Economic Systems

Economics is both simple and complex.

At many levels it is simply adding and subtracting when we measure things like Gross Domestic Product or trade balances.

However the actual impact of the economy on individuals can be harder to determine.

This is similar to measuring the individual cells in a person to see how he is doing.

If all of them are doing fine except say the brain ones, we probably wouldn't give hive a high rating.

That's a bad analogy but individuals are in fact the economy and the goal of most economic theory.

Capitalism is generally concerned with improving the larger economy.  Whether that leads to trickle down or not is debatable but arguing about what to do with more is better than arguing about what to eliminate.

Socialism, which is not necessarily Communism, is less concerned with the means of production but treats it as a collaborative effort where the fruits are shared equally.

So in Capitalism someone owns the apple tree and tends it, makes it grow, keeps it healthy and at the end owns all of the fruit which they trade to others for something of value.

In socialism the tree belongs to everyone, or no one and you simply take the fruit you need and leave the rest.

In Communism the tree belongs to the State who controls access to it and who gets what.

Socialism is problematic because in many cases the tree simply doesn't do well.

In Communism, the State is generally an inefficient owner since its goals are often disputed.

In Capitalism profit is the clear goal and motivator.

.Who gets the rewards though is also different and you have a system where the few get the biggest rewards but there are plenty of apples, or a system where the rewards are shared equally, but you generally have less apples.

If you don't get any apples it doesn't really matter though.

People

Forget about political parties for a second and consider the state of the people.

A very small percentage have so much that they have no concerns about how to pay for things or how much they cost.

They are a small percentage but in a country such as ours that still adds up to a significant number.

Enough of them, mostly those new to the group, are very visible and flaunt their lifestyle and wealth.

They create a desire in others to be like them, to join that exclusive club.  A few do either because of a bright idea or perhaps sport talent but for most of us they are out of realistic reach.

Another percentage of Americans about (10%) are what we used to call comfortable.  They have accumulated some wealth and income and while not so secure as to be worry free, they can enjoy much of what America has to offer.

They likely have or had a job with a major corporation and earned, to some extent income and prestige.

Below them is the group that we tend to think of as the middle class, although that term is pretty vague.  They tend to be college educated, employed and are able (with credit) to afford a house, a nice car, some investments, some savings and generally resemble the Americans we see in most sitcoms.  They are not likely to have much of a cushion, likely to have student debt for themselves or their children and employer provided health insurance.  They live a life at risk of a major financial setback, such as loss of job and benefits or a major health crisis.

We now turn to working class Americans who comprise the rest.  The jobs they can get now are not as good as the high paying high benefit Union jobs their fathers had, as unions have been effectively attacked by the business owners.  They struggle on a regular basis to live a decent lifestyle and the industrious ones work multiple jobs and so do their spouses, and they still have trouble.  Many of them turn to alcohol or drugs to deal with the desperation of their lives and neither helps beyond the immediate high.  They struggle and are the most manipulated group.  They are told that immigrants and minorities have stolen the good jobs and the good benefits.  The very things they need, like health care and decent old age pensions, affordable or free education and job training are lambasted as giveaways to those "others" that come out of their tax dollars.

It is this last group that is most likely to want change or to decide that the system is so broken that it isn't even worth voting.

You see a concerted effort to convince them that the very people who moved their jobs, reduced their benefits and initiated the opioid epidemic have their best interests at heart.

As they like to say, what else do you have to lose?

Whatever it is, they will take it.

The Future

It should be noted that the two areas that continue to decline in this country are manufacturing and coal mining.

It is just cheaper to manufacture elsewhere and coal doesn't make sense anymore, there are cheaper alternatives.

This has impacted and continues to impacts certain areas of this country disproportionately and the solution is not a return to a past that is long gone but movement into the future.

There are already areas that have transitioned into new industries and abandoned most of the old.

Jobs in the service sector don't offer the same level of income and security for the unskilled as our old manufacturing economy used to.

The transition is therefore going to require that the Government fill some of the gaps in things like health care and pensions that have been created.

The alternative is a further increase in income inequality as those with the right skills or right connections do well and everyone else doesn't.

At this point people are being warned against voting for their own self interests with scare tactics and social issues.

We are a country of and for the people, so what serves them is what is right for America.

Employment

Talk of the economy tends to focus on two areas, unemployment and the stock market.  The stock market has done well as corporate profits have based on current economic policies.  In addition each month we are reminded of how the unemployment numbers are near record lows.  The problem is that those statistics, while accurate are a bit misleading for many of us.  The chart below reflects workforce participation in the labor market.  As you can see following the great recession it dropped significantly This drop means millions of Americans are no longer looking for work, so they are not unemployed, but they aren't working.

This very well may reflect the impact of the boomers leaving the workplace, or it might reflect the jobs we have lost.

Wages have also been largely stagnant over this period, not completely but not rising as much as they would if the jobs of today were the same as the jobs of the past.

If machinist jobs paying $30 an hour are eliminated and filled by robots but a low paying service job is created paying minimum wage, we see employment numbers unchanged but wages decreasing.

So are people  better off than they were?  Not as much as they should be, if at all.

Making Less on More?

One of the things that you hear a lot is how good the economy is doing.

Another thing I hear a lot is how people are struggling to make ends meet.

These two things seem incompatible unless you consider some facts.

Unemployment is low but the jobs are not as good as they used to be for many as low paying service jobs replaced manufacturing jobs.

Jobs used to offer fairly comprehensive benefits including pension and health and now they have reduced both of those dramatically.

While average wages seem to be going up, the wages at the top are going up much more than wages in the middle and bottom.

Many of our recent and not so recent graduates are saddled with debt payments that they mat never be free of.

Much of the economic boon has been retained by industries or distributed to shareholders who are among those high earners already.

So as we migrate to a nation of haves and have nots, the have nots face increasing struggles to make ends meet.

Yet the statistics look good.

Public vs Private Services

One of the more insidious change of the last 30 or 40 years is that our old system of working for a company that provided us a decent living wage, health insurance and a pension has largely disappeared.

Those things got too expensive so we have seen automation ad outsourcing make each of us a free agent.

Few companies offer traditional pensions anymore, health insurance has large deductibles and co-pays and employment is often a tenuous thing as both companies and employees feel little loyalty to each other.

Further we have seen many of our young people saddled with student debt they may never pay off.

This is not the fault of the liberal elite, it is simply the obvious result of capitalist greed.

Those who can profit from us, do.

Instead of providing things like health care, schools and pensions as a public service we have seen the proponents of privatization (and profit) argue that the public sector is too inefficient and that the private sector can do it better.

It can for those who profit from it, not those who have to use it.

This belief that the private sector is more efficient, is simply not true, it is simply better at making some people rich and milking the rest of us.

If it does it cheaper, which it usually doesn't, it is because it cuts services, not because it weeds out inefficiency.

Yes, private industry is in many ways brutal in how it is willing to overwork people and cut jobs but is that really the goal?

Sunday Ramblings

Today we have attacks on a congressman because the district he represents has some issues.

One might wonder how the President thinks he shares none of the responsibility, he is the President of everyone.

He obviously doesn't feel that way as he works hard to divide the country, hoping that he can galvanize enough support to get re-elected.

One could argue that the inner city problems demonstrate that trickle down has failed, but it also demonstrates that our social programs have failed.

Perhaps it simply demonstrates that the poor will always be with us.

O course the issues are now becoming as common in the rest of the country as low paying jobs, lack of education and opioid addiction spreads.

The country is continuing to divide economically with our middle class dwindling.

Enough failure for everyone.

Economic Thoughts

We keep hearing about how good the economy is and by many measures it is doing well, unemployment rate, new jobs, etc.

However it is also true that these measures don't capture the reality many people face daily.

First Student debt is crippling for many who effectively mortgaged much of their future for a degree.

If you have the right degree and skills it may very well pay off, but many of our graduates end up working in jobs that give them little hope of paying off that debt, let alone accumulate enough to say buy a house or raise a family.

Farmers are suffering because of competition and our trade disputes with China who was a major buyer.  They can find other suppliers to satisfy their needs as more and more areas are cultivated at the cost of rain forests.

There has been effectively no progress in bringing back high paying mining and manufacturing jobs.  Yes some have been kept and a few have been created but most of the jobs being created are in highly technical areas or low paying service jobs.

The tax law provided significant savings and profits to many companies who used that money to pay dividends buy back stocks or increase executive compensation.  The wealth gap keeps increasing as the few derive the most benefits while the many tread water.

It did increase the deficit and therefore the national debt which is being managed because of the low interest rates but is eventually going to be a problem.  Its not a question of it, just when.

So is the economy strong?  Well it reminds me most of the early days of this century when many lived off homeowner equity by refinancing again and again.  It worked until one day it didn't.

Making America Second Rate

America has held a leadership position politically, economically and militarily for a number of years now.  We are now seeing that dominance, in economics and politics start to diminish.

We clearly maintain the largest military structure and it doesn't seem like it is going to be reduced any time soon.  However, we are seeing our economic leads and our political leads fading.

We are challenged to a large extent economically by rising economic powers as well as some older European ones.  Clearly China has the second largest economy and is likely to surpass us in the not so distant future.  To some extent this is simply due to the enormous population advantage they have so as they modernize the economy has tremendous growth potential.  We on the other hand are not helping ourselves by starting to restrict some trade opportunities and focusing on old industries instead of the industries of the future.

We also spend more of our GDP on the military than any of our rivals.  This is not the most productive use of those funds as it is not creating much in the way of new industries or opportunities.

Part of this dominance is tied to our leadership role in world.  We are clearly seeing that slipping.

Our wild accusations, failure to live up to international agreements and our imposition of tariffs and sanctions that are seemingly arbitrary are causing more and more countries to reconsider their relationship with us.  We have to some extent alienated our closest allies and emboldened our enemies.  Our policies are proving ineffective and self defeating.  In the areas we have initiatives, ongoing we seen effectively no positive results.  North Korea, Venezuela, Iran, the Middle East, the Ukraine are all either the same or worse than they were a couple of years ago.

Our approach, as apparently inspired by conservative media, is to bully these countries into submission.  There is no evidence that it is working and there is evidence that it is causing them to bypass some of our influence.

We are simply not in as strong a position today as we were two years ago despite propaganda on the right.  Nothing is better and much is worse.  Debt is soaring, our prestige has suffered and we are seeing attacks on our assets.  The one area that seems positive is our attacks on ISIS but that started before the administration and their policies have simply ceded the area to Russia.

Efficient Production

There is a fundamental economic principle which is that production will migrate to the most efficient method.

This is simply because the most efficient method will be able to compete better than all the other methods.  This is not an instantaneous change, although it can happen rapidly at times.

You also have to consider what is the discriminating factor.

Certainly coffee made at home is more efficient in price than coffee bought outside, but the second may actually be more efficient from a time perspective, especially considering the range of choices provided.

Still certainly for commodities and manufactured items, price is usually the deciding factor.

This has led to the decline in American manufacturing as advances in trade and transportation have allowed other countries to compete effectively in our markets.

The more significant labor is as a cost, the more competitive cheap labor countries become.  Of course we are also replacing expensive labor with robots and automation leaving us with our current situation, which is to some extent a real crisis.

Communities that were thriving with a local manufacturing plant are in many cases faced with real economic hardship as those plants have closed.  Those that have stayed open have oftentimes survived by automating and eliminating jobs.

Labor is obviously people and our economy is consumer driven, once again people.  People who make less spend less.  Sometimes not at first, they dip into savings, home equity, and incur credit card debt, but eventually those sources dry up.

Eventually some new equilibrium is reached, but to get there a lot of pain is required.

Paying for Tarifs

Manufacturers need to sell their products to stay in business.  Products that are essentially equal compete based on price.  Tariffs on a particular nation increase the price of that nations product.  If the tariff increases the price higher than its competition it won't get sold.  Manufacturers will reduce the price if at all possible to sell it.  It should be noted that the replacement item, is by definition more expensive than the original item, costing the buyers more.

The sentence above is a simplistic explanation as to who pays for tariffs.  What should be noted is that its always paid either fully or partially by the buyer, but the manufacturer or producer may lose profits.

In a simple example take an item that sells for $100.  First, the tariff is applied on the value of the imported item, not the final sale price.  So say that item when imported costs the importer $50 (the rest of the price includes the sellers costs and profit).  If it is hit with a 25% tariff the tariff would be $12.50.  If passed along completely to the consumer it would result in a final price of $112.50, not $125.

Now if a product is available that can be sold for less than $112.50 it will get more sales.  Assume the replacement product costs $105.  In that cast the manufacturer either reduces his price so he can match that price or accepts less sales.  In our example, and I apologize for the math, the $6250 of the imported item would have to be reduced to no more than $55 all things being equal.  With a 25% tariff, the price of the imported item would have to be reduced to $44.  So to stay competitive the manufacturer would absorb $6 in costs which could be viewed as paying part of the tariff.  However the tariff instead of being $12.50 is now $11 which is still passed on to the consumer, even thought the ultimate price increase was only $5.

In many scenarios the actual outcome is that the competitor sees and opportunity to raise its price from the $105 price point to say $110, make more profit and still capture more market share.

For all of you non-math lovers, the simple answer is that tariffs cause higher prices which consumers pay.  It may impact the place of manufacture or it may not, but it impacts our wallets.

Tax Us Via Tariffs and Give it to the Wealthy

I was watching a show in which the question was asked if out dontard really believes it when he says the tariffs are paid by China?

The answer seems to be tat he does, which would have been my guess since he is imposing the tariffs on Chinese goods.

The fact that he doesn't understand this when he was in various business over his lifetime is a bit surprising.  He was not generally involved in the type of business where he would have learned this.

He was originally a developer.  Developers have their own issues related to labor and materials but dealing with tariffs is not one of them, its just part of the product cost.

Most of his other so called businesses only required the use of his name with him having little to no real involvement, except maybe approving a color or being in an ad.

Not where you would learn about much of anything and certainly not tariffs.

He then was a reality host for a period of time and once again no practical knowledge of business except how much he was getting paid.

Those who consider him a business genius should think again.

So does he understand how tariffs work?  Probably not and he obviously thinks the tax money he is collecting doesn't come from Americans.

While the tariffs increase the cost of items bought by everyone, it is by definition a regressive tax, since it is the same for everybody.

Not a Robin Hood, he takes from the poor and gives to the rich, like every self serving dontard.

Devalued Labor

We have been seeing a significant shift in economics in that labor is getting cheaper because the supply has increased.

This is not all labor, some skilled labor is still in short supply.

However unskilled or low skilled labor has become widely available as we have added foreign sources and automation.

So much labor that used to require people is now done via automation or robots.

This has led to an overall drop in wages for the unskilled who use to get good pay working in factories or warehouses.

There is a long list of jobs that used to exist and which are now either gone or much reduced.

The trend isn't new, but it has accelerated.

It also isn't finished.

So while we may be reporting low unemployment, it isn't creating the pressure on the economy it once did, since many of the jobs are low paying.

In many sci-fi movies and books, the machines end up taking over.  If you visit some of our more advanced factories, the future is now.

Economic vs Social Issues

What is maybe the most interesting thing about politics in America is how people who are often the most in need of Government assistance have in many cases become loyal to a party that is determined to take that assistance away.

To a large extent this has been accomplished by making politics about social issues more than economic ones.

It has coincided with the erosion of Unions in this country and the erosion of the middle class.

Things like Abortion, Gun Rights, immigration, and anti-Political Correctness have prompted many people to vote against what is clearly in their best economic interests.

Of course they are told that by helping business and giving tax breaks to big business while reducing regulations they will benefit down the road with more jobs and better economics, but that hasn't worked yet and isn't going to.

Even an issue that the Republicans have pushed for ages, free trade (which made the same promises) has somehow been turned upside down and blamed on the Democrats.

In fact, while much of the nation is finding their economics in trouble as low paying service jobs have replaced the high paying manufacturing jobs they once had, these same people have been persuaded to support the people largely responsible.

On the other hand, many of the people who have benefited the most have gone the other way.

The hard working farmer in Mississippi who sees the Democrats as the devils representatives on earth because they want to abort his kids, take away his guns and turn his children gay is supporting a party that is putting tariffs on his exports, making it harder to hire inexpensive help and making health care unaffordable.

The current economy is in a sense a false positive as workforce participation and low paying service jobs have created statistics that look good.  Clearly a job is better generally than no job, but its far from the best economy ever, at least for the working man.  For much of our history we had a labor shortage but now with automation and overseas production, we have a labor surplus.

We are going to need more Government services and probably a better way to pay for them.

Its something that needs to be talked about.

Incentives

Sometimes I hear well meaning people talk about things that they obviously don't understand.  They make statements such as "That money should be used for community incentives instead of a corporate incentive".  Of course this implies that the money actually exists.  Almost all incentives are a reduction of taxes or fees that would otherwise have to be paid.  If the project doesn't happen there is no money at all, in fact there is less money.

Take the Amazon deal that is now not happening in New York.  It would have created about 25,000 jobs and would have redeveloped an area that is currently underutilized.  Yes to some extent it would have led to some disruptions of people living there, but it would have provided a strong tax base in the area, created all those jobs, created all the secondary jobs, increased the need for housing and in exchange they would have received about $3 billion in incentives.

Yes they are a rich company and maybe they don't need incentives but now that they cancelled the deal, the incentives won't happen, but neither will all the other things.  So New York doesn't have $3 billion to spend, they have less taxes and less income taxes for the indefinite future.

It means there is less money to spend on schools, and other priorities as well as less jobs in general.

Is this a better outcome than having a thriving business in Long Island City that would employ tens of thousands and pay direct and indirect taxes for the foreseeable future?

That is probably a matter of opinion, but what is clear is that the incentive money actually doesn't exist without the deal.

There are no spoils from this victory.  Just less all around.

Brick and Mortar

What is the future of Brick and Mortar stores?

Clearly Internet shopping has hurt them and will continue to do so, but are they in fact doomed or will they simply evolve?

The answer is obviously dependent on a number of things, but it seems that they are starting to evolve.

They are already in many cases serving as a local pick up option for on-line buying.

The one advantage they have, or one of the advantages is the ability to get an item instantly.

You go, you see, you buy, you have it.

Even with some incredible technology on-line requires a certain waiting period.

Even if you are ordering on-line, the ability to pick up the item at a brick and mortar location can be persuasive.

They may have to improve this option, I have used it in the past at a number of locations and they weren't particularly well run.

Sears in particular seemed onerous when I used them, and once you get an e-mail saying it is ready for pick up, you shouldn't have to wait once you arrive.

Sears is going to be saved in some reduced version and whether they can be a going concern may provide the answer to the question about brick and mortar stores, or maybe they are just beyond salvation.

I will say that other stores were generally better than them although they all have some issues.

It would seem that to capitalize on the fact that you have the customer in the store, you might want to have them in the store instead of some remote pick-up location.

I digress.  One area the brick and mortar stores offer is the sense of a place to gather.  You don't really do a lot of on-line shopping in a group.  Malls are already further evolving into a place with more amenities and a more pleasant environment.  Food courts are not the only option anymore.

I think at least some brick and mortar establishments survive and even thrive.  On-line shopping is here to stay, but as a place for social interaction, instant gratification and on-line distribution, they are filling functions that can't be replicated easily.

Robin Hood Democrats?

Most of us are aware of the story of Robin Hood, a person who robbed from the rich to give to the poor.

While most likely fictional, it has resonated over the years as a popular story and has inspired a number of books and movies.

This popular legend resonates because it was pretty clear that the rich of that time exploited the labor of the serfs who worked their lands.

The rich exploiting the poor is something that has happened almost everywhere almost always.

It has led to significant disruptions, think the French Revolution or the Russian Revolution to name two.

However the system has always ultimately reverted back to this model, as some of us manage to excel and surpass the rest of us in acquiring wealth.

I don't think too many of us object to the people who do this, like Bill Gates, or Warren Buffet.  They managed to create their own money and they certainly have the right to enjoy it.

What strikes many as unfair is how profits are distributed among those who generate them.  If you look at the statistics you see a number of trends which basically tell you the rich get richer and the poor are standing still at best.

One example would be CEO pay vs average worker pay.  In 1965 CEO's made about 25 times what the average worker made.  On average they now make closer to 200 times as much.  Have CEO's become that much better?

The problem of wage inequality is further compounded by the wealth inequality.  The average American has seen his wealth increase except of course the average hides a disturbing fact.  All that increase went to those in the upper percentiles while those in the bottom saw wealth stay the same or even decrease.

In the last election we saw the current President tap into the discontent this has sown by promising  to reverse that trend, however he has passed a tax bill that increases is.

The next election may see a whole different populist approach to fixing the problem, call it the Robin Hood one, or if you oppose it you might call it a socialist approach.

We'll see.

No Money for the Wall

Its pretty clear that when the dontard talks about negotiating with him he means you have to give him what he wants.

The spending bills that were previously passed by the Senate and which have now been passed by the House are bipartisan and include money for border security, just not a wall.

Only one of the spending bills even has anything to do with the wall.

His idea of negotiations was on display the last time the two sides met (last Wednesday) when he asked Nancy Pelosi if she would approve the money for the wall, she said no, he walked out.

The House has approved all the spending bills needed but the Senate now refuses to bring them up.

Clearly they would pass which would force the dontard to sign or veto.

He went from being proud to shutting down the Government to trying to shift the blame.

The House has passed the bills the Senate needs to bring them to the floor and if they pass he need to sign them.

They contain negotiated amounts which everyone (well the great majority) agreed to, but Homeland Security doesn't include a wall.

In his idiocy he thinks what the wall is made of makes any difference.  Its the cost of the wall which was never supposed to be paid by American taxpayers in the first place.

In terms of our Government, the amount isn't much percentage wise, but it is only a down payment.

The total cost is probably over $50bilion if funded to completion.

Money that we don't actually have thanks to the record deficits under this administration.

There is no money for this wall.

Economic Musing

We had a good job report for December and while that is encouraging, not everything is wonderful.

Looking at the report, available here Employment Report, it still seems like a continuation of the recovery started under the previous administration, which is fine, but not a booming economy.

Anyone can draw their own conclusions but it seems like the new economic reality for this country continues to clarify.

The days of doing well by just showing up are in the past.  The millions of jobs that used to filled by people acting like automatons are now filled by automatons.

You need to develop skills to do well and if you do the rewards can be significant.

If you don't the jobs and pay available are going to be barely enough to get by in this country.

Income inequality has continued to increase.  You need to hone skills that are needed or become an entrepreneur to succeed.

This is part of the problem that has permeated our society as we have a large group of people who feel under represented.

Many working Americans feel that Government helps the very poor and of course the wealthy people are doing OK, but they struggle to survive with little help or much of a future.

They can get jobs, but the jobs they get don't provide the lifestyle they see as the average American one, so they work multiple jobs.

They don't feel that the taxes they pay are doing anything for them (although they probably are) and they can't save for retirement, can't afford to send their children to college and live paycheck to paycheck.

They are told by certain media outlets that they are the forgotten Americans who are left out in the cold while the poor and immigrants get assistance.

The real solution to their issues is better income distribution.  The best way to achieve that is via a progressive agenda, but for many reasons, they generally oppose that.

So the economy continues on much like it has,, the rich get richer and the others don't.

Happy New Year

It would be nice if we could start the new year with a clean slate and a working government.

Unfortunately the government is probably as broken as it ever has been.

It doesn't seem likely that any big issues are going to get solved soon, so we will probably stumble along until the next big election in 2020.

Still, this is still a country of opportunity, although unfortunately, more and more, unequal opportunity.

It starts very young as the school you go to and the education you get is dependent on how much money your parents have and where they live.

If you grow up in a place where drugs and gangs offer the best path to success (at least material success) you are more likely to follow that path.

In many ways they are the perverted image of the American dream where anyone with skill, determination and luck can start at the bottom and rise to the top.

Assuming they survive and avoid prison.

Those two things provide plenty of vacancies on the way up.

Its a high risk path as opposed to the path in wealthy suburbs where students are groomed for the best colleges followed by traditional success opportunities.

Unfortunately most American occupy the area between these two strata, forced to overcome significant hurdles to get an education and often left with crippling student debt.

I've seen some recent studies that indicate success in life is more predetermined in America than it has ever been in the past.  There is still some social mobility, just a lot less of it.

You are likely to end up pretty much in the same circumstances as your parents, with the exception of second generation immigrants.