GREED!!!

Playwright Tony Kushner at a commencement speech to graduating college seniors had this to say:

"The people and not the oil plutocrats, the multivarious multicultural people and not the pale, pale, cranky, grim greedy people, the hard working people and not the people whose only real exertion ever in their parasite lives has been the effort it takes to get politicians to slash a trillion dollars in tax revenue and then stuff it in their already overfull pockets." 

Then there is Bill Moyers who stated:

"We must guard against true believers in the god of the market who would leave us to the ruthless forces of unfettered monopolistic capital where even the laws of the jungle break down....And these idolators wrap themselves in the flag and rely on your patriotism to distract you from their plunder.  While your standing at attention with your hand over your heart pledging allegiance to the flag, they're picking your pocket."

This attack on the free market system, while just a faint echo in the past, has been growing in volume in recent years.  But in spite of the protestations, free markets have resulted in mankind stepping out of abject poverty to a steady improvement in standards of living.  Before the Industrial Revolution which took hold around 1800, life was poor, brutish, and short for the masses.  It brought  about a new concept...economic growth, which  spawned a growing middle class, and ultimately many in the middle class becoming truly wealthy.  Alan Greenspan said, "It is precisely the 'greed' of the profit-seeker which is the unexcelled protection of the consumer."  Then John Maynard Keynes stated, "Avarice and usury must be our gods for a little longer still.  For only they can lead us out of the tunnel of economic necessity into daylight."

Author Ayn Rand had this insight:  "America's abundance was not created by public sacrifices to 'the common good', but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes.  They did not starve the people to pay for America's industrialization.  They gave the people better jobs, higher wages, and cheaper goods."

Then there is Henry Hazlitt who writes, "Contrary to the age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor.  Almost anything that the rich can legally do tends to help the poor.  The spending of the rich gives employment to the poor.  But the savings of the rich, and their investment of these savings in the means of production , gives just as much employment, and in addition, makes that employment constantly more productive and more highly paid."

All of the above documents the wide gulf between two opinions.  Which opinion represents the truth?  The important thing is to question everything rather than blindly accept what is being handed to you.  If we objectively seek truth, eventually it will come gently to us.

Policy Errors Of The Great Depression

Imagine a policy maker whose policies don't work.  He resembles Euclidean Geometers in a non-Euclidean world who discovers that straight lines, apparently parallel often meet.  He then rebukes the lines for not keeping straight only to soon witness more collisions.  This is precisely what the government policy makers do when their solutions fail.  Faced with failure, government then tends to blame the market rather than itself, and intervenes more!  Feeling that they just haven't intervened enough, they try more...followed by more failure.  If this process is not interrupted, the price and profit system will break down and government control ensues. 

This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression.  Here is a list:

1.  Wagner Act --  This basically kept wages from falling for union labor.  In fact it went up 24% during the depression.  But non-union workers were basically cast to the wolves.  Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices.  Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment. 

2.  High Taxes On The Rich -- The rich are primarily the investors.  They risk their capital in new ventures.  If the risk pays off, it means jobs.  If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing.  We should be encouraging saving and investing, not discouraging it.

3.  Excise Taxes on Everyone -- This took money out of workers pockets.

4.  Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression!  Withholding funds from the workers during a crisis was a clear policy error.

5.  Corporate taxes raised --  To take money away from the very ones who could potentially hire workers was another policy blunder.

6.  Deficit spending went on too long.  John Maynard Keynes advocated deficit spending.  His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy.  To some extent he was correct.  But he never implied that it should go on indefinitely.  He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing.  He was, of course, ignored, and the depression continued.

7.  Trade Protectionism -- The Smoot - Hawley Tariff  changed a recession into a depression. Today,  even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer."  -- NY Times; April 22, 2001

Should We Go Back To The Gold Standard?

Richard Nixon ended the gold standard in 1971.  At the time gold was pegged at $35 per ounce.  Countries who sold goods to the United States would continually run trade surpluses.  They would end up holding large supplies of dollars as a result.  Eventually it became obvious that the US could not redeem all the dollars with gold, so country after country started converting their dollars into gold, thus drawing down the US gold stock.  It was then that Nixon shut the gold window.  The US would no longer exchange its dollars for gold.  The world entered a period of generally floating exchange rates.

There are some that would love to return to some kind of gold standard.  Very few professional economists would go along with this.  The reason is because economists subscribe to the Quantity Theory of Money.  This gets down in the weeds a bit, but let me explain this concept with the following formula:

MV = PY

where M = money supply
           V = velocity of money
           P = price level
           Y = real GDP

Real GDP is growing globally.  As a historical norm, V is relatively constant.  If M is gold, we have a variable which is hardly growing at all.  The fact that it has a high value is because of its scarcity.  Now looking at the formula, if Y is globally increasing, P (prices) must be forced down.  This would result in deflation which is an economy killer.

At the time of this writing, the spot gold price is $1314 oz.

The New Global Economy -- Facts and Fallacies

In 2006, Israel fought a war with Hezbollah.  Israeli Jets bombed encampments in Lebanon, while Hezbollah rained rockets on northern Israel.  Yet, in spite of an all out war with much destruction, the Israel economy grew 5% and its currency soared.  Why so little harm to the country's economy amidst so much destructive violence?  As Greg Ip pointed out (The Little Book Of Economics) it was because of globalization.  Israel's economy is led by advanced tech companies whose markets are the rest of the world.  But in 2009, Israel went into recession with the rest of the globe.  Israel didn't have a banking crisis, but because its major trading partners did, it was hit with the collateral damage.

Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it.  In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP.  The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products.  That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies.  Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die.  The consumer is the winner with superior products at a lower price.

Of course politics often conflicts with economic reality.  When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm.  But politicians rarely look at the big picture.  How was Mankiw right?  If a company outsources some of the basic programming to India, US consumers of that software are better off.  And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).

Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries.  But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US.  And because of the lower price, sales boom creating more demand and more US jobs.  So the winners are Apple shareholders, employees, and, of course, consumers.

Of course there will always be losers.  Some domestic employment in high wage labor intensive manufacturing will take a hit.  It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.

FALLACIES

According to economist Thomas Sowell, there are four basic economic fallacies.  The Zero Sum Fallacy, the Fallacy of Composition, the Chess-Piece Fallacy, and the Open-Ended Fallacy.

                                                          The Zero Sum Fallacy

This states that what is gained by X, is lost by Y.  This is often used by politicians to pit one group against the other, the latest being the 1% (the very rich) against the 99% (the rest of us).  It is indeed a fallacy since the 1% are the investor class, and we need investment and risk taking to make the economy grow.  When it does, we all benefit.  As John F. Kennedy pointed out, "A rising tide floats all boats". (emphasis mine)

                                                      The Fallacy Of Composition

This states that what is true of a part is true of the whole.  We often see politicians passing legislation which benefits a special interest, and selling it to the public with arguments like, "it will create jobs".  At times like this, we need to keep in mind Star Trek's Spock who stated, "The needs of the many outweigh the needs of the few".  Special interest legislation is just the opposite.  Case in point would be the trade barriers protecting  the domestic sugar crop.  As a result, the consumer pays substantially more for this product, and the products that use sugar.


                                                         The Chess-Piece Fallacy


This fallacy states that large scale grand plans can benefit individuals.  China's Mao had a massive program called The Great Leap Forward in which central planners tried to manage a billion people.  It was a disaster resulting in the mass starvation of millions of people.  Unlike chess pieces, human beings have their own individual preferences, values, and plans, all of which conflict with the goals of any specific social plan.  The problem is that usually the social planner's response to a failing program is "if at first you don't succeed, try, try again".  This is a formula for disaster.


                                                           The Open-Ended Fallacy

Who could be against health, safety, or open space?  But each of these things is open-ended, while resources are limited.  No matter how much is done to promote health, more could be done.  No matter how safe things are, they could always be safer.  And no matter how much open space there is, there could still be more.   Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of limits.  Open-ended demands are a mandate for ever-expanding government bureaucracies with ever-expanding budgets and powers.

The Greatest Anti-poverty Program In The History Of Man

             "Man born of woman is short-lived, and glutted with agitation."  --  Job 14: 1

During the heated federal budget battles of 2011, one liberal Christian group took out a full page ad in a national newspaper with the provocative question, "What Would Jesus Cut?"  The ad asked readers to sign a petition asking Congress to oppose any policies that involve cutting domestic programs that help the poor.

The first anti-poverty program in the US extends as far back as the 1930's with Roosevelt's New Deal.  This has been followed by many other "programs"....The Fair Deal, The Great Society, The New Frontier, etc, etc.  Has the poverty rate dropped?  Sadly it hasn't.  There always seems to be a hard core that will never disappear...hovering above 10% of our population.

But for most of us, the free enterprise system has lifted more people out of poverty than all the government anti-poverty programs combined.  In 1800, the average person had a standard of living no better than people living in the Stone Age.  Even in advanced cities like London, only one quarter of the population could expect to live beyond five years of age.  For the lucky few who survived childhood in the eighteenth century, the life that awaited them was difficult and short.  So for all of history until about 200 years ago, the world was desperately poor.

Then, with the industrial revolution something changed.  We had economic growth fueled by the free market system, incentivized by the profit motive.  Jump now to the 21st century.  The average American in 2007  enjoyed 35% more real income than 30 years ago, and every income bracket has benefited.  In 1850 the average life expectancy was 38 years.  Today it is 78.  The first public school opened in Boston in 1817.  Today we have 13 years of mandatory taxpayer funded education in all 50 states.  All of this is funded by the greatest antipoverty program ever known.....the free enterprise system.  As professor of economics (NYU) William Easterly stated, "profit-motivated capitalism is still the best case for the poor."

Of course, we will always need the safety net for the hard core poor mentioned above.  But in looking at poverty here and around the world, social welfare programs are the band-aid.  Free enterprise is the cure.

The "Evils" Of Outsourcing

Outsourcing is the contracting out of an internal business process to a 3rd party.  In short, it often manifests itself in a company hiring cheap overseas labor which replaces domestic jobs.  On the surface, this seems disturbing.  But there is more than initially meets the eye.  First, we are talking about a global economy, and if a domestic company is producing a labor-intensive product, they had best produce that product in a low cost labor market, or they could be out of business.  Their international competition most certainly will have low unit labor costs, and their final prices will reflect that.  A politician may wring his/her hands about it, but short of throwing up tariffs, there is nothing that can be done.  And you won't find a legit economist on the planet that would agree to the old days of high tariffs.

By the same token, those that complain the loudest about outsourcing never even mention "insourcing".   That is, international companies like BMW and Michelin locating plants in South Carolina, and Honda, Nissan, Mercedes, and Hyundai having manufacturing in Alabama.  It is Europe, with its liberal labor practices, high tax rates, and restrictive tariffs that has been outsourcing millions of jobs. 

The upshot is that globalization has resulted in a loss of some jobs.....unionized factory jobs in autos, steel, and textiles.  But manufacturing insourcing has more than offset this in right-to-work states.  By the same token, there have been significant increases in the services industries, technology, and knowledge based industries.  Nonetheless, some would balk at the service industry...they would argue that it doesn't pay well.  But many service based jobs (trade, finance, insurance, banking, retail, travel, delivery, education, healthcare, entertainment, government, etc) have very competitive wages.  And here is the salient point:  A booming service economy is a symptom of economic sophistication.