Say’s Law

Posted by PITHOCRATES - August 6th, 2012

Economics 101

Keynesians believe if you Build Demand Economic Activity will Follow

People hate catching a common cold.  And have long wanted a cure for the common cold.  For a long time.  For hundreds of years.  But no one had ever filled this incredible demand.  All this time doctors and scientists still haven’t been able to figure that one out.  Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates.  Which is quite the incentive for figuring out the ingredients to make one little pill.  So why hasn’t anyone found the cure for the common cold?

There are many reasons.  But let’s just ignore them.  Like a Keynesian economist ignores a lot of things in their economic formulas.  In fact, let’s try and enter the head of some Keynesian economists.  And have them answer the question why there isn’t a cure for the common cold.  Based on their economic analysis you might hear them say that we have a cure for the common cold.  Because a high demand makes anything happen.  Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet.  And that we need to get more people to catch colds so we increase the demand for a cure.

Keynesians believe if you build demand economic activity will follow.  Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it.  So Keynesians believe in government spending.  And love stimulus spending.  As well as taxing people to give their money to other people to spend.  Because having money to spend stimulates demand.  Consumers will consume things.  And increase consumption.  So suppliers will bring more things to market.  And create more jobs to meet that consumption demand.  Unless people save that money.  Which is something Keynesians hate.  Because saving reduces consumption.   Which is about the worst thing you could do in the universe of Keynesian economics.  Save money.  For in that universe spending trumps saving.  In fact, spending trumps everything.  No matter how you create that spending.  Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity.  Because these ditch diggers/fillers will take their paycheck and spend it.

Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have

Of course there is a problem with this economic theory.  When you take money away from others they haven’t created new economic activity.  They just transferred that spending to someone else.  The people who earned that money spend less while the people who didn’t earn it spend more.  It’s a wash.  Some spending goes down.  While some spending goes up.  Actually there is a net loss in economic activity.  Because that money has to pass through government hands.  Where some of it sticks.  Because bureaucrats have to eat, too.  So the people receiving this money don’t receive as much as what was taxed away.  So Keynesian stimulus doesn’t really stimulate.  It actually reduces economic activity from what it might have been.  Because of the government’s cut.

And it gets worse.  Because this consumption demand doesn’t really create jobs.  We get nothing new out of it.  What do people demand?  Things they see.  Things they know about.  For it is hard to demand something that doesn’t exist.  You see a commercial for another incredible Apple product and you want it.  Thanks to some great advertising that explained why you must have it.  In other words, when you give money to people all they will do is buy things they’ve always wanted.  Things that already exist.  Old stuff.  It’s sort of the chicken and the egg thing.  Which came first?  Wanting something?  Or the thing that people want?

Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff.  But it won’t help Apple create more new things to bring to market.  Things we don’t even know about yet.  If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things?  Things we don’t even know about yet?  Things that we will learn that we must have?  Once upon a time no one was asking for portable cassette players.  Then Sony came out with the Walkman.  And everyone had to have one.  Once upon a time there were no MP3 players.  No smartphones.  No tablet computers.  Now people must have these things.  After their manufacturers told us why we must have them.  Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.

Say’s Law states that Supply Creates Demand

Supply leads demand.  We can’t ask for the unknown.  We can only ask for what the market has shown us.  Which is why Keynesian economics doesn’t work.  Because focusing on demand doesn’t work.  Giving people money to spend doesn’t stimulate creativity in the market place.  Because that money was taxed out of the market place.   Reducing profits.  Leaving less for businesses to invest into research and development.  And reducing their incentive to take big risks to bring the next big thing to market.  Like a phone you can talk to and ask questions.  Again something no one was demanding.  But now it’s something everyone wants.

Jean-Baptiste Say (1767–1832) was a French economist.  Another brilliant French mind that contributed to the Enlightenment.  And helped advance Western Civilization.  He observed how supply led demand.  Understood production was key in the economy.  He knew to create economic activity you had to focus on the producers.  Not the consumers.  Because if we encourage brilliant minds to bring brilliant things to market the demand will follow.  As history has shown.  And continues to show.  Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it.  Or said in another way, supply creates demand.  A little law of economics that we call Say’s law.

If Keynesian economics worked no one would have to have a job.  The government could print money for everyone.  And the people could take their government dollars and consume whatever was in the market place.  Which, of course, would be pretty sparse if no one worked.  If there were no Steve Jobs out there thinking of brilliant things to bring to market.  Because supply creates demand.  Demand doesn’t create supply.  For fists full of money won’t stimulate any economic activity if there is nothing to buy.  So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold.  You take the homemade concoction and in a week or two it cures you.  Of course, the cold just ran its course.  Which is how recessions end.  After they run their course.  Which can be a short course if there isn’t too much Keynesian intervention.

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Stages of Production

Posted by PITHOCRATES - July 16th, 2012

Economics 101

People used their Human Capital to Transform Raw Materials into Something Valuable

As we unleashed our human capital civilization advanced.  Our food needs taken care of thanks to advances in agriculture we used our new free time to think.  To think about transforming the world around us.  By exploring our world.  And the stuff that made it.  Great civilizations rose and fell throughout history.  But the ones that really advanced the world were those in northern Europe.  The people who conquered the oceans.  The Portuguese.  The Spanish.  The Dutch.  The French.  And the British.

As these great European powers set out to explore the world they established colonies in faraway lands.  To gather the raw materials available.  And to ship them back to their mother countries.  Where their advanced civilizations would transform those raw materials into higher value finished goods.  And then export them throughout the world.  Including their colonies.  This was mercantilism.  Establish colonies.  Ship raw materials to the mother country.  Export finished goods.  And Import bullion accepted in payment for those finished goods.

It’s not a good economic system.  Mercantilism.  But it did create the United States.  Which started out as a British colony.  But as a colony of a mercantilist country the Americans had to follow the rules of the mother country.  First of all they had to understand their place.  And purpose.  They were subordinate to the mother country.  And their only purpose was to procure raw materials and ship them to the mother country.  They couldn’t open trade with other countries.  Everything that left the colonies had to go on a British ship to a British port.  Where British manufacturers would transform those raw materials into finished goods for export.  The British did this because finished goods were more valuable than raw goods.  And sold for much higher prices than the raw materials sold for.  So Britain did the manufacturing.  While their colonies fed their manufacturers with raw material.

The Stages of Production is the Economic Activity that happens to bring Finished Goods to Market

The British eventually abandoned mercantilism and adopted free market capitalism and free trade.  And the British Empire went on to rule the world for a century or so.  This after losing the American colonies in the Revolutionary War, losing about half of their empire.  So free market capitalism is clearly superior to mercantilism.  But for a couple of centuries mercantilism built empires.  And provided an excellent example of the stages of production.

Raw materials mean little to consumers.  What we like are the things that people with human capital transform them into.  The things we go to the store to buy.  Such as a smartphone, for example.  Whenever a new model comes out we flock to our favorite retail store to buy it.  The retail store has it to sell because they bought a shipment from their wholesaler.  The wholesaler had it to sell because they bought it from the assembly plants that assembled them.  The assembly plants could build them because they bought the components (displays, hard cases, antennas, keys, circuit boards, etc.) from various manufacturers.  And the various manufactures bought raw materials from those who extracted them from the ground.  Interconnecting all of these is ship, rail and truck transportation.  Even planes.  Not to mention an extensive cellular network to make these smartphones work.  As well as all the software applications they run.  Adding value at every stage along the way.

There is much economic activity that happens to bring that smartphone to your favorite retail store.  Throughout these stages of production.  Note how everything else has to happen before you buy that smartphone.  Going all the way back to the extraction of raw materials from the ground.  All of these stages have to happen before you buy that phone.  So the payment for the phone follows much later than all of these other stages.  Introducing a very important element in the stages of production.  Time.  It takes time to bring things to market.  And because it takes time it also takes money.  Everyone working from raw material extraction to the salesperson selling you the phone earns an income.  And their employers pay them before you buy your phone.  Some a lot earlier than others.  Also, all of these people either work in a building.  Or in the field with equipment.  Things that others have to build first before we can even begin our raw material extraction.  Requiring an enormous capital investment before anyone earns a dime of revenue on the sale of a smartphone.

The British Empire went on to Rule the World for a Century or More because they let the Market Manage their Economy

To bring a smartphone to a retailer near you requires people to risk their money by investing in something that may earn a profit.  Investors.  And bankers.  As people saved their money they created large pools of capital for businesses to borrow.  Venture capitalists bankrolled promising entrepreneurs.  And the big corporations turned to the equity and bond markets to raise their capital.  Individuals worked hard and saved money to put in their savings account.  Or to buy stocks and bonds.  Because they did there was money to borrow.  Or to invest.  And because there was money to borrow and invest the stages of production could begin.

In the days of mercantilism the government controlled much of this.  Even providing some of that early capital.  But as the economy grew more complex it was too complex for government to manage.  Which is why the British Empire went on to rule the world for a century or more.  Because they let the market manage their economy.  A myriad of people in the market place pursuing their own interests.  Pursuing profits.  Which is why free market capitalism works.  For no one person could know enough to manage all of the stages of productions to bring a smartphone to market.  And the beautiful thing is in free market capitalism no one person has to.  For when people throughout the stages of production pursue profits smartphones arrive at a retailer near you.  At reasonable prices to boot.

So the next time you pick up a smartphone at a retailer think of everything it took to bring it to your hands.  And everything it takes to operate it as you wish.  Hundreds of thousands of people pursuing profits.  Most of which have no idea what they’re doing will allow you to hold a smartphone at your favorite retailer.  Because in the stages of production everyone does their part.  Without any consideration of what their part is in the big picture.  Which is why it works so well.  Thanks to people thinking.  And unleashing their human capital to create great things throughout the stages of production.

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Competition, Mom and Pop Store, Big Box Store, Cooperative, Internet Sales, POS System, Inventory Control System and Wal-Mart

Posted by PITHOCRATES - July 3rd, 2012

History 101

Big Box Stores offered More Choice and Lower Prices putting Mom and Pop Stores our of Business

Competition makes everything better for consumers.  Consumers love competition.  Because it gives them so much to choose from.  And choice is good.  Especially when that choice lowers prices.  And raises quality.  Which is why we love competition.  But it’s not very popular with businesses.  Especially the older ones.  Used to doing things the old way.  Who got into a comfortable rut.  Doing things the way they always did them.  Enjoying their comfortable incomes.  Until something arrived that shattered their world. 

America became the innovative capital of the world.  Thanks to their entrepreneurs.  In the land of liberty they were free to do great things.  Invent great things.  And go into business.  In cities and small towns everywhere moms and pops opened up shops.  Mom and pop stores.  Family affairs.  Serving their communities with quality goods and services.  At reasonable prices.  At least what people thought were reasonable prices.  Often times there was little competition for these mom and pop stores.  Apart from other mom and pop stores.

Mom and pop stores don’t have large sales.  Or large purchasing power.  So their prices are higher than a competitor who has large sales and large purchasing power.  Mom and pop office supply stores learned this lesson quickly when Office Max opened in town.  And Office Depot.  And Staples.  Big box stores that offered more choice and lower prices.  And no matter how much we loved our mom and pop stores when we had a chance to get more for less we chose to get more for less.  And these big box office supply stores put the mom and pop office supply stores out of business.

Advanced POS and Inventory Control Systems allow a Large Variety of Items at Low Prices

The mom and pop hardware stores suffered the same fate.  When the big box home improvement stores moved in.  Builders Square.  Home Quarters.  Home Depot.  Lowes.  Who served both consumers and contractors.  Giving them huge economies of scale.  Moving such a wide variety of material at low prices the small mom and pop hardware stores could never match.  Some survived.  Offering services like they did in the old days (like fixing a broken window).  And joining a cooperative (such as True Value or ACE Hardware) to match the purchasing power of the big box stores.  To get some economies of scale.  But more have gone out of business than stayed in business.

During the Eighties a lot of computer stores opened as the personal computer industry took off.  A lot of small stores custom built PCs.  Sold dot-matrix printers.  Fanfold printer paper.  Printer ribbons.  Floppy disks.  Cables.  External storage devices.  With the advent of the Internet they added dial-up modems.  As the industry grew the big box stores came in.  CompUSA.  Computer City.  The big box office supply stores.  Best Buy.  And Circuit City.  Put the small computer stores out of business.  By providing a huge variety at low prices.  They added software.  Games.  Uninterruptible power supplies.  And other electronic devices (PDAs, digital cameras, game boxes, game controllers, etc.).  Then Internet sales took off putting pressure on the big box stores.  Putting some of them out of business.

A big driver in the move away from the mom and pop stores to the big box stores is technology.  In particular inventory control systems.  Tied into their point of sale (POS) systems.  Buying a lot of goods and storing them in large warehouses is costly.  Because inventory doesn’t earn any revenue.  It costs to warehouse items.  And it takes cash to place things into inventory.  Businesses buy these things to sell them later.  If they buy too much of the wrong things they may sit in those warehouses.  Becoming less valuable as people’s interests change.  Requiring deep discounting to move these unwanted items out of inventory.  On the other hand, if you don’t carry a large inventory there is a chance you may run out of something that is popular and is selling.  This is where technology comes in.  When a cashier completes a sales transaction a lot of things happen automatically.   As people receive their change from the cashier the POS system automatically interfaces with the inventory control system.  It updates the system to show the reduction in inventory.  And the inventory control system places an automatic order to replenish the inventory.  The successful big box stores carry smaller inventories of each individual item.  Allowing them to carry a larger variety of items.  Which is how they can offer a larger variety at lower prices.

Stores like Wal-Mart are the People’s Hedge against Bad Fiscal and Monetary Policy 

The king of retail, Wall-Mart, got to be king with technology.  The ultimate big box store that sells just about everything under the sun (groceries, clothes, hardware, gardening supplies, electronics, prescription drugs, you name it).  They have taken inventory control systems to an art.  They combine economies of scale and efficiency that few can match.  They sell so much that they get to buy at the best prices.  And their sophisticated POS and inventory control systems keep the shelves stocked with the things people want to buy while keeping their inventories lean.  Few stores please consumers more by their wide variety and low prices.  Allowing them to fill their shopping carts without having to sacrifice other family needs.

Competition created Wal-Mart.  Because people wanted more choice and lower prices.  And Wal-Mart figured out how to do that.  Something the mom and pop stores just couldn’t do.  Which is why Wal-Mart stores are opening everywhere.  The people love them.  And the people want them.  Or they want the store that puts Wal-Mart out of business by offering even more choice at even lower prices.

Of course this begs the question why do people want more choice at lower prices?  Are they greedy?  Materialistic?  No.  They’re just not rich.  More and more of their income is taxed away at the local, state and federal level.  And prices keep rising thanks to Keynesian monetary policy.  Which continuously expands the money supply to ‘stimulate’ the economy.  Higher taxes and permanent inflation is why two-income households have become the norm and not the exception today.  And why shoppers love stores like Wal-Mart.  Because stores like Wal-Mart are the people’s hedge against bad fiscal and monetary policy.  Which is the true destroyer of mom and pop stores everywhere.

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Free Market Competition

Posted by PITHOCRATES - July 2nd, 2012

Economics 101

Competition makes Everything Better for Consumers

Let’s go back a hundred years or so.  When the railroads were making their way west.  Through barren and unforgiving country.  Where a depot is built in the middle of nowhere.  One day it will become a city but now is just a shack or two.  And a water tower along the tracks to replenish the steam locomotives.  This is the closest thing to civilization for hundreds of miles.  Railroad building supplies head west on the new track to continue the track further west.  And the trains stop to fill their locomotives with water.  You look at all that traffic passing that depot and decide to open up a diner/saloon to replenish all those people.  Who are earning wages.  But have nothing to spend them on for hundreds of miles around.

There’s no electricity yet.  Or ice.  So the meat shipped to the diner may not be the freshest.  But you can cook it with a lot of spices to hide any bad taste in case the meat is rancid.  Liquor comes out without any spoilage.  It’ll last so long that you can keep watering it down to make more money per bottle.  Your diner/saloon can be dirty and overrun with bugs.  You can just throw the bugs into the pot to make the meat go further.  It doesn’t matter.  Because for most of your customers this is the only place to come to eat and drink.  Even if they get ill from eating bad meat they’ll keep coming back.  Because where else are they going to go?

Your costs are low.  And your prices are high.  You’re doing very well.  It’s nice being the only diner/saloon at this depot.  But then a town starts growing around the depot.  And another diner/saloon opens.  It’s cleaner.  They serve fewer bugs in their food.  Their meat is less rancid.  Their liquor is less watered down.  And their prices are lower.  Everyone who eats and drinks at this depot-town eats and drinks there.  Not at your filthy shack.  You quickly go from making a lot of money to making nothing at all.  Because this new competition in town took away all of your business.  For competition makes everything better for consumers. 

When the Government Interferes with the Free Market there is no Incentive to Please their Customers

Competition is key to the free market economy.  And it’s the most important thing.  Even more important than government regulation.  Because with competition you don’t need regulations.  You don’t need inspectors.  You don’t have to file complaints.  You don’t have to wait for corrective action.  Because if you have competition you have something that works better.  And faster.  Pleasing customers.  If you don’t please them more than your competition then you will lose your customers to your competition.  This is a powerful incentive to lower your prices.  Improve the cleanliness of your establishment.  And to improve your quality.  Competition makes businesses try harder to please their customers.  On their own.  Without compulsion.

In the above example the first diner/saloon owner could have appealed to the government.  Asked the government to prohibit the second establishment from opening.  Saying that it was destructive competition.  That they were dumping lower-priced food and drink onto the market to put the first establishment out of business.  So they could raise their prices higher and lower their quality when they do.  That the market wasn’t large enough to support two businesses.  That their lower prices mean they will pay their employees less.  And a whole host of other bad things that will follow if this second business opens.  Of course the second business has none of these complaints.  Because they offer better quality at lower prices.  They don’t need the help of government.  Just a competitive free market.

If the first business should prevail in their request for government help the government will take action.  Force the second business to shut down.  Make them sell their food and drinks at higher prices.  Charge them a special excise tax on all their sales to raise money to transfer to and help the first business.  Or some other action to make the market ‘fair’ again.  Which means allowing the first establishment to continue to sell lower quality at higher prices.  Which they would.  For with the power of government helping them they have no incentive to please their customers.  So they don’t.  So people with no choice have to pay more for lower quality.  And this is what happens when the government interferes with the free market.

Free Market Competition delivers High Quality at Low Prices with the Most Efficient Allocation of Resources 

Competitive free markets also guarantee that businesses use resources in the most efficient manner.   As they try to sell the highest quality at the lowest price they will buy very carefully.  They will buy only the things they can sell.  And only enough of them to meet their demand.  For if they buy more than they can sell it will only raise their prices.  As those prices have to pay for the things they sell.  And the things they can’t sell.  So there is a very strong incentive to buy only what they absolutely need.  Leaving things for others to buy.  Which is much better than having some government bureaucrat allocate resources.

Suppose the government owned the railroad and all the depot-towns along the line.  And each depot has a diner/saloon.  Each depot-town is about the same size.  So the government bureaucrat ships the same supplies to each depot.  One barrel of flour.  One barrel of cornmeal.  One barrel of salted pork.  Two sacks of beans.  Four sacks of coffee.  Five cases of whisky.  And so on.  But the people don’t eat and drink the same in each of these depot-towns.  Some drink more liquor than others.  Some drink more coffee than others.  Some eat more meat than others.  Some eat more beans than others.  Depending on the season.  The cattle drives.  Whether the farmers are sowing or reaping.  The religious pilgrimages.  The weather.  Etc.  The local diner/saloon owners are in tune with the rise and fall of demand.  But the government bureaucrat 2,000 miles away isn’t.  So some receive more than they can use.  Others run out before the next shipment.  Making the allocation of resources inefficient.  Leading to waste.  And higher prices to pay for all of that waste.

Free market competition always works best.  And the more problems that we solve by creating more competition the better the solutions are for the people ultimately paying the prices.  The consumers.  As free market competition delivers high quality at low prices with the most efficient allocation of resources.  Giving us things like the high-definition television.  The smartphone.  The tablet computer.  And our morning coffee.  Where quality just keeps getting better while prices keep falling.  When we don’t use free market competition we get high prices, poor quality and inefficient resource allocation.  From cable television that increases rates while lowering quality (we’ll be at your house either sometime in the morning or sometime in the afternoon tomorrow or the day after.  Please have someone available at your home to meet our technician).  To waiting in line to renew your driver’s license.  Which is about as enjoyable as a root canal.

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Comparative Advantage and Free Trade

Posted by PITHOCRATES - May 21st, 2012

Economics 101

Mercantilism benefited only Protected Industries which Profited Handsomely from Higher Consumer Prices  

The Age of Discovery ushered in the era of mercantilism.  An era of trade.  But protected trade.  Tariffs, quotas, protectionism, restrictions, subsidies, etc.  You name it they used it.  To favor their trade position and their domestic industries.  And to restrict that of everyone else.  For mercantilism was a zero-sum game.  You only did well if others did not.  A thought that still has traction today.  Especially in older, inefficient industries.  That cannot compete with international competition that provides better quality at lower prices.  Such as textiles.  Steel.  Automobiles.  The Americans protected these industries in the face of better foreign competition.  Which only hastened their decline.

A protected industry has no incentive to improve.  When protective tariffs raise prices of lower-priced and higher-quality imports consumers buy the inferior domestic goods.  Because the tariffs make the better goods more costly.  So when a business has a captive audience their only focus is in maintaining that protectionism giving them that advantage.  Not improving their quality.  Or improving their productivity to lower their prices.  Why?  Because they don’t have to.  So prices continue to rise to pay for inefficient labor and management.  And quality continues to decline due to the lack of real competition forcing them to continually provide a better product.  By improving designs.  Production methods.  And making capital investments in new machinery and equipment.

This is the cost of protectionism.  Poorer quality and higher prices.  Because of the misguided belief in the zero-sum game of mercantilism.  There was a reason why mercantilism was abandoned for free trade.  Because free trade was better.  For consumers.  Giving them lower prices and higher quality.  Whereas mercantilism benefited only those protected industries which profited handsomely from those higher consumer prices.  And the government officials who granted those favorable protectionist policies.

The Consumer gets Lower Prices AND Higher Quality thanks to the Division of Labor, Specialization and Comparative Advantage

As civilization advanced so did the division of labor.  People began to specialize.  Instead of growing our own food, making our own tools, spinning our own pottery, etc., we did only one thing.  And did it well.  Then we traded the things we made for the things we didn’t make.  This division of labor created a middle class.  And this middle class would take their goods to market to trade with other middle class artisans.  At first bartering with each other.  Trading good for good.  Then they introduced a temporary storage of value into the economy.  Money.  Making those trades easier by reducing search times.  Trading your goods for money.  And your money for goods.  Making life a lot simpler at the market.

Let’s take a closer look at the division of labor.  Let’s consider two artisans.  A toolmaker.   And a potter.  Both are skilled craftspeople.  And can make an assortment of goods.  But each excels at one particular skill.  The toolmaker can make 10 plows a day.  But if he makes 2 pottery bowls he can only make 4 plows in that same day.  The potter can make 12 pottery bowls in a day.  But if he makes 3 plows he can only make 5 pottery bowls in that same day.  Each can make more of their specialty.  But when they try to make other things in addition to their specialty they can’t make as much of their specialty as before.  So there is a cost to the toolmaker to make pottery.  To make 2 bowls cost the toolmaker 6 plows.  And there is a cost to the potter to make tools.  To make 3 plows cost the potter 7 bowls.  So the economy as a whole is better off when the toolmaker and the potter focus all of their energies in their own specialty.  When they do we get 10 plows and 12 bowls in one day.  When they don’t we only get 7 plows and 7 bowls.

We call this economic principle comparative advantage.  Where we look at economic output.  Which is what matters.  The more we bring to market the better it is for consumers.  Because greater quantities mean lower prices.  And when these skilled craftspeople focus on their specialty they improve the overall quality of the goods they bring to market.  So the consumer gets lower prices AND higher quality.  Thanks to the division of labor.  Specialization.  And comparative advantage.

We will always Have Jobs regardless the Size of our Imports for Having a Job is the Only Way to Buy those Imported Goods

If you multiply this over and over again to represent all the individual economic exchanges throughout the world you see why free trade is better than the protectionist policies of mercantilism.  Because it provides consumers with greater economic output at lower prices and higher quality.  This is why nations practicing free trade have the highest standards of living.  Because their people can walk into large department stores and fill their carts with inexpensive, high quality goods on a moderate paycheck.  Which could never happen if the mercantilists had their way.

The old inefficient industries want tariffs to increase the costs of those goods we fill our shopping carts with.  Including the food we eat.  And the cars we drive.  They use lofty arguments about protecting American jobs.  But those protectionist policies destroy jobs by increasing costs for businesses throughout the supply chain.  Raising consumer prices everywhere.  Reducing the amount of things we can buy.  Meaning businesses can’t grow and create new jobs.  Or they have to cut back production and eliminate existing jobs.

There’s also a lot of talk about the balance of payments.  Which actually meant something during the days of the gold standard.  For any trade deficits had to be paid for with gold.  But we don’t have the gold standard anymore.  Governments everywhere abandoned it in favor of irresponsible government spending.  So we don’t have to pay for trade deficits with gold.  Most money today is just electronic entries in a computer.  International capital flows have never been greater.  There are currency markets where people actively trade the world’s currencies.  So trade deficits don’t mean the same thing they once did in the mercantile world.  Then there’s the argument that if all our manufacturing jobs go overseas there will be no jobs for Americans.  If we import everything and export nothing there will be jobs everywhere but here.  Sounds like a problem.  But can that happen?  Not unless we get those imports for free.  So we will always have jobs regardless the size of our imports.  For having a job is the only way to buy the imported goods in those department stores.

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FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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Business Cycle

Posted by PITHOCRATES - February 13th, 2012

Economics 101

When you have a Captive Audience you can Charge whatever Prices you Want

Go to a football game lately?  Hockey?  Basketball?  Baseball?  It’s a pretty expensive day out.  Especially if you eat while in the stadium.  Those concession prices are pretty steep.  In fact, people say that stadium food is some of the most expensive food anywhere.  I don’t.  I say it is some of the highest quality and some the most fairly priced food you’ll find anywhere…in the stadium.

Stadium food is convenient food.  And that’s what you’re paying for.  Convenience.  Because it’s too great of an inconvenience to leave the stadium to buy a more reasonably priced hotdog someplace else.  And despite what the critics say of concession pricing, those concessions have long lines.  Because people may say the prices are too high.  But deep down they know what a bargain they are.  Delicious food cooked and sold only steps away from their seat.  It’s better than at home.  And there’s no cleanup.

When you have a captive audience you can pretty much charge what you want.  Because the market is fixed.  Stadiums charge a fortune for those concession spaces.  Because running a big stadium is expensive.  And it’s not really used all that often.  I mean, there are only 8 home games in the regular season in football.  Doesn’t give the stadiums much time to earn revenue to pay for these expensive things.  So they charge high fees wherever they can.  So the concessioners have to pass that cost on to the customer.  As all businesses do.  And when you have a captive audience it’s a whole lot easier to do this.  Because, where else are the people going to go?

Competition Increases Quality and Lowers Prices for Consumers

Let’s look at this in another way.  Say you have a friend who works for a catering company.  He drives a ‘roach coach’.  He stops at the factories and local construction site to sell food to hungry workers.  He sees the money these trucks make.  Considers his paycheck.  And thinks he’s tired of making his boss rich.  So he buys a truck for himself.  And looks for his own territory.

Now let’s say you go on an evening bike ride on weekends.  And you come across your friend.  He’s found some prime real estate to park his roach coach on.  In the median of a boulevard across from an automobile assembly plant gate.  Where he has a captive audience.  Hungry workers working the midnight shift with no place else to buy delicious food.  Business is good.  You stop by on your bike ride and buy a snack and chat.  Then one night you noticed a beat up Ford Pinto pull up in the median not far from your friend’s truck.  He pops the hatch.  And you start smelling something.  Something good.  Fresh pizzas.  And hot fresh subs.  This guy owns a pizzeria.  And just closed for the night.  After filling his car with fresh pizzas, hot fresh subs and soda.  And just like that business wasn’t so good for your friend anymore.  For fresh pizza and hot fresh subs are more delicious than the sandwiches and cans of stew your friend was selling.  But one thing the Pinto didn’t have that your friend did.  Ice.  He was selling warm soda.  Or trying to.  Your friend had cold soda.  And that was just what the doctor ordered on a hot, humid, summer night.  Your friend was now sharing his captive audience.  Selling less than he was.  And at lower prices because of this new competition.  But he was still able to turn a profit and make his truck payment.

Then the Pinto guy took it up a notch.  One night, as the workers headed out into the median on break, he pulled out a tub filled with ice.  And soda.  “Cold soda,” he barked.  “Ice cold soda.”  This squeezed your friend’s sales even more.  He had nothing left to compete with but price.  So he lowered his prices even further.  Barely breaking even.  Then one night someone else pulled up on the median.  A beat up AMC Gremlin.  Some kid just out of high school got out.  Popped the hatch.  And started barking, “Fresh McDonald Big Macs.  French fries.”  And, of course, ice cold soda.  The kid didn’t have a lot.  But what he had he was selling at a nice markup.  Which was enough for him.  Because he had no overhead.  And made enough to by some beer later that night.  A very modest sales goal.  But it split that captive audience three ways.  Soon your friend was losing money.  Then the economy went into recession.  And they discontinued the midnight shift.  Your friend lost his truck.  And went back to driving a truck for his former boss.  The Pinto guy increased his pizzeria’s delivery radius to make up for the loss business.  And hired the Gremlin kid to help with those deliveries.

The Business Cycle is a Natural and Necessary Part of the Economy and is the Only Way Supply adjusts to Demand 

From the perspective of the workers increasing competition made things better.  Competition gave them more variety.  Higher quality.  And lower prices.  Over time that competition gave them more value for their money.  This microcosm of the economy was booming for awhile.  Others jumped in.  Making investments.  Increasing their inventories.  But eventually they expanded too much.  Supply exceeded demand.  Some inventory went unsold.  Prepared food not being something you can return these people had no choice but to cut their prices.  To reduce those burgeoning inventories.  The guy with the highest overhead, your friend with the catering truck, was the first to fail.  Then the market collapsed completely with the elimination of the midnight shift.  So the other two had to shutter their operations there.

We call this the business cycle.  It’s the boom-bust cycle of the economy.  From good economic times (boom) to recessions (bust).  It’s the natural ebb and flow of economic exchange.  When the market presents a demand to be met supply flows into it.  At first prices and profits are high.  Like at a stadium with a captive audience.  Then competition moves in.  Unlike at a stadium.  That demand is now split between the competition.  Each sells less.  And profits less.  To try and increase sales they try to offer better value for the money.  Tastier food.  Colder soda.  Etc.  When that doesn’t work any longer they start lowering prices.  But because supply built up so much as eager competitors joined in get a piece of that action supply grew so much it exceeded demand.  And no amount of price cutting can fix that.  Only a recession.  To reset prices and supply to meet market demand.  Which means some businesses fail.  Those who don’t lay off employees.  To reset their prices and production to levels that meets demand.

Monetary and fiscal policy tries to massage this business cycle.  By softening the recession part of it.  By lowering interest rates.  To encourage businesses to invest and expand production.  And hire more employees.  Or by increasing government spending.  Creating jobs by building roads and bridges.  Or by simply giving more money to consumers (via tax cuts or stimulus checks) to encourage them to buy more.  Thus encouraging businesses to hire more workers.  To meet this ‘higher’ demand.  Of course, in our example, this wouldn’t have helped our three businesses.  None of them would have borrowed cheap money to increase supply.  Not when supply already exceeded demand.  In fact no amount of monetary or fiscal policy action would have helped.  It certainly wouldn’t have added back that midnight shift.  Unless the government started buying cars for people.  Which might have put people back to work on that midnight shift.  But such an expansion of government spending would have increased taxes.  So high that it would have reduced economic activity elsewhere.  As it transferred this money out of the private sector and into the public sector.  Saving a few jobs at the cost of consumers everywhere paying higher taxes.

The business cycle is a natural and necessary part of the economy.  It’s how supply adjusts to demand.  And the only way supply adjusts to demand.  Thanks to prices.  That automatic mechanism that tells businesses exactly where supply should be.  And by interfering with this you make markets operate blindly.  Unable to know when supply exceeds demand.  So supply keeps increasing even after it already exceeds demand.  Creating bubbles.  And when the bubble bursts prices plummet.  To unload those burgeoning inventories.  Making recessions longer and more painful than they need be.

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Obama Favors Protectionism to Save Manufacturing Jobs that Employ Few while Increasing Costs for Consumers Everywhere

Posted by PITHOCRATES - January 28th, 2012

Week in Review

In full campaign mode, Obama seeks the support of unions in the manufacturing industry (see Why Manufacturing Can’t Solve The Jobs Problem by Roya Wolverson posted 1/27/2012 on Time Business).

Among other things, Obama’s State of the Union speech Tuesday drove home the idea that U.S. industries need more protection. “Over a thousand Americans are working today because we stopped a surge in Chinese tires,” he said in his speech. That’s all fine and good if your goal is to hold on to U.S. manufacturing jobs. But it’s not going to solve the country’s overall unemployment problem. And in the end, it may cost the American consumer more than those jobs are worth.

For one thing, raising trade barriers on imported goods like tires makes tire-buying more expensive for American consumers, which, as Matthew Yglesias points out, only undermines those consumers’ ability to spend elsewhere. It also provokes countries like China to raise trade barriers on U.S. goods, which makes the job of increasing U.S. exports and export-related jobs even harder. Even if protections did save some manufacturing jobs, they wouldn’t be enough to move the needle on unemployment. It’s worth remembering that only 11% of U.S. jobs come from manufacturing, thanks to globalization, which has taken jobs abroad to lower-wage countries, and technological advances that have increased worker productivity. And that percentage has been declining steadily for several decades.

…And since we can’t reverse that process, the biggest gains in the job market can’t come from greater protections, but instead from gains in technology. Standard Chartered’s Gerald Lyons made the point today that, despite the enduring public perception that technology kills jobs, for every one job technology destroys, it creates 2.1 other jobs. Thus, instead of clinging to our past by supporting unproductive industries and erecting trade barriers, the U.S. has to find “the types of jobs that are fit for this country’s future,” argues Diamond.

Once upon a time the whale oil business was booming.  And a lot of people where employed in the whaling industry.  Until John D. Rockefeller came along.  Who created Standard Oil.  Introduced Americans to kerosene.  And put the whale oil business out of business.  Creating far more jobs in the petroleum exploration and refining business than the whale oil business ever did.  Now if President Obama were in office during this time he would have placed a tax on kerosene to protect those whale oil business jobs.  Because although he may talk about the jobs of the future, he wants to protect the jobs of the past.  Especially if they are protected by a strong union.

When only 11% of U.S. jobs are  in manufacturing, this protection of the jobs of the past is also very costly.  Because to save 11% of jobs in the economy he will raise prices on everything in the economy.  Meaning 100% will pay a surtax so the 11% can keep these jobs of the past.  So to sustain a little economic activity he will kill a lot of economic activity.  Which doesn’t make sense.  But it will protect union jobs.  And sustain contributions to Democrat coffers.  Which is the whole point of saving these jobs of the past.

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Consumption, Savings, Fractional Reserve Banking, Interest Rates and Capital Markets

Posted by PITHOCRATES - January 23rd, 2012

Economics 101

Keynesians Prefer Consumption over Savings because Everyone Eventually Dies

Consumer spending accounts for about 70 percent of total economic activity.  This consumption drives the economy.  In fact, someone built a school of economics around consumption.  Keynesian economics.  And he loved consumption.  John Maynard Keynes even created a formula for it.  The consumption function.  Which basically says the more income a person has the more that person will consume.  Even created a mathematical formula for it.  No doubt about it, Keynesians are just gaga for consumption.

Of course, Keynesians don’t love everything.  They aren’t all that fond of saving.  Which they see as a drain on economic activity.  Because if people are saving their money they aren’t doing as much consuming as they could.  In fact, their greatest fear when they propose stimulus spending (by giving people more money to spend) to jump-start an economy out of a recession is that people may take that money and save it.  Or, worse yet, pay down their credit card balances.  Which is something most responsible people do during bad economic times.  To lower their monthly bills so they can still pay them if they find themselves living on a reduced income.  Of course, being responsible doesn’t increase consumption.  Nor does it make Keynesians happy.

Keynesians don’t like people behaving responsibly.  They want everyone to live beyond their means.  To borrow money to buy a house.  To buy a car.  Or two.  To use their credit cards.  To keep shopping.  Above and beyond the limits of their income.  To spend.  And to keep spending.  Always consuming.  Creating endless economic activity.  And never worry about saving.  Because everyone eventually dies.  And what good will all that saving be then?

To Help Create more Capital from a Low Savings Rate we use Fractional Reserve Banking

Intriguing argument.  But too much consuming and not enough saving can be a problem, though.  Because before we consume we must produce.  And those producing the things we consume need capital.  Large sums of money businesses use to pay for buildings, equipment, tools and supplies.  To make the things consumers consume.  And where does that capital come from?  Savings.

A low savings rate raises the cost of borrowing.  Because businesses are competing for a smaller pool of capital.  Which raises interest rates.  Because capital is an economic commodity, subject to the law of supply and demand.  Also, with people living beyond their means by consuming far more than they are saving has caused other problems.  Borrowing to buy houses and cars and using credit cards to consume more has led to dangerous levels of personal debt.  Resulting in record personal bankruptcies.  Further raising the cost of borrowing.  As these banks have to increase their interest rates to make up for the losses they incur from those personal bankruptcies.

To help create more capital from a low savings rate we use fractional reserve banking.  Here’s how it works.  If you deposit $100 into your bank the bank keeps a fraction of that in their vault.  Their cash reserve.  And loan out the rest of the money.  When lots of people do this the banks have lots of money to loan.  Which people and businesses borrow.  Who borrow to buy things.  And when buyers buy things sellers will then take their money and deposit it into their banks.  The buyer’s borrowed funds become the seller’s deposited funds.  These banks will keep a fraction of these new deposits in their vaults.  And loan out the rest.  Etc.  As this happens over and over banks will create money out of thin air.  Providing ever more capital for businesses to borrow.  Which all works well.  Unless depositors all try to withdraw their deposits at the same time.  Exceeding the cash reserve locked up in a bank’s vault.   Creating a run on the bank.  Causing it to fail.  Which can also raise the cost of borrowing.  Or just make it difficult to find a bank willing to loan.  Because banks not only loan to consumers and businesses.  They loan to other banks.  And when one bank fails it could very well cause problems for other banks.  So banks get nervous and are reluctant to lend until they think this danger has passed.

A Keynesian Stimulus Check may Momentarily Substitute for a Paycheck but it can’t Create Capital

Consumption, savings, investment and production are linked.  Consumption needs production.  Production needs investment.  And investment needs savings.  Whether it is someone depositing their paycheck into a bank that lends it to others.  Or rich investors who amassed and saved great wealth.  Who invest directly into a corporation by buying new shares of their stock (from an underwriter, not in the secondary stock market).  Or by buying their bonds.

Collectively we call these capital markets.  Where businesses go when they need capital.  If interest rates are low they may borrow from a bank.  Or sell bonds.  If interest rates are high they may issue stock.  Generally they have a mix of financing that best fits the investing climate in the capital markets.  To protect them from volatile movements in interest rates.  And from competition from other corporations issuing new stock that could draw investors (and capital) away from their new stock issue.  Even to secure capital when no one is lending.  By going contrary to Keynesian policy and saving for a rainy day.  By buying liquid investments that earn a small return on investment and carrying them on their balance sheet.  They don’t earn much but can be sold quickly and converted into cash when no one is lending.

A lot must happen before consumers can consume.  In fact, high consumption can pull capital away from those who make the things they consume.  Because without capital businesses can’t expand production or hire more workers.  And no amount of Keynesian stimulus can change that.  Because there are two things necessary for consumption.  A paycheck.  And consumer goods produced with capital.  A stimulus check may momentarily substitute for a paycheck.  But it can’t create capital.  Only savings can do that.

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FT101: “Unlike government a business tries to fix bad policy before it bankrupts them.” -Old Pithy

Posted by PITHOCRATES - January 20th, 2012

Fundamental Truth

If Businesses give their Employees Overly Generous Pay and Benefits they will not be able to Stay in Business

A lot of people say businesses are greedy.  That they are always trying to go on the cheap when it comes to their employees.  The fatal flaw of capitalism some even say.  That need to make a profit.  And because of the profit-incentive businesses try to use as few employees as possible.  While paying them as little in pay and benefits as possible.  Which they, of course, do.  Because that’s the only way they can stay in business when their customers are doing the same.  When we go to the store looking for the maximum value at the lowest price.

You see, a business has to earn enough sales revenue to cover all their costs.  And their sales prices include these costs.  If these costs are too high people won’t buy from them.  So this is the reason why they pay their employees as little in pay and benefits as possible.  Because of us.  And our greed.  To keep as much of our money as possible when shopping.

So businesses can’t be overly generous to their employees.  For if they are they are then faced with two choices.  Raise prices to pay for this generosity.  Thus dissuading consumers from buying from them.  Which reduces their sales revenue.  Or they can choose not to raise their prices.  Which will increase their costs greater than their sales revenue.  Either way it’s bad for business.  For if they give their employees overly generous pay and benefits they will lose money.  And not be able to stay in business.

Businesses must make these Difficult Choices if they wish to Survive in the Real World

In free market capitalism businesses have real constraints.  They can’t be overly generous.  Because they won’t be able to earn enough revenue to cover their costs.  But neither can they be too miserly with their employees.  Because they have to be generous enough to entice them to work for them.  It’s this balancing act between generosity and being too cheap that causes a business problems.  Because in good economic times employees like to demand more.  And if they don’t get it where they currently work they will leave and work for someone else.  So employers are generous.  Sometimes too generous.  Which they usually learn when the good times end and they can no longer cover their costs at the new levels of revenue during those bad economic times.

A business cannot raise revenue by simply saying ‘raise revenue’.  For it is not up to them.  It’s up to the consumer.  And during bad economic times they’re just not buying like they once were.  Which leaves a business only one choice.  They must cut costs.  Either by cutting back on pay and benefits.  Or by really cutting back on pay and benefits.  By laying off employees.  It’s either that or they will bankrupt themselves out of business.

All businesses must make these difficult choices.  If they wish to survive.  Because they live in the real world.  Capitalism.  Where there are winners and losers.  And where businesses fail because they don’t make the difficult choices when they have to.  We’ve all seen a favorite store go out of business.  It may not always be because of the cost of their employees.  But it is always because they’re not earning enough revenue to cover their costs.

Difficult Choices are Rarely Politically Expedient and don’t bring in Many Votes

Health care costs and pensions have been the biggest costs businesses have struggled with.  That’s why defined benefit pension plans are a thing of the past.  Unless you’re in a union.  Or in government.  And employees are contributing more to the cost of their health care benefits.  Why?  Because of our aging population.  People are having fewer babies and are living longer.  And consuming more health care and pension benefits in their retirement than the actuaries ever dreamed possible when they created the health care benefit and defined benefit pension plans.

It’s no different in the public sector.  In fact, it’s worse.  Government grew.  And taxes grew to pay for that growing government.  It became more expensive to have babies.  So people had fewer.  Made possible by birth control and abortion.  Now there are fewer and fewer young people entering the work force to pay the taxes to pay for the ever growing number of seniors in their retirement.  Again, something the actuaries never calculated.  And there’s no way to fix it.  It’s a failed model.  But government won’t give up on this bad policy.  Unlike businesses have.  Because government doesn’t operate in the real world.  Like those businesses.

Government can do things businesses can’t.  They can tax.  They can run deficits.  Paid by massive borrowings.  And they can print money.  So they don’t have to make the difficult choices.  And chose not to.  Because those difficult choices are rarely politically expedient.  And don’t bring in many votes.

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