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.

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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.
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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.
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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. While a few discredited studies (like Card & Krueger) show that raising minimum wage doesn't have large impacts, in a few situations, for short periods of time. But each study like that has dozens of rebuttals and refutations that show the flaws in their methodology, and counter studies that it does impact employment (and wages), in the wrong way. So if you see a Study or News that claims minimum wage doesn't hurt employment, you know it's Fake. A few socratic questions show the problems: (a) What's a fair wage for both NYC and B.F. Idaho? If $15/hr is good, why not $150/hr? If only 9% of minimum wage workers are below the poverty line (and 91% are not), wouldn't giving money directly to that 9% be better? If minimum wage is a starting salary, why should it have an ending value (be a livable wage)?
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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.

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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.
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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.


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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
A good example of government helping is what the FCC did for cell phones: it delayed them by 40 years. . In 1945 the Saturday Evening Post was talking about handle-talkies, which could have been done with transistor radios of the time. But while the technology was known for how to do it, as well as business plans and motivation, it took until 1982 for the FCC to allocate the spectrum to do it, and another 7 years (1989) to authorize licensing the service.
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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.
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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.
This one is many myths (lies) in one: (a) Women get $.77-.82 cents on the dollar compared to what men make (this injustice is called the "Gender wage/pay gap" or GWG) (b) We need big government (politicians) and new laws/regulations/taxes to fix it (c) Democrat politicians motives are all sincere, anyone that opposes is a sexist/misogynistic/bigot. All false, and debunked here.
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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.
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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.
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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.
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While discussing progressive "solutions" the other day, someone said my problem was that I saw government as a zero sum game. Where every dollar you used to help one person, came from the pocket of someone else, so there could never be a net win for society. I explained that it is much worse than that: when government is involved, because there's overhead, waste, fraud, work rules, politics, and other things that dissolve efficiency, freedom, pride and value, as part of the transaction, it is always a negative-sum (lose-lose) game. That isn't to say there aren't winners, there's just always far more losers: because of how the system works.


Dispersed.png
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.
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I listen regularly to the Freakanomics Podcast (Radio). And they did a two part series on writing. Starting with, “do we really need cursive anymore”, some light discussion on cursive, it was an interesting podcast, but just for curiosity. Mostly it was a setup for the next week’s one which was far more interesting. The second podcast was on i pencil: an economics treatise by Lawrence W. Reed, founder of fee.org (circa 1958), explaining the complexity of making something as simple as a pencil in the modern world. I’d heard parts of this, in other contexts, and I was very familiar with fee.org, which I’d read a lot of their stuff. But it piqued my curiosity, and read I pencil in it’s entirety. It’s definitely worth a listen or read.

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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.
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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)
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These Meme's just mock Keynesian macro-economic theories. While Keynes was brilliant micro-economist, his macro-economic ideas are all mock-worthy and disproven time and time again, by history.
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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. The facts: about 2.8M were covered because of Obamacare, and another 4-6M because of medicaid expansion, at a cost of about $20K per new person covered.
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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.
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There's a name for Trickle Down Economics... it's called economics.

No rational economist will argue against the idea that if you cut someone's taxes, that they have more money. And that resulting increase in earnings will either be actively invested, saved (passively invested), or spent. And if they do any of those, that money is passed through into the economy: in other words, it trickles out (and down). Period. End.

Now there can be intelligent debates on what helps the economy more: cutting or spending, cutting at the top or the bottom. But liars (polemics, fools and the media), will perverts that debate on what helps more, into some fraud that cutting taxes at the top "doesn't work at all".

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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.


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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. It's becoming the most widely spread theory because simply hate and ignorance spread faster than information, complexity, and introspection. It is really just a variant of GST and "Too Little Government".

The idea is:

  1. Massive greed encouraged massive over-leverage, and while everyone (or a few) knew better, they did it because they were dumb, greedy and corrupt.
  2. They screwed the public knowing that the entire system would collapse, but as long as they were making money and bonus's, they didn't care.
  3. Greed and over-leveraging caused everything.

The problem is no one credible has really offered this as a "theory", because it's not economics, it's politics. And it doesn't explain anything, if you think it through.

NOTE: No one doubts there were a few unsavory actors, or that Countrywide wasn't and aggressively selling LIAR/NINJA loans (preying on consumers that couldn't afford to pay them back). They were doing exactly what Fannie/Freddie and the CRA had demanded, and paid them for (by buying all those loans up, and putting them into MBS's in the first place). But these characters weren't the fundamental cause of the crash (all markets cycle), or the credit crunch caused by over-regulation, and it has nothing to do with Glass-Steagall which couldn't have done anything to stop it. So yes, there were over-aggressive players, taking advantage of the Democrat created credit traps -- and they slightly magnified the problem. But had they not existed, the same exact thing would have happened. And those that try to pin THE blame on these guys, are ignorant or dishonest. These were bad actors, but it's like blaming a pickpocket in the back of the plane for 9/11.

The reality is:

  1. If Fannie/Freddie weren't buying these loans, it wouldn't have been possible: so it's still a failure of Government Sponsored Entity and thus government.
  2. The leverage was lower in the 2007 than it was in 1998 -- so their increase in leverage was not the trigger (or it would have gone off in 1998).
  3. Leverage doesn't cause crashes or markets seizing up -- it can only magnify it (or mitigate / hedge against it, if leverage was being used as a hedge). Whether you have 10% or 20% equity in your home, or if you owe $5K or $20K on your credit card doesn't change whether you're going bankrupt or not. The underlying problem is one of cashflow: money in versus money you have to put out.
  4. Either Fraud was the cause, and there was no underlying value to the assets being written against, and the market couldn't recover something that didn't exist (the correction would have to have been permanent). Or fraud was a very minor part of the issue, and once the bigger issues were worked out, the market/housing would rebound (as happened). Pick one. The facts that the markets recovered so quickly (a few years), shows that most assets did have underlying value, and it wasn't just smoke-and-mirrors (all leverage), and the Big Fraud Theory is flim-flam.
  5. This theory doesn't explain is why the credit markets seized. Why do people stop loaning, and why did TARP fix it if it was fraud? So it's saying that fraud helped with the bubble, slightly - but everything else in CRAFFT theory was still at play. So it's not an explanation of anything, it's just an excuse to point fingers somewhere else and hate.
  6. Why didn't government go after them? To believe the Big Fraud Theory, you have to also believe in a huge conspiracy between Government and Wall Street, that bankers and investors have colluded with Congress to deceive the public and that's why no one went to prison in massive investigations of widespread abuse. But CRAFFT theory explains why, much better.
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The idea of the CRA->Fannie/Freddie theory (CRAFFT) is as follows:
  1. Fannie/Freddie tried to help the poor by lowering loaning standards.
  2. The CRA allowed community organizers to punish those that didn't lower them enough.
  3. Banks capitulated with the laws that the politicians created.
  4. Good intentions often don't have limits... and politicians and community organizers kept lowering the standards until failure.
  5. Then when things turned to shit, the politicians and community organizers that caused the whole mess weren't going to take responsibility: so they blamed the Banks for complying with the regulations they were required to comply with. (Who doesn't hate a rich guy in a suit?)

The GST theory is great at pointing fingers at who (by scapegoating evil bankers and sub-prime loans), it doesn't tell you the what, why, how like the CRAFFT theory does. Why would they do it (knowing that short term greed would kill the goose that made them rich)? Oh, because they had to by law, now that makes sense. What really happened? Credit markets froze. How did TARP help? By helping banks have enough liquidity (loan them money) to get around the governments own restrictions: it fixed their debt-equity ratios, and that let them loan again. So knowing CRAFFT, explains far more -- knowing GST means you can't explain anything, but you get to hate bankers and wallow in virtue (think more government could have fixed it).

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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.
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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.
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Glass-Steagall was the 1930's new deal regulation that said Commercial and Investment banks had to be separated. There would be no "universal" banks (that did both). 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. Think of these:
  1. We know transparency wasn't the problem, as everything they did was known by all. (A few were able to anticipate things by reading the info that had been out there all along).
  2. Adding/removing steps didn't change anything material -- and regulation increased after the repeal by over 17%, with thousands of pages of new regulations.
  3. Banks were less leveraged after the repeal than before -- so Glass-Steagall had done nothing to reduce leverage (risk)
  4. If Glass-Steagall prevented catastrophe, why didn't Asia and Europe have financial meltdowns first: they never had Glass_Steagall?

Most of all, if G-S was the problem, then during the collapse it would have been the unified banks that had the biggest problems (over-leveraged/under-capitalized). It wasn’t. The Unified banks outperformed the Commercial banks (Countrywide) and the Investment Banks went out of business (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns). The Unified banks bailed out the others; JP Morgan Chase (Unified) bailed out Bear Stearns (Investment), while B of A (Unified) helped by taking over Merrill Lynch (Investment) and Countrtywide (Commercial). This is backwards from what GST says should have happened!


TreasuryView.jpg
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.
TrickleDown1.jpg
There's a name for Trickle Down Economics... it's called economics.

No rational economist will argue against the idea that if you cut someone's taxes, that they have more money. And that resulting increase in earnings will either be actively invested, saved (passively invested), or spent. And if they do any of those, that money is passed through into the economy: in other words, it trickles out (and down). Period. End.

Now there can be intelligent debates on what helps the economy more: cutting or spending, cutting at the top or the bottom. But liars (polemics, fools and the media), will perverts that debate on what helps more, into some fraud that cutting taxes at the top "doesn't work at all".