Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 13th, 2013

History 101

(Originally published August 28th, 2012)

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

Savings Rate

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Food Surplus, Artisan, Guilds, Industrial Revolution, Mechanized Looms and Luddites

Posted by PITHOCRATES - May 14th, 2013

History 101

As the Middle Class grew Artisans joined Guilds to Restrict Entry into their Trade

For most of our existence on this planet we were hunters and gatherers.  Like the animals in the wild.  Dependent on our environment for our food.  Which was often scarce.  Leaving our distant relatives with a chronic gnawing hunger in their bellies.  Sometimes the environment provided so little food that there wasn’t enough for everyone.  So a great many went hungry.  And a great many eventually died from that hunger.  Such was life for hunters and gatherers dependent on their environment for food.  Then we started thinking.  And figured out how to farm.

As farmers we took control of our environment.  Instead of eating only what the environment gave us we grew what we needed.  And grew even more to have a food surplus.  To get us through times when the environment did not provide a good growing season.  Having control over our food turned that chronic gnawing hunger into a rare and infrequent occurrence.  Which established us at the top of the food chain.  And made us master of the planet.  Where we shaped it to serve our needs.  Instead of living at its mercy.

With a stable food supply we were able to do something else.  Something other than grow food.  We could build things.  And an artisan class grew.  Potters.  Shoemakers.  Blacksmiths.  As time passed the artisan class grew.  Creating a middle class.  Markets where people met to trade their goods grew into cities.  The economy grew more complex.  The cities grew more crowded.  And the artisans became protective of their trades.  Joining guilds that restricted entry into their trade.  By maintaining a maximum number of artisans in each trade.  For though there was more food than ever the fear of hunger never went away.

In Medieval Europe Cloth Production was Second only to Food Production

Artisans joined guilds for one reason.  So they wouldn’t starve to death.  Basically.  By restricting entry into their trade they limited competition.  This allowed them to charge higher prices for their goods or services.  And that healthy income allowed them to buy all the food they desired.  Whereas if other artisans were allowed to set up shop in town they could offer their goods or services for less.  Forcing other artisans to lower their prices.  Which is good for the masses.  Allowing them to pay less for the artisans’ goods or services.  Helping them to push off hunger themselves.  But not good for the limited few who saw their wages fall with more artisans entering their trade.  Hence the guilds.

But artisans had more to fear than just people trying to take food off of their tables.  There was something else that was a far greater risk.  Technology.  Which led to increases in productivity.  That is, producing more with fewer people.  Replacing some highly-skilled artisans with lower-skilled and lower-paid people operating machines.  And without a job it was difficult to put food on the table.  With the specter of hunger haunting them some artisans did something about that new technology putting them out of a job.  They fought back against the machines.

Besides food there was another basic necessity the people needed.  Especially in England.  Where it got pretty cold during the winter.  To live in the northern climes you needed to wear clothes.  Or die of exposure.  In Medieval Europe food production was the number one occupation.  The number two occupation was cloth production.  To make the clothing people needed to wear to keep from dying of exposure.  Highly skilled weavers filled factories as they manually worked their looms.  Making the cloth that others would turn into clothing.

The most Infamous Neo-Luddite was the Unabomber Theodore Kaczynski

Their meager production rate kept clothing prices high.  Then came the Industrial Revolution.  First they mechanized spinning.  Creating more thread than a weaver could ever use.  Then they mechanized weaving.  Turning that thread into cloth at an incredible rate.  Turning cloth-making from a skilled trade into an automated process.  Producing more with fewer people.  Lowering the price of clothing.  And reducing the need for skilled artisans.  Making the people happy.  For they could buy more clothing.  And still be able to afford enough food to ward off that gnawing hunger.  Everyone was happy except, of course, those artisans put out of a job thanks to those new machines.

Britain was at War with Napoleon’s France in 1811.  During war the home economy typically suffers.  And machines replacing people didn’t help.  Highly skilled weavers either lost their jobs.  Or had to take steep pay cuts to compete with other unskilled laborers working the new mechanized looms.  Lower incomes made it difficult to buy food when prices were rising.  As they typically do during war.  Pushing some people to the breaking point.  And some people rebelled against the machines.  Smashing them.  And burning them.  These people were Luddites.  Their rebellion against technology was so great that at times more British Red Coats were in England putting down their rebellion than were fighting Napoleon’s Grande Armée.

But in the end the Luddites loss their struggle.  By 1817 the British had put down the rebellion.  And the Industrial Revolution carried on.  Making life better for the masses.  The modern economy flooding us with new must-have products at reasonable prices.  And creating scores of new jobs the Luddites never could have imagined.  Still, their anti-technology philosophy lives on.  Perhaps the most infamous neo-Luddite being Theodore Kaczynski.  The Unabomber.  Who fought against technology by planting or mailing bombs.  Killing three.  And hurting 23 others.  Who they finally found holed up in a primitive cabin in the Montana wilderness.  Where he rejected all technology.  Living without any of the creature comforts technology gives us.  Like electricity, fresh water or personal hygiene.  Being a Luddite to the extreme.

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Disposable Income and GDP Growth

Posted by PITHOCRATES - February 25th, 2013

Economics 101

With less Disposable Income there will be less New Economic Activity Created

The key to economic growth is disposable income.  For when we live from paycheck to paycheck economic growth is flat.  It’s when we have disposable income that we can spend money beyond our basic needs.  Such as on a vacation.  A new car.  A television.  New windows, carpeting, appliances, furniture, etc.  Movies, ball games, dinners, the theater, etc.  New clothes, jewelry, shoes, accessories, etc.  Tennis rackets, skis, baseball gloves, hiking boots, fishing gear, etc.  Smart phones, MP3 players, iPads, laptops, etc.  Jet skis, boats, motorcycles, mountain bikes, etc.  Radio-controlled cars/helicopters/planes, Game Boys, Xboxes, Wiis, PlayStations, multiplayer role-playing computer games, etc.

Buying these things creates a lot of economic activity.  But we can’t buy any of these things unless we have disposable income.  So the only way to increase economic activity is to increase disposable income.  Which means there is a direct relationship between GDP and disposable income.

There’s been a lot of talk about real incomes being flat.  Even falling during the Obama presidency.  Which is bad.  For if median incomes are falling people will have less disposable income.  And with less disposable income they will be buying less of all those things that create new economic activity.  The things we enjoy.  That make our lives more fun.  More enjoyable.  And less miserable.  Those things that increase our standard of living.  And the quality of life.  So a flat and falling median income reduces our standard of living.  And our quality of life.  As we live from paycheck to paycheck.  Making barely enough to meet our living expenses.  And sometimes not even making enough for that.  Having to turn to government assistance to make up the difference.

We add Disposable Income and Discounted Government Spending to get the Net Add to GDP

The key to disposable income and GDP growth is jobs.  And the more jobs the better.  So job creation is very important.  Which means we need a business-friendly environment.  With a minimum of costly regulations.  And low taxes.  To encourage employers to hire more people.  So more people have jobs.  Those who do use their income to meet their living expenses.  And use their disposable income to create new economic activity.  The more disposable income they have the more new economic activity they can create.  So what’s the best way to increase their disposable income?  The same way we encourage employers to hire more people.  Low taxes.  We can illustrate this in the following table which is based on assumptions and approximations.

GDP Discounted Required and Average Calculations

The effective tax rate a person pays includes all taxes he or she will pay.  Property tax, sales tax, gas tax, telecommunication tax, liquor tax, cigarette tax, import tariff, dog license tax, fishing license tax, luxury tax, watercraft registration tax, vehicle sales tax, state income tax, federal income tax, Social Security tax, Medicare tax, capital gains tax, etc.   Median income and living expenses are constants.  We subtract taxes from median income to get net income.  Subtracting living expenses from net income gives us disposable income.  We then calculate these numbers for additional effective tax rates that are multiples of 4%.

We add disposable income and stimulus together to get the net add to GDP.  What we call ‘stimulus’ is a percentage of all those taxes reentering the economy through government spending.  In our example 80% of those taxes find their way back into the economy.  While 20% is lost through waste and inefficiency.  This stimulus can pay for a government worker, a government contractor or a direct government benefit that helps people meet their living expenses.  This redistributed income is money that the income earner would have spent had it not been taxed away.  Instead, someone else will spend it.  But not as efficiently.  As it must first pass through an inefficient government bureaucracy.

Giving People Benefits does not Replace Disposable Income

We extend the table out to an effective tax rate of 52% and graph the results.  We see that as the effective tax rate increases disposable income falls.  As does GDP growth.  Showing that increasing taxation reduces GDP.  That said, average GDP growth has been approximately 3% during the latter half of the 20th Century.  Despite increasing taxation reducing GDP.  So how do we reconcile a falling GDP and a 3% GDP growth?  With aggressive increases in productivity.  And investments in capital equipment.  Allowing business to produce more with less.  Resulting in a rising real GDP growth rate.  As shown in the following graph.

GDP Discounted Required and Average

In order to maintain a 3% growth rate in GDP we need a rising real GDP growth rate (in one America doing very well despite government) to offset the falling discounted GDP growth rate due to falling disposable income (in another America not doing well because of government).  When we add the real and the discounted GDP growth rates together we get the constant 3% of average GDP growth.  Which is why businesses have never been more profitable despite stagnant economic growth during President Obama’s time in office.  They’re doing well because they’re producing more with less by exchanging people for new capital equipment.  Hence the higher profitability along with chronic high unemployment.  With more unemployed workers than available jobs there is a downward pressure on median income.  That combined with higher personal effective taxes has greatly reduced disposable income.  And new economic growth.  Which subtracts a lot away from that real GDP growth.

Giving people benefits does not replace disposable income.  For government assistance helps people meet basic living expenses.  While having a job offers the ability to earn disposable income.  Which is key for new economic growth.  If we bring the effective tax rate down the discounted GDP growth graph will flatten out.  As this happens the gains in productivity would remain.  Leaving real GDP growth unchanged.  With real GDP growth unchanged and discounted GDP growth decreasing the average annual GDP growth would therefore increase.  And approach real GDP growth.  With double digit GDP growth tax revenues would soar even at lower effective tax rates.  Requiring less borrowing.  Which would give us smaller deficits.  While reducing the growth in the federal debt.  Perhaps even reducing the debt.  Solving all of our financial problems.  By simply cutting taxes.  And the spending those taxes fund.

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Economies of Scale

Posted by PITHOCRATES - December 31st, 2012

Economics 101

Employers are very Reluctant to hire Additional Employees because Labor Costs are their Greatest Costs

When it comes to running a business there is nothing more costly than people.  Employee salaries and wages.  Payroll taxes.  And benefits.  People need a large paycheck to live on and will go to the employer that offers the highest pay.  Government has imposed costly taxes and regulatory costs.  And to further entice good workers employers have to sweeten the deal with some fringe benefits like health insurance, paid vacation time, holiday pay, paid sick days and retirement plans.  It adds up.  Something like this:

As you can see the amount of pay employees are familiar with (the working pay above) is far less than the total cost to the employer.  The employee doesn’t see the 63.1% markup on their working pay that their employer has to pay in addition to paying the employee.  As a business hires more employees these costs add up.  A small factory with 15 workers on the factory floor can cost the employer $1.6 million.  Which is why labor costs are the greatest costs of most businesses.  And why employers are very reluctant to add additional employees.

The more Productive you are the Lower your Unit Cost and the Lower the Selling Price in a Store

Besides labor costs a business like a factory will have material costs, too.  These are variable costs.  They’re variable because they vary with varying levels of production.  The more production there is the more variable costs there are.  In addition to variable costs businesses have fixed costs.  Often simply called overhead.

Factories make things.  Like things you can pick up off a store’s shelf.  Things with low prices on their price tags.  But when it can cost a small manufacturer $1.6 million JUST for its labor costs how can they sell things with such low prices?  By making a lot of those things to sell.  As much as they possibly can with their variable and fixed costs.  What we call economies of scale.  And the more they can make for their given costs the lower the unit cost is for each thing you can buy off a shelf at a store.   As you can see here:

Assuming a factory can produce anywhere from 1,250,000 to 2,750,000 units with a given labor force operating the same production equipment in a factory you can see how the unit cost falls the more they produce.  Which is why there is so much talk about productivity.  The more productive you are (the more you can produce for a given cost) the lower your unit cost.  And the lower the selling price in a store.  Increasing productivity could mean moving an assembly line a little faster.  Or replacing some people with machines.  Things that workers don’t like.  But things consumers love.  For they like low prices when they go shopping.

Employers are very Reluctant to Hire New Employees and Prefer Increasing Productivity with Automation

If you crunch these numbers for the labor costs of 16 and 17 workers you can see how unit costs rise as an employee or two is added to the production floor.  At an annual production of 2,000,000 units the unit cost increases $0.05 (4.6%) going from 15 to 16 workers.  Adding two workers increases the unit cost $0.11 (10.1%).  Doesn’t seem like a lot.  But we notice when something we once bought for $0.99 now costs $1.04.  And we don’t like it.  But business owners like it even less.  Here’s why.

Business may be booming.  Those on the factory floor may be working a lot of overtime to produce at a rate of 2,000,000 units per year.  And are growing unhappy with all of that overtime.  They keep demanding that the owner hire another person.  The owner does.  Increasing unit costs by $0.05.  But the owner hopes the booming economy will continue.  And that they can even increase the production rate.  For if they can sell an additional 250,000 units the unit cost can actually fall $0.07 to $1.02.  Making the addition of a new worker on the factory floor not increase costs.  As the increase in production will make costs fall greater than that increase in labor costs.

But it doesn’t always work like that.  Economic booms don’t always last.  When too many factories increase production to meet booming demand they bring too much supply to market.  Causing prices to fall.  And forcing factories to cut back on production rates.  So instead of increasing the production rate they may find themselves cutting back.  Perhaps going from 2,000,000 to 1,750,000.  A fall of 250,000 units.  Increasing the unit cost $0.21 (19.3%).  Which could very well raise the unit cost above the prevailing market price.  Requiring layoffs.  To get the unit cost back down to $1.09.  Allowing them to sell at the prevailing market price.  And at a production rate of 1,750,000 units that may require letting go more than just one worker.  Maybe even more than two.  Which is why employers are very reluctant to hire new employees.  And prefer increasing productivity with automation.  For it is far easier to make machines increase or decrease production rates than it is to hire and lay off people.  Making it easier and less costly to reach great economies of scale.  Which makes low prices.  And happy consumers.

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Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 28th, 2012

History 101

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Britain and the US should follow New Zealand’s example of Public Sector Reform

Posted by PITHOCRATES - August 12th, 2012

Week in Review

Ruth Richardson was Finance Minister of New Zealand from 1990 until 1993.  During that time New Zealand reformed their public sector.  Something she believes Britain needs to do to help pull it out of its financial troubles.  And it probably wouldn’t be a bad thing for the U.S. to do either (see Want to reform government? Start with the Civil Service by Ruth Richardson posted 8/9/2012 on The Telegraph).

New Zealand underwent a radical reform of the public sector nearly three decades ago, [as] Minister of Finance I knew it was crucial to secure a results-driven and accountable public sector. The NZ public sector performance management system broke sharply with the bureaucratic norm…

The UK Government faces the same urgent imperatives that New Zealand did. A crippling fiscal position; an inefficient and unaccountable public sector; and a bureaucracy incapable of innovation…

I learned that success in government relies on ensuring that the forces of productivity and innovation, so crucial to lift private sector performance, must equally be allowed to make themselves felt in the ranks of the Civil Service.

New Zealand, like the UK, used to be burdened by a typical bureaucracy . The system served its own ends, behaved in a wasteful and unaccountable fashion and there was a complete disconnect between resources and results…

And so the public sector performance management system for which NZ has become renowned was instituted.

We introduced contracts between Ministers and the heads of government departments to focus them on our priorities. And to sharpen accountability we put these heads of departments onto fixed term contracts, rather than providing them with jobs for life. We then let these managers get on and manage their organisations.

We also radically changed the way the way we managed our budgets. We made departments account properly for their assets, so that they would value them better. We made them report their performance in a way that every citizen could understand. These changes were important in allowing us to monitor the performance of services, were central to holding heads of department to account and were crucial in the quest to do more with less in fiscally straightened circumstances…

It is hardly a surprise that the old guard – the unelected government with real staying power – are lining up to oppose reform. But their arguments are discredited by our experience in New Zealand…

The real crux of the matter is – why should civil servants have jobs for life? The real life “slumdog millionaire” from Mumbai, who wants to use his winnings to take India’s tough civil service exam so he can win a secure and prestigious lifetime job”, is so typical of the species and the problem. And why shouldn’t they be accountable for their performance?

Do more with less?  Accountability?  That’s crazy talk.  No wonder the career civil servants are fighting similar reform in Britain.  And in the U.S.  Why would they want that when they can have prestigious lifetime jobs?

In the U.S. they don’t call them civil servants anymore.  Not when they work for the federal government.  No.  Civil servant was too demeaning for their prestigious stations in life.  Now we call them federal workers.  The very sound of it elevates them above us.  The civil society they serve.

It is hard to initiate this type of reform, though.  Because the people who can initiate this reform are served well by these civil servants.  For the more people that work for government the more votes they will get.  As civil servants tend to vote for the people who want to expand government.  Not shrink it.  Because few people will vote themselves out of a job.

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Black Wednesday and the Killing Season sound like Action Adventure Titles but it’s just August in the NHS

Posted by PITHOCRATES - August 11th, 2012

Week in Review

If you’re traveling in Britain in the first week of August don’t get sick.  Unless you feel lucky (see Thousands of juniors start jobs in NHS ‘killing season’ by Rebecca Smith posted 8/1/2012 on The Telegraph).

Around 7,000 graduates begin their first job as a doctor today and thousands more change to new jobs as their training continues.

The changeover has been labelled as ‘black Wednesday’ or the ‘killing season’ because of the rise in deaths.

Studies have shown that patients admitted as an emergency on the first Wednesday in August are six per cent more likely to die than on the previous Wednesday.

Black Wednesday?  Killing Season?  Egad these are two labels you don’t want to hear describing the hospital they’re rushing you to so they can save your life.  The NHS should really do something about this.  It’s not befitting a national health care system they celebrate in the opening ceremonies of the Olympic Games.  And the NHS, being the fine national health care system it is, is fixing this problem.

It was announced earlier this year that junior doctors will shadow a more senior colleague for four days in an attempt to reduce the number of mistakes made and ensure patients are kept safe…

Trials in Bristol reduced mistakes by junior doctors by 50 per cent over their first four months.

There’s a fine line between being a highly skilled doctor in the NHS capable of taking on any health care emergency.  And being a junior doctor with capable skills that may only kill 6% of his or her patients.  That line in the NHS is after day 4.  After which their kill percentage goes down to an acceptable 3%.

There is a reason this is happening.  And it’s not because the medical schools are bad.  It’s not because these senior doctors do a poor job in teaching the new doctors.  And it’s not because the junior doctors are bad.  The reason is economic.  A declining birth rate created an aging population.  That aging population is now hitting Britain’s pension system.  And the NHS.  Increasing spending at a time when there are fewer people entering the workforce to pay the taxes to fund the NHS and those pensions.  Budgets are straining.  Deficits are growing.  So what do you do when the number of patients is growing greater than the ability to pay for them?  You make doctors and nurses cover more patients.  Forcing these junior doctors to ‘grow up’ fast on the job.  To act as if they have years of experience during their first days on the job.

Surveys have shown that junior doctors are asked to carry out operations and procedures on patients which are beyond their capabilities and often have responsibility for large numbers of hospitals patients overnight when fewer senior staff are on duty.

Dr Anthea Martin, senior medical adviser at the Medical and Dental Defence Union of Scotland, which provides legal advice for doctors and dentists nationwide, said junior doctors should not be asked to carry out tasks they are not confident doing and should always seek help from senrio [sic] colleagues if tehy [sic] are unsure.

The sad thing is that it will only get worse.  Until the baby boomers die out so that they have more taxpayers entering the workforce than leaving it.

Announcing the new shadowing scheme, Professor Sir Bruce Keogh, NHS Medical Director, said…“Patient safety and providing a high quality service is at the heart of a modern NHS. This shadowing period could potentially save lives, and will equip new junior doctors with the local knowledge and skills needed to provide safe, high quality patient care, from their first day as a doctor…”

“It means new doctors will be ready to go on the first day, familiar with the hospital’s systems and ready to focus on patient care rather than worrying about where to find the X-ray request forms.

“It will go some way to making sure that patients get good care whatever day of the year they present and we’re pleased this is now in place nation-wide.”

Yes, let’s teach these new doctors the important things. Have these senior doctors show these junior doctors where the X-ray request forms are.  Once they get the proper bureaucratic procedures under their belt then they can treat their patients.  Knowing that when they request some test or procedure that they will use the correct form.  Reducing lost time from not making these life-threatening mistakes.  So the hospital can input patients and process them quickly.  In an assembly line procession.  One after the other. Quickly.  And efficiently.  No time to dither around with that talking nonsense.  Patient arrives at one workstation.  The worker reads the form.  Performs the work.  And sends the patient to the next workstation.  High productivity is the only answer to the problems at the NHS.  As it will be with Obamacare.  Because the Americans, too, have an aging population.

Currently the U.S. doesn’t have a Black Wednesday.  Or a Killing Season.  But you know it’s coming.  Because there is no way that Obamacare will be better than the NHS.  Not when they will be starting with an aging population that will only age more.  And they will have 5 times the patients the NHS has.  Not to mention the fact that the NHS has been doing national health care for awhile.  So on top of everything else the Americans will also have the learning curve working against them.  Which could cause a British patient being rushed to hospital on a Wednesday during the Killing Season to say with typical British fortitude, “Could be worse.  I could be in America.”

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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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Because of Greece the Germans have to Choose Higher Taxes and Austerity or Higher Unemployment and Austerity

Posted by PITHOCRATES - November 12th, 2011

Week in Review

As the Eurozone struggles to save the Euro there is but one country that can.  Germany.  They are the only ones rich enough to bail out anyone.  Some in the U.S. like to point to Germany as a success story for the social democracy system of government.  But there is a reason why Germany is the only one that can bail out the Eurozone.  And it’s not because of their generous pay and benefits (see Eurozone Crisis: Correcting Paul Krugman by Tim Worstall posted 11/6/2011 on Forbes).

Around the turn of the century Germany realised that it was becoming uncompetitive. Labour costs were getting too high for the productivity of that labour. So they determinedly turned the screws on labour costs. They deflated that part of the economy, driving down labour costs and up productivity.

Driving down labor costs?  Increasing productivity?  Why, that sounds like things we do on this side of the Atlantic.  Us evil capitalists.  Who believe prices are set by the market.  Not by the amount of labor it takes.  As Karl Marx said.

The Germans have learned that if your costs are too great you will price yourself out of the market.  So they cut their biggest cost.  Labor.  And now German exports are leading their economy.  Which is no doubt benefited by a weak Euro.  Thanks to the European sovereign debt crisis.

Which puts the Germans in a very unique position.  If Greece fails and drops out of the Euro the Euro will grow stronger.  Which will increase the cost of German exports.  Negating all their productivity gains.  So Germany needs to save Greece.  To keep the Euro weak.  And favorable to German exports.  The only question is will the German people go along and pay the taxes required to save the Euro?

The German taxpayer can’t win.  Either higher taxation and austerity.  Or greater unemployment and austerity.  All because Greece didn’t do what they did.  Turn the screws on their labor costs.

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LESSONS LEARNED #13: “If you were to live under the socialist maxim ‘from each according to his ability to each according to his need’ you would find yourself surrounded by needy people with no ability.” -Old Pithy

Posted by PITHOCRATES - May 13th, 2010

KEY TO CIVILIZATION growth is the food supply.  Food surpluses in particular.  Before dependable food surpluses, life was short, harsh and miserable.  Especially for women.  When they weren’t working in the fields they were giving birth and raising children.  High infant mortality rates, though, inhibited population growth.  Most of the children women gave birth to didn’t survive to adulthood.  So there was a constant state of child rearing.  But few children survived to help with the business of family life.

Malnutrition and famine were common.  Feudalism provided a precarious balance between life and death.  For centuries the common people (i.e., peasants) eked out survival on their landlord’s manor.  The lord owned the land.  The peasants worked it.  Most of the bounty went to their lord.  But they kept what they grew on a small strip of land for themselves.  Just enough for subsistence.

But England changed all that.  By 1750, her agricultural output was second to none.  Private property.  Free market economy.  Capitalism.  Increased productivity.  Specialization.  These all combined to provide incentive.  Incentive produced food surpluses.  Food surpluses produced profits.  Reinvested profits improved farm yields.  This produced more profit.  And the cycle continued.  In less than a century feudalism would disappear from England.  There, you either worked land you owned or were paid wages to work land owned by others.  People began to live longer and healthier lives. 

The British Empire ruled the civilized world in the 19th century.  Representative government.  Abolition of slavery.  Free trade.  The Industrial Revolution.  These things, and others, gave them wealth, power and moral authority.  A lot of good came from this island kingdom.  Including the United States.  They weren’t perfect.  There was a learning curve.  But the modern capitalistic economy which they gave us liberated the masses.  It let us do what we wanted to do, not just what we had to do.  In particular, women, who could do more than just raise families and work in the fields.  One day, she could even become prime minister of Great Britain.

FOOD SURPLUSES BEGET industrialization.  Food surpluses beget everything, really.  Food surpluses release human capital to do everything else we do besides farming.  England was at the van of this modernization.  Others followed.  In time. 

Russia abolished serfdom (i.e., feudalism) in 1861.  Industrially backwards at the time, this liberty awakened a dormant human capital.  They followed the English model.  In time, with the advent of steamship and rail transportation, Russian grain competed with other European producers.

Joseph Stalin, looking to jump ahead in the industrialization process, implemented collective farming in the late 1920s.  He turned away from the English model.  The government became land owners.  It was feudalism on a grand scale.  Large collective farms would produce vast food surpluses that could feed industrial cities.  And there would still be surpluses left over to export to raise capital to build these industrial cities.  At least, that was the plan.

With less incentive came less productivity.  What land the former serfs had come to own was lost to the state.  The state took so much of the harvest that there was little food left for those who labored to grow it.  And the price the state paid for their crops was less than it was before collectivization.  The ‘free’ serfs were earning less and working more.  They didn’t like it.  And chose not to participate.  Collectivization became forced collectivization. 

Deportations, terror, murder and famine followed.  Perhaps more than 5 million starved to death during the famine of 1931 and 1932.  Others were to follow.

Forced collective farming produced famines elsewhere.  In China, during Mao Zedong’s Great Leap Forward, forced collectivization produced even greater famine deaths.  Historians estimate that 20-30 million, maybe more, starved to death in the famine of 1959–62.  Though hard numbers aren’t available, North Korea suffered a devastating famine in the late 1990s that claimed millions.  But in the West, in the 20th century, famine was unheard of.  When the United States suffered during the great Dust Bowl of the 1930s, there was no corresponding famine despite the loss of productive farmland.

WITH INDIVIDUAL LIBERTY comes incentive.  With incentive comes productivity.  A small island nation of free land owners could produce grain to feed themselves with surplus left over for export.  Nations with great fertile tracts farmed by forced collectivization led to famine.  Slaves have little incentive other than to subsist.  The collective good means little to them when they are starving.  They continue to sacrifice.  And continue to suffer.  Even if they do produce a few more bushels of grain.  So if the suffering is the same, what is the incentive to work harder?

As individual liberty declines, those in power tend to exploit those they rule.  In the name of the state.  Or the common good.  This is easy to see when it results in famine or revolution.  Not easy to hide those things.  But it is a little more difficult to see when the results are more benign.  Longer unemployment benefits, for example.  I mean, those are pretty nice.  Hard to see the downside in them.  As it is in other benefits these rulers give us.  So we are seduced as they whisper these sweet nothings in our ears.  And soon we willingly cede our liberty.  A little at a time.

WITH THE RISE of individual liberty, there was a corresponding decline in the ruling elite thanks to representative government.  Great Britain gave this gift to us and the United States took it to incredible heights.  The oppressed everywhere immigrated to the United States to feed a growing industrial demand.  Being new, we did not know all the affects of industrialization.  When the bad things came to light, we addressed them.  Great Britain, for example, was one of the first to protect women and children from the worse of industrial society.  Still, working conditions could be harsh.  As could life in the industrial cities.  Poverty.  Filth.  Disease.  And it was the wretched state of life in these slums that gave birth to a new school of thought on industrialization. 

In 1844 Friedrich Engels wrote The Condition of the English Working-Class to expose life in these slums.  He would collaborate 4 years later with Karl Marx on a treatise called The Communist Manifesto.  And from this Marxism, Communism, socialism, collectivism, etc., would follow.  As economic systems go, these would all prove to be failures.  But the essence of them lives on.  State planning.

You see, it was capitalism that gave us the industrial slums.  And that was good propaganda for a ruling elite looking to rule again.  So they whispered sweet nothings into our ears.  They talked about a Social Utopia.  From each according to his ability to each according to his need.  Fair taxation (i.e., only the ‘rich’ pay taxes).  Social safety nets (paid for by taxes of the rich).  Shorter workdays.  Longer paid vacations.  More government benefits.  A burgeoning welfare state.  Free stuff for everyone.  Again, paid for by taxing the rich who have exploited the working class.

What evolved was the elimination of the middle class.  You had the evil rich (and the middle class were, for all intents and purposes, rich because they didn’t need government help) whose wealth the government taxed away.  And the poor.  The poor who the government would now take care of.  If elected.  And they were.  They seduced a great many people with their utopian vision.  Even in the West. 

Great Britain and the United States would fall to this seductress, too, thanks to the Great Depression.  It was capitalism that gave us the Great Depression, after all.  The greed of the money people.  And so these great nations declined from greatness.  They became welfare states, too.  They had short respites during the 1980s.  Margaret Thatcher helped rejuvenate Great Britain.  Ronald Reagan, the United States.  But the ruling elite whispered more sweet nothings in our ears and the decline continues.

In 2010, our appetite for state benefits appears to be insatiable.  And we may have run out of wealth to tax away to pay for it.  California is on the brink of bankruptcy.  New Jersey elected a governor who proposed draconian spending cuts to stave off bankruptcy.  Other ‘blue’ states (i.e., states who vote Democrat) are also in trouble.  Underfunded pension obligations.  Demands of teacher unions.  Of government worker unions.  Everyone is there with their hand out.  None of them are willing to sacrifice for the common good.  No, they expect others to do the sacrificing.

THE OBAMA ADMINISTRATION has increased federal spending to such record levels that Communist China is concerned about our fiscal/monetary policies.  As they should be; they hold a lot of our debt.  The federal government has ‘bailed out’ private industry and taken de facto control.  They have created a healthcare entitlement that will cost more than a trillion dollars.  More spending is coming.  And it is all for the greater good.  They are vilifying those who are not poor, taxing away what wealth they can from them and giving it to the poor.  When about half the electorate doesn’t pay any income taxes, there is little opposition to raising taxes on those who do.  For if the ‘rich’ complain, the government vilifies them.

Where will it all end?  It is difficult to say.  How will it end?  Badly.  We can look at Europe who we seem to be emulating.  They’re further down The Road to Serfdom than we are.  With the excessive government spending, there will have to be greater government revenue (i.e., taxes).  Previous methods of taxation may prove insufficient.  Hello value added tax (VAT).  It’s all the rage in Europe.  It’s a multiple tax.  At every stage of production, government is there.  Taxing.  From the raw materials to the final assembly, government is there at every stage.  Taxing.  VATs will increase government revenue.  But they will also make every day life more expensive.  VATs increase the sales price of everything you buy.  And you pay it again at checkout.  It’s everywhere.  Everything will cost more.  From manicures to lattes to toilet paper to tampons.  And this is a tax everyone pays.  Even the poor.  It is a regressive tax.  The rich will pay more, but the poor will feel it more.  This hidden tax will take a larger portion of what little the poor has.

But how bad can it really get?  In 2010, I guess the answer would be to look at Greece to see what happens when a country can no longer sustain her welfare state.  And the people aren’t all that keen on losing the government benefits they’ve grown accustomed to.  It isn’t pretty.  But when you start down that road (from each according to his ability to each according to his need), the taking and giving always get bigger.  It never gets smaller.  And when you reach a critical point, government just can’t sustain it any longer.  And it crashes.  Like in Greece.

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