Economics

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Economics isn't just about theoretical impacts to money, though many get caught up in that. It's about social engineering or understanding. You can't argue a policy change (or any change) intelligently if you don't think about the consequences of your actions -- and not just to the people you care about, but all people and the system as a whole. How will people react, how can the solution be gamed, sure you helped a few -- but what happened to the rest (and does the help outweigh the costs). Micro-economics is looking at one system, Macro-economics is looking at how that system impacts all the others.

Allegories

The Broken Window Fallacy

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The Broken Window Fallacy is a fundamental concept of economics (and logic) about seen advantages versus unseen costs. Henry Hazlitt summed up the art of economics as not merely looking at the immediate consequences but the longer effects of any act or policy, and tracing those consequences not merely for one group but for all groups

Milton Friedman goes to China

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Milton Friedman popularized this allegory that explains the perils of the Broken Window Fallacy, in an amusing and more socratic way. Some refer to this by Shovels vs. Spoons.

Minimum Wage

Minimum Wage

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The minimum wage and living wage warriors seem reluctant to accept the economic realities: price and wage controls almost never work. There are extremely rare cases where they can work (or do minimal damage) in one small location for short amounts of time, but there's no magic wage that's right for everywhere and everywhen at once. Thus wage controls start out bad and get worse over time.

I like to use thought experiments and the socratic method to try to get min-wage supporters to think:

  • What's a fair wage for both NYC and B.F. Idaho?
  • If $15/hr is good, why not $150/hr? (Every answer why $150 is bad also applies to $15)
  • If I raised your salary by 5%, but the cost of everything you buy by 10%, would you come out ahead?
  • If I’m willing to pay someone $10 to do something, and they’re willing to take $10 to do it, what business is it of the government or voters?
  • Who knows more what's a fair labor value for a job, in every market in the U.S.: the employer and employee involved, or a bureaucrat in D.C. or voter in Barstow? Why?

And so on. To understand minimum wage arguments, read on.

Goldilocks and the 3 wages

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Minimum wage is like Goldilocks, there are three ways you can set minimum wage: too low, too high, and just right. Too low, means it's doing nothing of value. Too high means it's hurting employment and growth. And since just right can never apply to two different people, places or moments in time, there's really only one way to set minimum wage: and that's at the wrong level.

Does minimum wage impact employment?

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This is of course hotly contested, but it breaks down into two camps: (1) "No" (2) Those who have a clue as to what they're talking about.

The problem is (of course) that it doesn't always, and doesn't always immediately impact it. So there's some plausible deniability for the economics deniers out there to find edge cases and say, "see". But as soon as you look deeper than the surface, you find that it does suppress growth, or increase a decline, sometimes ahead of the law and sometimes well behind it but it happens, and it especially hits certain segments and groups of people harder than others (like teens, starting out, part time work, and so on). Let's dive into the evidence.

Minimum Wage: Poverty

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Poverty (and who makes minimum wage) gets even more complex:

  • 75% of it is due to underemployment (which is more insidious than unemployment)
  • Most poverty is short term (short term unemployment that effects people in one year).
  • Most of the rest is due to under-education, immigration, fatherless families, and finally bad social program programs (which holds more people down than they helps people up).

Explain to me how raising minimum wage helps with any of those things?

I can explain how fewer teenage jobs means more teenagers doing other things, like getting pregnant. Fewer opportunities for the less educated and immigrants doesn't help them out. And so on. So target the right people, instead of offering blanket subsidies to the wrong ones. Instead of raising the minimum wage, Congress should look at other ways to aid the working poor that actually focus on providing help to those who need it.

And that' the first rule of economics: do no harm. If you can't show how you're making something better, and the other side can show how you're not, then you're wrong. Or don't knock down fences without understanding why they're there.

Minimum Wage: Cost basis

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I hear all the time, that McDonald’s can afford to pay a “livable wage” without raising costs, or "it’s just a few cents a burger", by people that don’t understand basic economics, or business.

Here’s some notables taken from the average McDonald's balance sheet:

  • The average McDonald's generate about $2.5 million in gross revenue, but then they have a lot of expenses like rent/mortgage, taxes, utilities, food, taxes, and labor (and their taxes).
  • The average McD's Employs 61 people in operations and restaurant management positions, and spend nearly $507,595 on wages (about $800K or 32% of gross revenue, when you factor in benefits, tax liability, and other costs around employment).
  • A McDonald's ends up with an average net profit after those expenses of 6%. Or about $150K/year in net revenue (for about $2M in initial investment/risk).
  • A jump from $7.25->$15/hour means $264K in increase wage costs, on profits of about $150K…. so they’re now losing $114,000.00 on each store per year. How many new McDonald’s will open with that as their forecast, how many will close because of it?

The store (and chain) must respond, or the average store will go out of business. They must: raise prices, trim staff, automate (or some balance of these), or shut down.

Livable Wage

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Ignoring the stupidity that there's one magic "livable wage" that would be equally fair on both sides of the same city, let alone country, the left tries to sell the gullible that setting a salary minimum will set a salary minimum, but it doesn’t.

Progressives often see the choice as: (a) A livable minimum wage (b) A lower minimum wage.
But that's a fantasy. The real choice is: (a) What the market will bear (b) Unemployment ($0/hour).

The choice isn't pulling people out of poverty or not, it's about what value an opportunity is worth to an employer, before they skip the job, automate, outsource, or just give up.


Minimum Wage and Automation

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Value (Money) is derived from the product of work (productivity/results), not based on what you paid for it. Thus the less you pay, the better off you are. The more you pay, the worse. This is why despite the doomsayers automation is good, and despite what the Social Justice Warriors (also known as economically illiterates) will tell you, minimum wage is not good. Despite the B.S. they're selling, you can't lose more money on every transaction and make it up in volume.


Basics

Bay Bridge Boondoggle

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The bay bridge is a metaphor for San Francisco. The Golden Gate was built privately and under budget for $35M ($1.2B in today's dollars), one span of the Bay Bridge needed a retrofit, that was run by the city and came in late, and over budget at $6.4B, and has withmetallurgy issues (per the spec). For that cost we could have built 4 other bridges. But it looks nice, so everyone wins.... except the taxpayers

Suffocating Liberty - the cost of red tape

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Each new tax, law or regulation, comes with costs (compliance, non-compliance, enforcement and punishment). We 174,545 pages of regulations with over 1,040,940 restrictions. Our tax code has over 73,954 pages. Our federal legal code has over 23,000 pages and over 4,450 federal crimes (in 2008). Double that for statutes, case law, and regulatory provisions. Then there’s another 300,000 criminal punishments within the discretion of administrative agencies. Then you have to add in the state and local laws, regulations and taxes on top.

Dispersed Knowledge

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There was an economics battle between Keynes and Hayek fought generations ago. But History proved Hayek the winner: things he predicted came true. Keynes scored a few microeconomic points, but history broke his macroeconomics models: the boom economy after WWI, stagflation in the 1970's, Japan's lost decades and the failure of Abenomics, China and Russia's growth after abandoning command economies, all proved Keynes wrong. And Hayek won the noble prize for explaining why: Dispersed Knowledge. If the leaders don't know more than everyone else combined, then the more decisions you make from the top, the less efficient those decisions will be, and planned economics will underperform ones where the decisions can be made closer to the problem.

Costs of Defensive Medicine

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There are many unexpected consequences for everything we do. I had a minor epiphany for improving a medical device/process, that the heads of the company I worked for (Baxter) agreed would save lives, but they could never use because of medical liability. They had to practice defensive medicine, which is about protecting the company from lawsuits. For every action, there is an opposite reaction.... but in life (unlike physics), it isn't always an equal and opposite reaction.

Economics of lies, and fidelity

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Increase the economic value of a cheat or lie, and you'll use them less often. Thus permission to do something once (or infrequently) will reduce the likelihood of you doing it, more than the impossible standard of pure abstinence.

Gini Coefficient

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The Gini Coefficient (or Gini Index) came about when Corrado Gini (and Italian Sociologist) wrote the book: The Scientific Basic of Fascism. His idea was that you could make systems stronger than the individuals, if you just weeded out the threats to the collective and accepted fascism (democratic socialism combined with crony capitalism).

His book, and the infamous “Gini Coefficient” he created, said that income should be evenly distributed, and if it wasn’t, then government should use that imbalance as an excuse to seize wealth and liberty, and redistribute it (fascism) to make things “more fair”. His coefficient is basically just that: a measure of how economically fascists (socialist) your country is.

Income inequality and the middle class

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There’s a bunch of meme’s and soundbites going around where politicians love to point out the disappearing middle class (income inequality), and how we need them to fix it. There’s only a few problems with that:

  1. It’s a lie that plays to people’s ignorance and greed
  2. History always looks better from a distance (and if you don’t look too closely)
  3. It’s prestidigitation to distract you while they pick your pockets

This article details why this is a fraud, and how they give ammo to the frauds and flimflam the gullible.

Gender Wage Gap

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This one is many myths (lies) in one:

  • Women get $.77-.82 cents on the dollar compared to what men make (this injustice is called the "Gender wage/pay gap" or GWG)
  • We need big government (politicians) and new laws/regulations/taxes to fix it
  • Democrat politicians motives are all sincere, anyone that opposes is a sexist/misogynistic/bigot


Keynesianism

Keynesianism

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Keynes microeconomics was brilliant, his macroeconomics have never worked in the real world.
  • Examples where it failed include: Japan, Venezuela, China, Russia, North Korea, U.S. in every administration since WWII
  • Keynes idea that government can borrow and spend to stimulate growth relies on the ignorance of the people to recognize that increased spending will cost them in taxes/inflation, that government will trim back as the economy gets better (which never happens), and assumes that jobs are highly mutable (they’re not any more).
  • Not all government spending is bad, it’s just usually worse than the alternatives: and the few successes are the broken window fallacy (looking at seen benefits, while ignoring larger unseen consequences)

Keynesian failures

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It would be great if Keynesianism worked, governments could manipulate economies, and our lives would be better. But history shows us the opposite: it has failed every time it has been tried. Examples: the new deal, the new new deal, after WWII (Keynesians predicted a depression cutting all those military jobs, instead we had huge growth), 1970's Stagflation broke their models completely, Japan's lost decades (Abenomics) all went the opposite of Keynes predictions. Every country that converted from centralized planning and communism to free'er economies (Russia, China, Vietnam, East Germany, etc), should have had a depression, instead of massive growth. The history of central planned economies like North Korea, Venezuela, Cuba, should have all outgrown places like South Korea, Brazil or Hong Kong: but the opposite happened. Heck, if it would have worked, then Obamanomics would have given us the highest labor participation rates in our history, instead of the lowest since the Great Depression. So what did we learn? Keynesians learned nothing because reality doesn't fit their desires. But the rest of us learned that Keynes was wrong.

Treasury View

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The general definition is "government spending crowds out private investment" and is widely accepted. The Keynesian version is that it all has to be perfectly efficient and instantaneous, and since it isn't, they mock their re-definition of it. Keynesians prefer to see those lags, overreactions and inefficiencies in corrections (recessions/depressions) as opportunities for government to step in and spend (stimulate) to where "things should have been", to smooth out the downturns.

Why can't Keynesianism work?

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The idea of Keynesian spending boosting a crashing economy requires 4 things: (1) an information vacuum (no information that spending and thus taxes are going up), (2) you have to cut spending/programs as the economy gets better (3) you need to be replacing like jobs (4) you have to have near equal efficiency between government and private sector. Since none of those things happens, Keynesian promises are never realized.

Obamanomics

Numbers Covered by Obamacare

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Those claiming 20 million more people are insured because of Obamacare (ACA) either don’t know what they’re talking about, or are bald-faced liars. We're around 29 million people short of the campaign promise for universal coverage. And it's well below the 20 million new people covered that the fools and frauds like to claim: about 2.8M because of Obamacare (and another 4-6M because of medicaid expansion), at a cost of about $20K per new person covered.

Economics of Community Organizing

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From Gun Sales to Mass Shootings, how the unintended consequences of community organizing are often detrimental to the stated goal. How divisive rhetoric and drawing attention to your cause can often get the opposite outcome of intent. Of course if your intent is to pose for the selfie-stick and drive up gun ownership and mass shootings then maybe it isn't the opposite of intent.

Financial crisis

Financial crisis of 2007-2008

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What caused the financial crisis of 2007-2008? This is a comparison of the two (or three) most popular theories: whether Glass-Steagall, CRA and FannieMae/FreddieMac, or the Big Fraud caused the meltdown. Along with a full explanation of the strengths and weaknesses of them (which holds up to scrutiny). Links and resources provided.

Financial Terms

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These are a bunch of financial terms (concepts really), that you can scan to get familiar with the jargon and ideas. Especially before reading the Financial crisis of 2007-2008, but they're good jargon to know when watching financial shows or reading financial press.

Glass-Steagall

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Glass-Steagall was the 1930's new deal regulation that said Commercial and Investment had to be separated. There would be no universal banks. In theory, by separating sides there would be more transparency, and people might behave less risky. In truth, there's just more inefficiency and the same risk. If Glass-Steagall prevented catastrophe, then how come Asia and Europe didn't have financial meltdowns, since they never had Glass_Steagall?

CRA, Fannie/Freddie Theory

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The idea of the CRA->Fannie/Freddie theory (CRAFFT) is as follows: Fanny/Freddie (F&F) was created (and created MBS's) to help the poor get subprime loans. The CRA punished banks that didn't do enough of them. Since F&F would buy as many loans as the banks underwrote (to F&F standards), they wrote a lot of them. Banks didn't know how much risk was in the system (since it was F&F that was bundling the MBS's). Eventually the high risk and low oversight meant at a downturn all those people with nothing down (or upside down), just walked and left the banks holding the bag. That meant Bank regulations (loan to equity ratios and mark-to-market) meant the banks couldn't loan, and the credit markets froze until the Govt. loaned them enough money to unfreeze things.

Big Fraud Theory

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There are a few books or movies like "The Big Short", Liar's Poker, or William Black who float this Big-Fraud theory (BFT), It is loved by Hollywood, the Media, Progressives (Elizabeth Warren, Bernie Sanders), and those who know better but want to distract and enrage the gullible. Basically, "Massive greed encouraged massive over-leverage, and while everyone (or a few) knew better, they did it because they were dumb, greedy and corrupt." While it's becoming the most widely spread theory (because hate and ignorance spreads faster than information, complexity, common sense and introspection) it doesn't hold up to scrutiny or history. This article offers those.