say, there’s nothing wrong with the basic position, that people should have enough to eat. But given that it is us, collectively, who are making this decision then it should again be us, collectively, who are willing to pay for our moral position.”

So he’s basically saying that if the American democracy demands a minimum wage for the American worker, the “moral” thing for the American democracy to do is pay it themselves. Do you see how ridiculous that is? No? Well, let’s apply this sense of morals to the concept of a supply-chain and see how much sense it makes… I added a diagram to try an make this clear as possible…


When a supplier up the chain increases the price of a component, he doesn’t offer to pay the difference just because he increased the price. The supplier is expecting the downstream consumer to either pay the price or find another supplier but according to Tim Worstall’s argument, this is immoral. There really is no reason why a democracy or a union that supplies labor should be subject to a different set of rules (other than to isolate the issue in rhetorical packing material that won’t break these eggshell arguments against minimum wage). If it’s immoral for an organization that provides labor, such as a union or democracy, to make such a demand without paying for it themselves then it’s also immoral for upstream suppliers to demand a price for their products and services without paying for it themselves. According to this moral perspective the suppliers should either buy their own products and give them to consumers for free or they should let consumers pay whatever they want for the supplies.

So why the double-standard? Or maybe I should be asking if they even realize it *is* a double-standard. I’ve had this discussion before and a typical response is to say that democracies and labor unions don’t provide labor… laborers do. Well, that’s like saying McDonald’s doesn’t serve hamburgers, their employees do. In other words, it’s a pointless distinction that only serves to reveal how shackled up our perceptions can be. The only reason why we don’t think of a democracy as a supplier of labor is that we aren’t accustomed to seeing it presented that way. That doesn’t mean it’s not true. Besides the discussion is about upstream polices that affect downstream cost, not the merits of individual workers. Again, let’s have a look at the picture.

As we can see a factory can decide the price of it’s own product based on the cost of production and related business. Likewise, a supplier can decide the price of it’s own product for the same reasons. A labor force also has associated costs, such as food, education and healthcare but the only entity in the picture that actually deals with all these things is our democracy. So, it makes sense that our democracy would advocate a fair price to cover the costs. That’s what minimum wage is.

28. February 2015 · Comments Off on Internet Access Now a Public Utility · Categories: Economics, Politics, Technology · Tags: , ,

The FCC yesterday made a giant decision. They agreed to reclassify broadband under Title II of the Federal Communications Act. In other words, Internet access is now a public utility. This regulation is a huge victory for advocates of net neutrality. I expect a lot of people won’t understand what this means other than the general understanding that another industry has just been put under government regulation. So before everyone reaches for their partisan pistols, let me just explain why it came to this.

The Internet Service Providers (companies that provide us with access to the Internet, such as Verizon, AT&T and Comcast) have been developing methods to tier their services where premium services would be available for higher paying customers. Such service would include faster access. So, what’s wrong with that? Well, let me state this a slightly different way. These tiered services were being developed on the basis of slowing down connections for standard customers to make more room for the premium customers on networks that are not otherwise improved.

I don’t have a problem with anyone spending money on ways to improve their Internet connections through their own equipment or even by investing in technical research and development of better compression techniques. But I do have a problem when the money is spent on the privilege to cut in line.

This is what net neutrality means… It’s another example of the push for equality… It’s the demand that Internet Service Providers keep things simple and just focus on providing Internet access to everyone, no special treatment, no judging, no schemes for squeezing money out of people, just simple and honest… Internet access.

It’s too bad it has to take the government to step in and insure things like net neutrality, but so far it appears to be the only way a democracy can extend the will of the people on a market that is tilted to the weight of the wealthy.

20. February 2015 · Comments Off on Government Spending · Categories: Economics, Politics · Tags: ,

This chart shows government spending from 2000 – 2015.  As far as I can tell, there are no tricks, no hidden or partial contexts, no percentage of GDP… Just straight up spending measured here in billions of U.S. dollars.

source: tradingeconomics.com

As you can see, there is a huge peak in 2010. This peak was in the headlines almost constantly and when it wasn’t you could still hear the hum of angry citizens fuming about government spending. Well, I just wanted to share this… Government spending appears to have been decreasing since then.

02. February 2015 · Comments Off on Why the National Debt was excluded from the 2015 State of the Union Address · Categories: Economics, Politics · Tags:

In January 2015, President Obama delivered his State of the Union address and during that speech he said that all economic indicators show that this country is better off now than it was when he took office. In the subsequent press conference a reporter asked Press Secretary Paul Earnest if Obama was including the national debt in the set of economic indicators, a question enforced by citing the 70% increase in the national debt since Obama took office.

Obama did say that all economic indicators suggest we are better off now than when he took office. Perhaps it was unfortunate that he didn’t actually explain his exclusion of the national debt as an economic indicator, but then again, he only had so much time to address the entire nation. He can’t spend all that time catering to the less-versed minds of people who don’t understand the exclusion and it makes sense to me that he would leave that task to the press conference.

I’m not that impressed by the way Paul Earnest responded to the question though. I think I would have been more prepared to answer that specific question. First, I would have started by giving the reporter a straight yes or no answer to his very simple question and THEN I would have explained the reason for it. Here’s what my response would have been along with a chart that I would have brought to the conference to make the response as clear as possible.

“No John, he did not include the national debt. He was referring to the economic indicators that reflect the performance of his administration which is after all the topic of his discussion at that point in his speech. The reason why the national debt is excluded from this set of indicators is that it does not necessarily reflect the performance of the current administration… it is instead, a running total of all obligations initiated by all administrations, past and present minus all payments made on those obligations. Now, I understand your point about the 70% increase on the President Obama’s “watch”, indeed when he took office, total debt stood at $10.6 trillion. Since then it has increased by almost $8 trillion, which is roughly 70%. At first glance, you might think the only way $8 trillion can be added to the debt is through additional spending, but it’s not. Roughly half of that $8 trillion comes from a deficit pattern that was set before 2008. In other words, when President Obama took office, he was handed a deficit created by government obligations that far exceeded government revenue. So even if we cut new spending to $0.00, that preexisting gap would continue to pile on debt and the only way to close that gap is to increase revenue by raising taxes or decrease the obligations initiated by the previous administration through a breech of contract. The other half of that $8 trillion does actually come from new spending, but that spending has dropped by two-thirds since 2008, as indicated in the current deficit.”

Now that took 211 words for me to explain… I can see why Obama decided to leave such explanations to the press secretary when so many Americans already do understand this.

12. February 2014 · Comments Off on Raising The Debt Limit · Categories: Economics, Politics · Tags:

To raise or not to raise. How is this even a question? For those of you who know how politics works, the answer is simple… anything that is put to a vote becomes a card in the game we call politics. “I’m not going to give you my vote unless you give *ME* something.” The reason why the question even becomes a card in the first place requires an understanding of a very simple concept. In a nutshell, it doesn’t matter how much debt you carry as long as you make your payments on time. If you don’t make your payments on time, you loose credibility.

Unfortunately, our government doesn’t have the cash to pay off what is due, so the idea is to borrow more money so they can – and since the government has already reached it’s self-appointed debt limit, they need to raise that limit first. This may sound insane, but  it’s really no different than what millions of Americans are doing when they use credit cards to pay their overdue bills. They are borrowing more money to avoid the immediate consequences of not paying what is due. And yes, it *is* insane, but I think most reasonable people will find that in general, it’s better to carry more debt than to default on payments. As long as you make your payments on time, you can carry an increased debt at least until you come up with a long term solution, which shouldn’t be hard to recognize… it’s called living within your means.

Of course for a non-profit government like ours, the only means available is tax revenue. So then, to live within it’s means, the government should spend no more than what it gets in taxes, right? So why can’t our government do that? Is it just spending too much money? Is it wasting money? Is there some corruption going on? These are the same questions a CFO in the private sector will ask of a company’s operations, which can be roughly equated to the obligations of a government. It’s not unusual to find waste, corruption or both in corporations as well as government, but since corporations are private affairs we tend to hear less about it. Another thing a CFO will look at is operating costs.

The operating cost of the government’s obligations are without a doubt escalating. And why wouldn’t it? The government still has to buy supplies and equipment from the market just like any corporation does – it still has to pay it’s workers, just like any corporation does. In fact government is just as affected by prices up the supply-chain as any corporation is. Then you factor in the the increasing number of customers, or in the case of the government, the increasing number of citizens. So naturally, the cost of a government’s obligations are going to escalate the same way the operating costs for a corporation does. So how does a corporation solve this problem? It seems the most common approach is to pass the cost to the customer through price hikes. Customers might be annoyed but at least the company stays balanced. The equivalent solution for a government of course is to raise taxes, but this isn’t what’s happening. In fact, while our population was getting more expensive to serve, the government has actually been cutting taxes and therefore reducing it’s means. So the only other sensible option then is to cut the operating budget to stay within the shrinking means of a tax cutting government, spending has to be cut accordingly and as we just saw, neither the Democrats nor the Republicans want to cut their spending programs. So now what?

Borrow, that’s what. If you’re operating costs exceed your revenue and you can’t change either, you borrow until you can find a way to either expand your revenue or reduce your costs.


23. January 2014 · Comments Off on Ten Core Beliefs of the Tea Party… And My Response to All of Them · Categories: Economics, Politics, Social/Culture · Tags:

There are some obvious things about the Tea Party such as their opposition to taxes and to Obama and their paranoia about socialism of all things. The discussions that I’ve had so far with actual Tea Party supporters however never get past the slogans. When I push for more depth they tend to get defensive. So, I turned to their web sites where I found the “Ten Core Beliefs of the Modern-Day Tea Party”. So now I am at least able to understand the official core beliefs of this movement. Here are my responses to each of them, starting with the preamble…

Preamble: The Tea Party Movement is an all-inclusive American grassroots movement with the belief that everyone is created equal and deserves an equal opportunity to thrive in these United States where they may “pursue life, liberty and happiness” as stated in the Declaration of Independence and guaranteed by the Constitution of the United States.

When you have millions of dollars funneling into the movement from the top 1% it’s hard to call it a grassroots movement, but otherwise it does seem to be organized on some level in a grassroots sort of way. The of the statement is nice… pretty much the same thing all the rest of the parties are saying.

OK, here’s the ten core beliefs…

1. Eliminate Excessive Taxes – Excessively high taxes are a burden for those exercising their personal liberty to work hard and prosper as afforded by the Constitution. A fiscally responsible government protects the freedom of its citizens to enjoy the fruits of their own labor without interference from a government that has exceeded its necessary size, scope and reach into the lives of its citizens.

So my first question is… How do we determine what excessive is? This isn’t a stupid question. If anyone in the Tea Party actually took the time to figure this out, they would probably realize quickly that it’s not such an easy question to answer, especially since every penny taken by the IRS is funding something that is viewed as critical to someone. As far as I can tell, determining what is “excessive” is basically the same thing as determining which Americans to cut off. I’ve heard a lot of opinions from various Americans about this and it’s usually a matter of targeting “someone else”. This works fine for the self-obsessed that think the common good means them. So much for “all-inclusive”.

2. Eliminate the National Debt – By implementing fiscally conservative policies at all levels of government, progress can be made toward eliminating the U.S. National Debt. Massive increases in the National Debt have created and continue to create a huge burden for the next generation of Americans, thus imperiling the country’s short-term and long-term economic health and prosperity.

I basically agree with this stance on the national debt. So do most Americans it seems. I’m not sure what they mean by fiscally conservative policies though. If they are referring to the fiscal policies of the GOP then they’re on the WRONG track. So far there have been two main types of spending polices… “Pay as you go”, which is typically what the Democrats adhere to. They spend a lot, so they tax a lot, which infuriates people. The other category is “Pay later”, which is typically what the Republicans go with, where they DON’T tax people… (yet). Instead, they borrow from the Fed and use the money to pay for their spending, which is just as much if not more than what the Democrats spend but this way, they don’t have to tax the people, so the spending isn’t noticed and the Republicans can win elections on their low-tax policy. The only drawback to this is a deficit which accumulates into a national debt.

So… on very basic level… How do the geniuses in the Tea Party expect to “eliminate” the national debt AND “excessive taxes? I can only think of one way… Cut spending down to where both is possible, but that introduces a whole new problem, the fact that government spending has become such an integral part of our economic system, both on the supply side (i.e., defense industry) and on the consumer side. To bring spending down to the level where we can pay off our national debt AND cut taxes would be slitting the throat of our economy. We can always look and see how well the austerity programs in Europe are going… Greece, Ireland… Yeah – cutting their government spending is working out REAL well for them 😉

3. Eliminate Deficit Spending – All deficit spending must be eliminated immediately. We insist that government representatives at all levels maintain a fiscally responsible budget and balance the books as would be expected of any American business.

Good idea. Thing is… we already DO expect government representatives at all levels to maintain a fiscally responsible budget and to balance the books. The Republicans expect this, the Democrats expect this, we ALL expect this. The problem is that the representatives don’t always do what their constituents expect. That certainly doesn’t make their fiscal irresponsibility a tenet of their party but it DOES prove that you have to do more than “expect” you’re representatives to behave.

What I find interesting is the reference to American business – as if we hold business to a higher standard. As if the private sector wasn’t already many times worse than the government when it comes to deficit spending and accumulated debt. Our national debt (created by government deficit spending) is currently at around $16 trillion. The way the Tea Party reacts you would think it’s the end of the world. But they seem oblivious to the fact that our private sector debt is at about $38 trillion. They also seem to have no idea that our national debt isn’t as bad now (100% of GDP) as it was at the end of WW2 (120% of GDP) and the fact that instead of freaking out about the debt, Democrats AND Republicans at that time calmly SPENT their way out of the debt by investing in our industries, which boosted productivity and created the boom that was the 1950’s.

4. Protect Free Markets – America’s free enterprise system allows businesses to thrive as they compete in the open marketplace and strive toward ever better services and products. Allowing free markets to prosper unfettered by government interference is what propelled this country to greatness with an enduring belief in the industriousness and innovations of the populace.

Protect free markets? Isn’t this an oxymoron? Isn’t protectionism the antithesis of a free market? Seriously, the elephant in the room is the fact that there is no such thing as a free market …and there never has been. What we have are markets that are all guided by rules and all these rules translate to market advantages for some and disadvantages for others. The common approach for the disadvantaged is to try and change or eliminate the rules and a common battle cry for their efforts is the free market. It’s an appeal to a broader ideal in an effort to pass off their personal ambitions, which they advertise as a valiant crusade toward freedom for all. One of the oldest tricks in the book.

This core belief is the single most critical issue I have with the Tea Party AND the Libertarians and here’s why…

1. I’ve been following the expansion of international trade agreements for the past 20 years and the resulting battlefront between international investors and sovereign governments. The international investors have taken the banner of “free markets” as their own in this battle, giving their victories names like the North American FREE Trade Agreement and the Greater Arab FREE Trade Agreement.

2. Every so-called “free trade” agreement is actually a set of rules and limitations that regulate the market in a way that favors the international investors and limits the ability of local governments to protect their local business communities.

3. I don’t actually have a problem with the benefits these agreements provide, my problem is with the consequential disadvantages to the people of compliant nations and the fact that they can no longer appeal to their own governments for protection.

This second issue is the reason why I don’t think supporters of the Tea Party really put much thought into this, because the free market movement as it currently exists is nothing less than a full frontal assault on their own 10th core belief.

5. Abide by the Constitution of the United States – The U.S. Constitution is the supreme law of the land and must be adhered to without exception at all levels of government. This includes the Bill of Rights and other Amendments to the U.S. Constitution and their provisions designed to protect states’ rights and individual liberties.

Again, how is this unique to the Tea Party? The Republicans, Democrats, Libertarians… they ALL support the U.S.Constitution. It’s the one thing this country has that unifies us all. Almost every government oath taken requires one to uphold and protect the Constitution. The disputes among citizens are never about whether or not we should abide by the Constitution… the disputes always arise from differing interpretations of the Constitution when applied to laws and actions. I’m not saying there is anything wrong with this belief and I’m glad to see it included but it certainly doesn’t set the Tea Party aside. All I can say here is welcome Tea Party to the same thing everyone else is saying.

6. Promote Civic Responsibility – Citizen involvement at the grassroots level allows the voice of the American people to be heard and directs the political behaviors of our representatives at both the local and national level so they, in turn, may be most effective in working to preserve the life, liberty and pursuit of happiness of this country’s citizens.

I agree with this one, I mean it *IS* basic democracy 101 folks. When I hear people say the U.S. is NOT a democracy, the only truth I see in their statement is that people aren’t involving themselves in the process and that’s a personal choice not the core belief of ANY political party in our system.

7. Reduce the Overall Size of Government – A bloated bureaucracy creates wasteful spending that plagues our government. Reducing the overall size, scope and reach of government at both local and national levels will help to eliminate inefficiencies that result in deficit spending which adds to our country’s debt.

OK, this is another one that I’m just going to call too simple minded to be any good to anyone. I have one word for you…  Ratios! Why on earth people can’t figure this one out is beyond me, but it’s not that complicated. To be represented you need a healthy ratio of representatives to citizens. How many parents do you hear screaming that there are too many teachers? How many times do you hear people saying there are too many police officers? In both cases people seem to be acutely aware that there needs to be a healthy ratio of teachers to students, police officers to residents. So why is this logic completely eliminated from our view on the size of government?

I suggest having a look at the web site for an organization called Thirty-Thousand.org I am not associated in anyway with this organization, but I do appreciate their insight on the matter and I think anyone who thinks reducing the size of government is an actual answer should consider their view. The objective of this organization is described on their web site as…

The primary purpose of Thirty-Thousand.org is to conduct research on, and increase awareness of, the degradation of representative democracy in the United States resulting from Congress’ longstanding practice of limiting the number of congressional districts despite the continuing growth in the nation’s population.

Here’s an interesting passage from their website, that may appeal to the conservatives out there who think we should return to a society as envisioned by our founding fathers…

The framers of the Constitution and the Bill of Rights intended that the total population of Congressional districts never exceed 50 to 60 thousand. Currently, the average population size of the districts is nearly 700,000 and, consequently, the principle of proportionally equitable representation has been abandoned.

They are referring to the original draft of the Bill of Rights which contained not 10 but 12 amendments. Only the last 10 amendments were ratified. The original first amendment is where this idea that the total population of Congressional districts should never exceed 50 to 60 thousand. That amendment was short one state on being ratified. For the skeptics here’s a way to see for yourself – (excepted from usgovinfo.about.com)

If you are fortunate enough to visit the Rotunda for the Charters of Freedom at the National Archives in Washington, DC, you can view the original government copy of the Bill of Rights as sent to the then 11 states for ratification in 1789. What might surprise you is that the original Bill of Rights contains 12 – not 10 — amendments.

I’m not necessarily saying that we should increase the size of government to match the population… in fact I am more inclined to suggest we break the union up into smaller governments. Bottom line here… we have a huge government because we have a huge population. Want a smaller government? Then here are your choices… accept less representation or consider the ratio.

8. Believe in the People – The American people, given their guaranteed freedoms, will thrive in a democratic, capitalist environment which allows individuals to strive toward ever greater achievements, innovations and the efficient production of needed and valued goods and services.

The Constitution stuck with basic universal principles; it did not specify religion, nor economic model. This eighth core belief however is very obviously promoting one economic model. Capitalism. I think capitalism is a viable economic option it excels in fast moving industries like consumer electronics and commodities but our system is a hybrid system with a fair amount of socialism baked in and there’s a reason for that. Over the years the American people have found areas where strict capitalism doesn’t necessarily offer people the best option, usually areas where compassion and human judgement serves better. Capitalism has no such compassion, no sense of judgement and and for most things like consumer products that’s fine but sometimes the best option for a human being is not a profitable one. The danger that I sense here is that there are business people out there that are pushing for a strictly capitalist system so that profits can be made even at the expense of human interest and the Tea Party has all the earmarks of a vehicle to make that happen.

9. Avoid the Pitfalls of Politics – American politics is burdened by big money from lobbyists and special interests with an undue influence on the peoples’ representatives. The Tea Party movement is seen as a threat to the entrenched political parties and thus is the continual target of smear campaigns and misrepresentation of its ideals. We choose not to respond to these attacks except to strongly and explicitly disavow any and all hate speech, any and all violence as well as insinuations of violence, and any and all extreme and fringe elements that bring discredit to the Tea Party Movement. We are a peaceful movement and respect other’s opinions and views even though they do not agree with our own. We stand by the Tea Party beliefs and goals and choose to focus our energies on ensuring that our government representatives do the same.

1. Ironic how a movement funded by big money from lobbyists is such a critic of big money from lobbyists.
2. I was going to say a lot more about this somewhat whiny tenet, but I think the underlying message is a good one – at least in principal, so I’ll leave it at that.

10. Maintain Local Independence – The strength and resilience of a grassroots movement is the ability of citizens at the local level to determine their own platforms, agendas and priorities free of an overriding central leadership. Exercising the clearly stated message of the Tea Party movement by its nature involves discourse about which policies and candidates best hold to our stated principles, and these various opinions should flourish and evolve at the local level.

The Anti-Federalist in me wants to high five the Tea Party for this tenet, but the realist in me can’t ignore the contradictions. I’ve already stated the conflict of interest between this core belief and the fourth core belief but I can’t stress it enough because while you’re protesting the overriding central leadership in the Federal government, you are bowing down to the overriding central leadership of the free-trade movement, which overrides the Federal government and is arguably the primary road to a one-world government.

So… in summary… I understand the frustrations of the Tea Party supporters. I also agree with what I think are the ultimate hopes and dreams of the Tea Party such as self-determination but I am not impressed with what I can only describe as a half-baked set of principals that only makes sense when you put the big money sponsors into the picture at which point it becomes clear (at least in my mind) that the Tea Party is a rhetorical and manipulative trick played on the frustrations and political ignorance of good people.


05. July 2012 · Comments Off on Newsmax Tries to Smear the ACA with Subjective Polls · Categories: Economics, Politics, Social/Culture · Tags:

Newsmax.com, a very busy propaganda machine, recently issued another “urgent” survey… Should Obamacare Be Repealed?. The poll consists of several “yes or no” questions one of which is this… “Should Congress restore $500 billion in Medicare benefits for seniors that the Obama plan cut?” The problem with this question is that the Obama plan doesn’t cut $500 billion in Medicare benefits. So, neither answer is appropriate; “Yes, Congress should restore the $500 billion that was never taken in the first place”, or “No, Congress should not restore the $500 billion that was never taken in the first place.”

There can only be two possible explanations for this giant lie, which I have yet to discern, either Newsmax is staffed with complete morons, or they are intentionally trying to mislead their readers. The question itself is based on a lie propagated by several conservative leaders including Mitt Romney, in which $500 billion in estimated cost savings achieved by the Affordable Care Act (ACA), (or “Obamacare” for those conservatives who refuse to utter the official name of the law) is intentionally misrepresented as a $500 cut in benefits. Perhaps the so-called fiscal conservatives who typically cut budgets to save money don’t actually understand the concept of saving money through cost-effective improvements?

Anyone can check any of the fact-checking sites available and they will see a full explanation for themselves. PolitiFact.com and the Washington Post just to list two.

ABC News explains that the lie stems from a memo written by Richard Foster, chief actuary of the Centers for Medicare and Medicaid Services (part of the U.S. Department of Health and Human Services) that claims the ACA will “cut Medicare by more than $500 billion” but the Centers for Medicare and Medicaid Services (CMS) also make it clear that spending on these programs will continue to increase. What the ignored context of Richard Fosters memo was making clear was that the provisions of the ACA will slow that growth down by an estimated $500 billion.

According to the CMS and the Kaiser Family Foundation that estimated $500 billion in savings will come from crackdowns on the insurance industry, specifically, over-payments and fraud, over the next ten years. So it’s misleading when Newsmax polls it’s readers, asking if they think $500 billion in Medicare cuts should be restored. In light of the truth, what that question is really asking is if we should overrule the ACA and let the insurance companies rip us off for another $500 billion.

22. November 2009 · Comments Off on Imperfect Systems · Categories: Economics, Politics · Tags: , ,

A fundamental basis of capitalism is that it’s balanced on the dollar which is naturally reconciled with basic numbers. But humanity is far more complicated and there is nothing natural about reducing it to numbers. Humanity requires judgment. So as long as capitalism drives everything to the ends, conflicts with humanity can only be expected.  Socialism, which is balanced on judgment, might seem like a far better idea but is plagued with the problem that people, though capable of judgment, often suck at it.

01. November 2008 · Comments Off on Intervention and the Swerving Economy · Categories: Economics, Politics · Tags: , , ,

Interesting op-ed in the Wall Street Journal last week (10/27/08) titled “The Age of Prosperity is Over” written by Arthur B. Laffer. CNN-Headline news mentioned it on one of their late morning shows but I only caught bits and pieces because the TV was in commercial evasion-mode. You know, when every three minutes the commercials come on and you mute the TV, get focused on something else and then suddenly notice the show is back. But I caught enough to get curious about why Laffer thought the Age of Prosperity is over. The title invokes such a drastic picture. So I ran down to the hotel lobby and picked up a copy of the paper and read it.

Laffer brings up some interesting points but what I got in the end was another plug for the free market as you might suspect just from his opening paragraphs where he says “Financial panics if left alone, rarely cause much damage to the real economy, output, employment or production” and from his closing paragraph where he says “Whenever people make decisions when they are panicked, the consequences are rarely pretty.” In other words, intervention is a bad idea.

In support of his later closing statement he reminds us of several examples of bad decisions made in the throes of economic panic but interestingly is entire editorial is void of any examples to support his opening claim. To me this reflects a one-sided point of view that I find typical among proponents of free market. After reading the article, I decided to take a shower and think the editorial over in my head. As I did I was reminded of a car accident I had a few years ago.

I was in the fast lane and a truck passed me along the right, pulled in front of me and then slammed his brakes on. I had little choice but to slam my brakes on too, but that wasn’t enough, I had to swerve to avoid crashing into his tail gate. Now the car I was driving was a rental, a Chevy Impala (which for those of you who don’t know drives like a boat). The combination of the panic caused by the truck in front of me and my unfamiliarity with the car I was driving resulted in my over steering, I probably swerved about five times, each time resulting in a wider arc requiring more drastic compensation, each time I over estimated and gradually I lost control entirely and smashed the car into the center divider, totaling the car, almost dislocating my shoulder and ripping a patch of skin off the back of my hand.

The point is that my panic and resulting over reactions on the I-77 that day is a perfect analogy to the panic driven decisions that Laffer was describing in his editorial. But my analogy also brings up another important consideration that Laffer’s one-sided perspective doesn’t acknowledge, that simply letting go of the steering wheel wouldn’t have helped me either. In fact anytime you drive your car, even when driving in a straight line in perfect conditions with your mind drifting off into the clouds, your hands are constantly saving your life, by steering. I remember when I was a kid in the back seat watching my dad’s hands on the wheel as he drove us along a long and straight two-lane highway through the California desert. I noticed his hands were never still, they we always moving ever so slightly in either direction. If he were to suddenly commit to taking his hands off the wheel we would have wound up plowed into a Joshua tree in no time.

While I agree with Laffer that decisions made to fix the economy while in a panic because the economy is swerving all over the highway rarely wind up looking pretty, I don’t agree that the answer is to simply take our hands off the wheel. I think we need a steady hand on the wheel at all times so that the economy doesn’t swerve in the first place. It doesn’t have to be heavy handed, just even handed, that’s all. As they say, an ounce of prevention is worth a pound of cure, so if you don’t want a lot of-over-the-top intervention then invest in a moderate dose of sensible intervention before the economy get’s out of hand.

Indeed, we should note that while we can criticize all the intervention being proposed by our government today, with confidence that most of it will fall short of fixing the swerving economy, we shouldn’t forget that it was the lack of intervention that caused the economy to swerve in the first place.

14. May 2006 · Comments Off on Road to Serfdom · Categories: Economics, Social/Culture · Tags: ,

I found an excellent article in this month’s issue of Harper’s magazine called “The New Road to Serfdom” by Michael Hudson, illustrated by Nigel Holmes. Hit the bookstore quick before the June issue pushes them off the shelves because these eight pages of short paragraphs, charts and illustrations are keepers. A great “at-a-glance” reference for what I consider to be one of the biggest threats to at least 80% of the American population – inescapable debt servitude.

The article breaks it down into 20 simple observations that, when linked together, presents the aggregate danger very clearly. Some of these observations are common knowledge, such as the lure of the home mortgage loan, with which the financial industry tries to suck as many people into debt as possible. Try? Here’s an astounding observation… 90% of the current national debt growth is in home mortgage loans. I’m pretty certain that the specific cause of the real estate boom is that people who can’t afford houses are buying them anyway with long-term and/or low-interest loans, interest-only loans and even the negative amortization loan, which not only dispenses with payments on principal altogether, but requires only partial payments on interest, tossing the rest on principle. It would seem that the point is to load as much of the population with as much debt as possible.

If your looking for a motive, you only have to look at the secondary market created by government subsidies like Fannie Mae, which incidently is currently being fined for cooking it’s books. Simply put, the banks can initiate loans then turn around and sell them like a hot-potatoes to companies like Fanny Mae that package them into investment portfolios. So, what does it matter to the banks when the borrowers run into trouble if they already made their money on the mortgage commodity market?

I’m not suggesting a vindictive financial industry. I’m sure the bankers are far more focused on the wealth pouring out of their end the deal than they are about the servitude at the debtor end. I think if anything, our projected servitude is an unfortunate by-product of financial aggression, but that doesn’t mean it isn’t a serious threat. Of course the money movement motives, whatever they are, transcend the financial industry.

We also have the government stepping into the picture with the IRS provisioning tax-breaks on loans, such as the famous “home-mortgage deduction” to entice the dreamers even further. It’s like those long TV ads that keep saying… “But wait! There’s more!” …and there is! Local and state governments continue to shift the tax burden from property to labor and consumption. Since 1929, the proportion of tax burden has almost completely reversed itself.

So, what all this means is that determined economic machines explain much of why and how more people currently owe money to the banks than in any other time in history. Michael Hudson indicates that currently at $11.8 trillion, the total value of home mortgages are on track to surpass the size of America’s entire gross domestic product by the end of the decade. You have to figure there is something terribly wrong with that. For those who can’t see it, Hudson and Holmes pull out the slide projector to explain some basic economic theory.

They start with the classic free-market model, which is the simplest of economic arrangements, involving a closed circuit of wages and sales between what I like to view as two separate pumps; the producer/employers (pump-1) and the employee/consumers (pump-2). Hudson and Holmes then add the Keynesian modification where the government steps in to regulate the sales/wages loop by acting as a third pump which circulates taxes and public funds. Then they add a fourth pump; something economists call the “FIRE” sector (Finance, Insurance and Real Estate), a collaboration of companies that Hudson points out are so symbiotic that the Commerce Department reports its earnings as a composite. The FIRE sector of course, pumps the credit, injecting loans and drawing interest.

Hudson points out that the FIRE sector has two advantages over the producers, consumers and governments. The first is that interest wealth grows exponentially, which means that as interest compounds over time, the debt doubles and then doubles again. The second advantage is that interest can be recycled back into more debt. The more interest paid, the more banks loan, the more banks loan, the more demand for real estate and again, the more interest paid. Hudson mentions that some economists call this perpetual-motion machine the “post-industrial” economy, but he prefers to call it the “Rentier Economy”. Either way, both titles suggest the idea that money is made through ownership rather than production.

Did I mention that home mortgages are at $11.8 trillion and on track to surpass our GDP by the end of the decade?

The miserable reality of this system is precisely what Voltaire had said; that the rich require an abundant supply of the poor. In more specific terms, the rentier class requires an abundance of debtors. As Hudson points out, there is just no other way. This just happens to be the way it works and the massive migration of money into interest payments is all the proof you would need. Many optimists will point out that over the last few decades everyone has become a little richer, but they fail to consider the context. While the majority of Americans got a little richer, the top 10% and even more so the top 1% got much, much, much richer so in terms of relativity, the value of the money held by the majority is decreasing. In other words, the rich are getting richer and poor ARE getting poorer.

As with all natural systems, the economy is tied to an S-curve, where the indices start slowley and gradually pick up the pace turning into a rocket bull ride to a peak where inflation surpasses the ability for debtors to make payments. And that’s when the demand for real-estate stalls which pulls the value of real-estate down below the value of the loans. It’s this negative equity that will secure most Americans into debt servitude.

But this S-curve that Hudson leaves us with suggests something very similar to economic patterns of the past where commodities rise and fall to the measure of decades. The steeper paradigm shift here is the transfer of control from a broader span of Americans to a much smaller section of super-rich rentiers, who will be able to negotiate their way across the cycles, riding the collapse of economies and families like the stock market. They will be able to do this because they own debt so they can play the game those of us in servitude will be chained to the carts that take us back to the earlier centuries where men of labor gave all they had to the men of privilege.

statistical data source: “The New Road to Serfdom” – Harper’s Magazine May 2006