Cash Flow

Posted by PITHOCRATES - March 24th, 2014

Economics 101

New Complex and Confusing Regulatory Policies require Additional Accounting and Legal Fees to Comply

There have been demonstrations  to raise the minimum wage.  President Obama even called for Congress to raise the federal minimum wage to $10.10 an hour.  He also wants employers to pay salaried people overtime.  There have been demands for paid family leave (paying people for not working).  Unions want to organize businesses.  To get employers to pay union wages.  Provide union health care packages.  And union pensions.  Obamacare has made costly health insurance mandatory for all employees working 30 hours or more a week.

Environmental regulations have increased energy costs for businesses.  Sexual harassment training, safety training, on-the-job training (even people leaving college have to be trained before they are useful to many employers), etc., raise costs for businesses.  New financial reporting requirements require additional accounting fees to sort through.  New complex and confusing regulatory policies require additional legal fees to sort through them and comply.

With each payroll an employer has to pay state unemployment tax.  Federal unemployment tax.  Social Security tax (half of it withheld from each employee’s paycheck and half out of their pocket).  Medicare tax.  And workers’ compensation insurance.  Then there’s health insurance.  Vehicle insurance.  Sales tax.  Use tax.  Real property tax.  Personal property tax.  Licenses.  Fees.  Dues.  Office supplies.  Utilities.  Postage.  High speed Internet.  Tech support to thwart Internet attacks.  Coffee.  Snow removal.  Landscaping.  Etc.  And, of course, the labor, material, equipment and direct expenses used to produce sales.

The Problem with Guaranteed Work Hours is that there is no such thing as Guaranteed Sales

The worst economic recovery since that following the Great Depression has created a dearth of full-time jobs.  In large part due to Obamacare.  As some employers struggling in the worst economic recovery since that following the Great Depression can’t afford to offer their full-time employees health insurance.  So they’re not hiring full-time employees.  And are pushing full-time employees to part-time.  Because they can’t afford to add anymore overhead costs.  Which is hurting a lot of people who are having their own problems trying to make ends meet in the worst economic recovery since that following the Great Depression.  Especially part-time workers.

Now there is a new push by those on the left to make employers give a 21-day notice for work schedules for part time and ‘on call’ workers.  And to guarantee them at least 20 hours a week.  Things that are just impossible to do in many small retail businesses.  As anyone who has ever worked in a small retail business can attest to.  You can schedule people to week 3 weeks in advance but what do you do when they don’t show up for work?  Which happens.  A lot.  Especially when the weather is nice.  Or on a Saturday or Sunday morning.  As some people party so much on Friday and Saturday night that they are just too hung over to go to work.  Normally you call someone else to take their shift.  Then reschedule the rest of the week.  So you don’t give too many hours to the person who filled in.  In part to keep them under 30 hours to avoid the Obamacare penalty.  But also because the other workers will get mad if that person gets more hours than they did.

The problem with guaranteed work hours is that there is no such thing as guaranteed sales.  If you schedule 5 workers 3 weeks in advance and a blizzard paralyzes the city you may not have 5 workers worth of sales.  Because people are staying home.  And if no one is coming through your doors you’re not going to want to pay 5 people to stand around and do nothing.  For with no sales where is the money going to come from to pay these workers?  Either out of the business owner’s personal bank account.  Or they will have to borrow money.  It is easy to say we should guarantee workers a minimum number of work hours.  But should a business owner have to lose money so they can?  For contrary to popular belief, business owners are not all billionaires with money to burn.  Instead, they are people losing sleep over something called cash flow.

Cash Flow is everything to a Small Business Owner because it takes Cash to pay all of their Bills

To understand cash flow imagine a large bucket full of holes.  You pour water in it and it leaks right out.  That water leaking out is expenses.  The cost of doing business (see all of those costs above).  A business owner has to keep that bucket from running out of water.  And there is only one way to do it.  By pouring new water into the bucket to replace the water leaking out.  That new water is sales revenue.  What customers pay them for their products and/or services.  For a business to remain in business they must keep water in that bucket.  For if it runs out of water they can’t pay all of their expenses.  They’ll become insolvent.  And may have no choice but to file bankruptcy.  At which point they’ll have to get a job working for someone else.

Cash flow is everything to a small business owner.  Because it takes cash to pay all of their bills.  Payroll, insurance, taxes, etc.  None of which they can NOT pay.  For if they do NOT pay these bills their employees will quit.  Their insurers will cancel their policies.  And the taxman will pay them a visit.  Which will be very, very unpleasant.  So small business owners have to make sure that at least the same amount of water is going into the bucket that is draining out of the bucket to pay their bills.  And they have to make sure more water is entering the bucket than is draining out of the bucket to pay themselves.  And to grow their business.

This is why business owners don’t want to hire full-time people now.  Because full-time people require a lot of cash (wages/salary, payroll taxes, insurances, training, etc.).  They’re nervous.  For they don’t know what next will come out of the Obama administration that will require additional cash.  For every time they want to make life better for the workers (a higher minimum wage, overtime for salaried employees, guaranteed hours, etc.) it takes more cash.  Which comes from sales.  And if sales are down future cash flow into the business will also be down.  Leaving less available for all of those holes in the bucket.  So they guard their cash closely.  And are very wary of incurring any new cash obligations.  Lest they run out of cash.  And have to file bankruptcy.  Which is why they lose sleep over cash flow.  Especially now during the worst economic recovery since that following the Great Depression.

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The BLS Employment Situation Summary for November 2013

Posted by PITHOCRATES - December 9th, 2013

Economics 101

There was Much Spending in November where People Gathered to Celebrate the Thanksgiving Holiday

The Bureau of Labor Statistics November’s Employment Situation Summary is out.  The government is trumpeting the 203,000 jobs created and the fall in the unemployment rate from 7.3% in October to 7.0%.  Proof they say that the economy is turning around.  And that their economic policies are working.  So everything is coming up roses.  If you stop reading the Employment Situation Summary there, that is.  For if you read further the economy is still horrible.

A big part of this improvement was the furloughed federal workers returning to work after the government shutdown.  And the Thanksgiving Holiday.  With retail hiring seasonal employees and stocking their shelves for the kick off of the Christmas shopping season.  This year starting on Thanksgiving Day for many retailers.  So you would expect a gain in employment connected to the Christmas shopping season.  Which there has been.  Retail trade employment added 22,000 jobs.  And leisure and hospitality, employment in food services and drinking places added 18,000 jobs.  And air transportation added 3,000 jobs.  Thanks to the biggest travel day of the year falling in November.

So there was much spending where people gathered with friends and family to celebrate the Thanksgiving holiday.  And the mad rush to the stores to begin their Christmas shopping.  There was much traveling, shopping and dining in November.  As there always is.  Though some years are better than others.  There was also new hiring in the automobile and construction industries.  Probably more due to the near-zero interest rates thanks to the Federal Reserve’s quantitative easing.  Basically printing money to drive down interest rates.  To encourage people to buy big ticket items like cars and houses.  Even though they had no plans to do so.

It is only the Decline in the Number of People in the Labor Force that gives us an Improving Unemployment Rate

So new jobs in these areas don’t reflect on the overall economic climate.  Because once Christmas is over business will lay off those they hired for those seasonal jobs.  And once the Federal Reserve stops ‘printing money’ those interest rates will rise.  Perhaps compounded by runaway inflation from so much printing.  So these aren’t good indicators of the economy.  We can gain a better understanding by looking at the higher stages of production.  Where there are large capital outlays required to hire and expand business.  Industries that look at the long-term.  So if they’re not hiring they’re not optimistic about the long-term economic picture.

A lot of economic activity has to happen before a retail store can sell anything.  Raw material industries have to pull resources out of the environment.  Industrial processors have to transform these raw materials so manufacturers can use them.  And once manufacturers build things wholesalers buy them and resell them to retailers.  That’s a lot of costs these industries have to incur to produce things that may sell 6-9 months later.  Or longer.  And if the economy is looking anemic to them they are not going to incur these costs.  Which is what happened in November with some of these higher stages of production.  Mining, logging and wholesale trade showed little to no change.

The civilian labor force declined by 720,000 in October.  With the government shutdown blamed for a lot of these lost jobs.  So when the government opened for business again in November we should have seen a large increase in the civilian labor force.  But we didn’t.  The civilian labor force only increased by 455,000 in November.  Which means that if you factor out the government shutdown there was still a decline in the number of jobs.  And it is only this decline in the number of people in the labor force that gives us an improving unemployment rate.  For once people give up and quit looking for a job because the economy is so bad the Bureau of Labor Statistics (BLS) stops counting them.  Skewing the real unemployment rate.

The Current Economic Recovery is a False One created with the Smoke and Mirrors of Low Interest Rates

This gets to the crux of the Obama economic recovery.  Or, rather, the absence of any recovery.  The government trumpets the creation of 195,000 new jobs per month this year.  But they don’t tell us how many jobs we lost per month this year.  Which we can calculate.  In January of this year there were 89,009,000 people not in the labor force.  In November that number rose to 91,273,000.  A total loss of 2,265,000 jobs this year.  Or a loss of 205,909 each month.  So while they cheerfully report the creation of 195,000 new jobs per month we actually lost 205,909 jobs each month.  If you count those people who left the labor force the BLS doesn’t count when calculating the unemployment rate.  In fact, if you look at the trends this year you can see the trends are going in the wrong direction.

Those in Labor Force vs Unemployment Rate thru November 2013 R1

The most shocking thing about this chart is that there are over 91 million people not in the labor force.  The labor force is the sum of the employed and unemployed persons.  So these are people who could be in the labor force but aren’t.  Because they don’t have a job.  For whatever reason.  On welfare, collecting disability, early retirement, just can’t get a job because the economy is so bad, etc.  So there will always be people out of the labor force.  And a large number is bad.  Because these people aren’t helping to create economic activity.  Which is why the Obama recovery is so anemic.

What’s also shocking about this chart are the trends.  The official unemployment rate has been falling.  Good news, yes?  Well, as it turns out, no.  Because the number of people not in the labor force has been rising during the decline in the unemployment rate.  Making the unemployment numbers questionable at best.  For you can’t have less unemployment if people continue to leave the workforce because they can’t get a job.  And the employment picture isn’t getting better.  It’s getting worse.  And it’s going to keep getting worse until those higher stages of production start hiring.  Which they won’t do until they see a real economic recovery.  And not a false one created with the smoke and mirrors of low interest rates.

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FT186: “Liberals are so bad at economics because they had no one in their lives to undo the bad education they got.” —Old Pithy

Posted by PITHOCRATES - September 6th, 2013

Fundamental Truth

Minimum-Wage Workers in Fast-Food and at Wal-Mart want a Living Wage for their Minimum-Wage Jobs

Wal-Mart workers are now demanding a living wage.  (Or people hired to protest the company the left loves to attack.)  Awhile back it was the fast-food workers demanding a doubling of the minimum wage.  So they could have a living wage.  Because they can’t raise their families with a minimum wage job.  So they want a pay rate beyond the pay rate of a minimum wage job.

So how much is earning $15/hour?  Well, if you work full-time and get the usual (2 weeks of vacation and holiday pay) that comes to 2080 (40 hours/week X 52 weeks/year) payroll hours a year.  At $15/hour that comes to $31,200 annually.  Which is the ‘living wage’ the fast-food workers want.  And no wonder.  According to the Bureau of Labor Statistics (see May 2012 National Occupational Employment and Wage Estimates) here are some other jobs that pay around $31,200 annually with what they do as noted by the Bureau of Labor Statistics:

Medical Assistants (Perform administrative and certain clinical duties under the direction of a physician. Administrative duties may include scheduling appointments, maintaining medical records, billing, and coding information for insurance purposes. Clinical duties may include taking and recording vital signs and medical histories, preparing patients for examination, drawing blood, and administering medications as directed by physician).  Medical Equipment Preparers (Prepare, sterilize, install, or clean laboratory or healthcare equipment. May perform routine laboratory tasks and operate or inspect equipment).  Ophthalmic Laboratory Technicians (Cut, grind, and polish eyeglasses, contact lenses, or other precision optical elements. Assemble and mount lenses into frames or process other optical elements. Includes precision lens polishers or grinders, centerer-edgers, and lens mounters).  Pesticide Handlers, Sprayers, and Applicators, Vegetation (Mix or apply pesticides, herbicides, fungicides, or insecticides through sprays, dusts, vapors, soil incorporation, or chemical application on trees, shrubs, lawns, or botanical crops. Usually requires specific training and State or Federal certification).  Pharmacy Technicians (Prepare medications under the direction of a pharmacist. May measure, mix, count out, label, and record amounts and dosages of medications according to prescription orders).  Phlebotomists (Draw blood for tests, transfusions, donations, or research. May explain the procedure to patients and assist in the recovery of patients with adverse reactions).  And Substitute Teachers (Teach students in a public or private school when the regular teacher is unavailable).

Some have worked Two or More Fast-Food/Retail Jobs so they could get the Education and Skills for a Higher-Paying Job

These are not entry-level jobs.  You just can’t walk in when you’re still a high school student, fill out an application and expect to get hired in any of these jobs.  They all take training/education beyond high school.  And require a license or certification.  Which requires an investment of time and money to get.  Usually including night school at the least.  And more often at least 2 years of college.  None of which is required for a minimum wage job.

So it’s no wonder people with minimum wage jobs want a pay rate that is beyond their skill-set.  Who wouldn’t?  Wouldn’t you want to get that higher pay without putting in that schooling?  That investment of time and money?  Things you probably can’t even do if you’re raising a family on a minimum wage job.  Or two.  But does that mean we should just pay these people more?  Would that be fair to the Medical Assistants, Medical Equipment Preparers, Ophthalmic Laboratory Technicians, Pesticide Handlers, Sprayers, and Applicators, Vegetation, Pharmacy Technicians, Phlebotomists and Substitute Teachers?

No.  It wouldn’t be fair to them.  For they would have made great sacrifices in their life to get those better paying jobs.  Because that is how you get a better-paying job.  In fact, some may have worked two or more fast-food/retail (such as Wal-Mart) jobs so they could get the education and skills these jobs required.  A lot of people working in fast-food/retail today may be doing the same thing.  For fast-food and retail offer two great things that allow these people to acquire these skills.  They will hire people without any skills (i.e., entry-level workers).  And fast-food and retail have many working schedules available.  Allowing single-parents to work when they have other arrangements for their children (school, daycare, parents, etc.).

The Hippies of the Sixties became Professors and then Moved on to Write the Curriculum

Instead of protesting fast-food and Wal-Mart we should be happy that at least someone in this horrible economy is actually hiring people when so few others are.  As President Obama’s economic policies have made such an anti-business environment.  The economy is so bad that just this past month another 516,000 have left the labor force (see Table A-1. Employment status of the civilian population by sex and age).  Which is the only reason why the unemployment rate fell.  Because of discouraged workers who couldn’t find a job just quit looking for a job.  But the government puts a positive spin on this by lauding the 169,000 new jobs the economy created.  Saying it’s further proof that President Obama’s economic policies are working.  Despite 516,000 who quit looking for jobs that are just not there.

If people are unhappy with their low-paying jobs in fast-food and retail they should be more upset about this economic destruction being waged by the Obama administration.  Which is the reason why fast-food and retail are the only businesses hiring today.  But there is no outrage.  Why?  Because most don’t understand economics.  And there is a reason why most people don’t.  It’s because of our education system.  Which the left has taken over.  Who write a curriculum that teaches students that capitalism and profits are unfair and bad while government and income redistribution so the rich pay their fair share is good.  And just.

A professor at Michigan State is the latest professor to illustrate the indoctrination of our young going on at our public schools and colleges.  Parents had to deal with their kids coming home from high school to hear how they were killing the polar bears because they drive cars.  But when these kids go to college this is the kind of stuff they encounter on a daily basis.  And he’s not the worst offender.  The worst offenders are those who don’t say outrageous things.  But who do it more subtly.  A smile, a smirk, a condescending remark—things that tell a young impressionable mind out from under their parents’ control for the first time that their parents were wrong.  Unless their parents were liberal.  They will believe almost anything these professors say.  Because they are very smart and must know far more than their parents.  And they treat these kids like adults.  And there is nothing that high school/college kids want more.  To be grown up.  It’s why they smoke cigarettes.  And have sex.  Because that’s what grownups do.

So is it any wonder that people have a poor understanding of economics?  Ever since the hippies of the Sixties couldn’t change the country from the outside they became professors to change it from the inside.  And then moved on to write the curriculum.  These people who hated capitalism.  And admired communism.  Which is why so many of them lived in communes in the Sixties.  These are the people writing the curriculum for our children.  Making sure our education system creates like-minded people.  To keep them voting Democrat until wisdom and experience opens their eyes.  And undoes the bad education they got.  This is why people think that it’s fair to pay minimum wage workers the same as Medical Assistants, Medical Equipment Preparers, Ophthalmic Laboratory Technicians, Pesticide Handlers, Sprayers, and Applicators, Vegetation, Pharmacy Technicians, Phlebotomists and Substitute Teachers.  Just to see how pervasive this indoctrination of our children is—and why people keep voting for those who keep trying the failed economic policies of the past—we should put a webcam in every classroom and lecture hall.  So parents—and the rest of America—can see the liberal dogma being fed to the young.  Making them think, and vote, the way they do.  Then we’ll know whether these are isolated incidences.  Or that it is in fact pervasive.  Explaining why so many people today have no understanding of economics.  That minimum-wage jobs are entry-level jobs.  And that if you want to raise a family you probably shouldn’t be voting Democrat.  Whose policies are making the only available jobs in this horrible economy those entry-level jobs.

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Economists say Falling Inventories, Steady Unemployment and Shrinking GDP is actually Good News

Posted by PITHOCRATES - February 2nd, 2013

Weekin Review

There is a slew of bad economic news but you wouldn’t know that if you listened to the economists.  Who say that this bad news is some of the best news bad news can be.  Even with unemployment rate ticking up slightly and GDP shrinking they still see the glass is half full.  Eternal Keynesian optimists they are.  But even their explanations are cause for concern (see US economy shrinks 0.1 pct., 1st time in 3 ½ years by Christopher s. Rugaber, Associated Press, posted 1/30/2013 on Yahoo! Finance).

The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter and the first contraction since the second quarter of 2009.

Economists said the surprise decrease in the nation’s gross domestic product wasn’t as bad as it looked. The weakness was primarily the result of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

Those volatile categories offset a 2.2 percent increase in consumer spending, up from only 1.6 percent in the previous quarter. And business spending on equipment and software rose after shrinking over the summer…

Subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.

Keynesians focus on consumer spending.  For them an increase in consumer spending equals a healthy economy.  Despite that economy shrinking by 0.1%.  They explain that away as just being a fall in inventories.  As if businesses will go back to increasing their inventories in the next reporting period.  Making everything fine once again.  But if non-Keynesians take all of this data together they arrive at a different conclusion.  The economy is bad.  And will be getting worse.

Consumer spending rose while inventories fell.  And no one is hiring.  What does this mean?  Businesses above the retail level (wholesalers, manufacturers, industrial processors, raw material extraction, etc.) don’t like what they see.  So they’re cutting back production.  They’re not expanding or hiring people.  With these businesses producing less there is less product flowing into inventories.  With less flowing in while there’s more flowing out inventory levels fall.  Which eventually will lead to higher retail prices as goods become scarcer.  Leading to a fall in consumer spending.  And less hiring at the retail level.

So what does this mean?  Businesses above the retail level see a recession coming.  And they’re already hunkering down to limit their losses.

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Microeconomics and Macroeconomics

Posted by PITHOCRATES - September 10th, 2012

Economics 101

Keynesians cannot connect their Macroeconomic Policies to the Microeconomic World

Economics can be confusing.  As there are actually two genres of economics.  There’s microeconomics.  The kind of stuff most people are familiar with.  And is more common sense.  This is more of the family budget variety.  And small business budget.  Where if costs go up (gasoline, commodities, food, insurance, etc.) families and businesses make cuts elsewhere in their budget.  When revenue falls (a decline in sales revenue or a husband/wife loses their job) people cut back on expenses.  They cancel the family vacation.  Or cancel Christmas bonuses.  Straight forward stuff of living within your means.

Then there’s macroeconomics.  The big economic picture.  This is the stuff about the national economy.  GDP, inflation, recession, taxes, etc.  Things that are more abstract.  Unfamiliar.  And often defy common sense.  Where living beyond your means is not only accepted.  But it’s national policy.  And when some policies fail repeatedly those in government keep trying those same policies expecting a different outcome eventually.  Such as using Keynesian economic policies (stimulus packages, deficit spending, printing money, etc.) to get an economy out of recession that never quite works.  And then the supporters of those policies always say the same thing.  Their policies only failed because they didn’t spend enough money to make them work.

Keynesian economics focuses on macroeconomics.  And cannot connect their macro policies to the micro world.  There is a large gap between the two.  Which is why Keynesians fail.  Because they look at the macro picture to try and effect change in the micro world.  To get businesses to create jobs.  To hire people.  And to reduce unemployment.  But the politicians executing Keynesian policy don’t understand things in the micro world.  Or anything about running a business.  All they understand, or all they care to try to understand, are the Keynesian basics.  That focus on the demand side of economics.  While ignoring everything on the supply side.

When the Economy goes into Recession the Fed Expands the Money Supply to Lower Interest Rates

Keynesians have a few fundamental beliefs.  And one of the big ones is the relationship between interest rates and GDP.  In fact, it’s the center of their world.  High interest rates discourage people from borrowing money.  When people don’t borrow money they don’t build things (like factories).  And if they don’t build things they won’t create jobs and hire people.  So the higher the interest rates the lower the economic output of the nation (GDP).

Low interest rates, on the other hand, encourage people to borrow money.  So they can build things and create jobs.  The lower the interest rates the more people will borrow.  And the greater the economic output of the nation will be.  This was the driving factor that caused the Great Recession.  The central bank (the Fed) kept interest rates so low for so long that people bought a lot of houses.  A lot of expensive houses.  The demand for housing was so great that buyers bid up prices.  Because at low interest rates there was no limit to how much house you could buy.  All this building and buying of houses, though, oversupplied the market with houses.  As home builders rushed in to fill that demand.  They built so many houses that there were just so many houses available to buy that buyers had a lot of choice.  Making it a buyers’ market.  So much so that people had to slash their asking price to sell their house.  Which popped the great housing bubble.

The Fed lowers interest rates by increasing the money supply.  They create new money and inject it into the economy.  By giving it to bankers.  Banks have more money to lend.  So more people can borrow money.  This is what lowers interest rates.  Things that are less scarce cost less.  More money to borrow means it’s less scarce.  And the price to borrow it (i.e., the interest rate) falls.  If the Fed wants to increase interest rates they pull money out of the economy.  Which makes it a little harder to borrow money.  Because more people are trying to borrow the limited amount of funds available to borrow.  And this is the basics of monetary policy.  Whenever the country enters a recession and unemployment rises the Fed expands the money supply to encourage businesses to borrow money to expand their businesses and create jobs that will lower unemployment.

Keynesian Economic Policies hurt the Higher Stages of Production where we Create Real Economic Activity

If low interest rates create greater economic activity why in the world would the Fed ever want to raise interest rates?  Because of the dark side of printing money.  Inflation.  Increasing the money supply gives people more money.  And when they have more money they try to buy what everyone else is buying.  As the money supply grows greater than the amount of economic output there is more money trying to buy fewer goods and services.  Which raises prices.  Just like those low interest rates did in the housing market.  The fear is that if this goes on too long there will be an economic crash.  Just like after the housing bubble burst.  From boom to bust.  Higher prices reduce consumer spending.  Because people can’t buy as much when prices are high.  As consumers stop spending businesses stop selling.  Faced with overcapacity in a period of falling demand they start cutting costs.  Laying off people.  People without jobs can buy even less at high prices.  And so on as the economy settles into recession.  This is why central bankers raise interest rates.  Because those good times are temporary.  And the longer they let it go on the more painful the economic correction will be.

This is why Keynesian stimulus spending fails to pull economies out of recession.  Because Keynesians focus only on the demand curve.  Consumption.  Consumer spending.  Not supply.  They ignore all that economic activity in the higher stages of productions.  That activity that precedes retail consumer sales.  The wholesale stage (the stage above retail).  The manufacturing stage (above the wholesale stage).  And the furthest out in time, the raw commodities stage (above the manufacturing stage).  As economic activity slows inventories build up.  Creating a bulge in the middle of the stages of production.  So manufacturing cuts back.  And because they do raw commodities cut back.  These are the first to suffer in an economic downturn.  And they are the last to recover.  Because of all that inventory in the pipeline.  When Keynesians get more money into consumers’ pockets they will increase their consumer spending.  For awhile.  Until that extra money is gone.  Which provided an economic boost at the retail level.  And a little at the wholesale level as they drew down those inventories.  But it did little at the higher stages of production.  Above inventories.  Manufacturing and raw material extraction.  Who don’t expand their production or hire new workers.  Because they know this economic activity is temporary.  And because they know all that new money will eventually create inflation.  Which will increase prices.  Throughout the stages of production.

The Keynesian approach focuses on the macro.  By playing with monetary policy.  Policies that ultimately hurt the higher stages of production.  At the micro level.  Where we create real economic activity.  If they’re not hiring then no amount of stimulus spending at the retail level will get them to hire.  Because giving the same amount of workers (i.e., consumers) more money to chase the same amount of goods and services only causes higher prices in the long run.  And it’s the long run that raw commodities and manufacturing look at.  They are not going to invest to expand their businesses unless they expect improving economic conditions in the long run.  All the way up the stages of production to where they are.  When new economic activity reaches them then they will expand and hire people.  And when they do they will add a lot of new consumers with real wages to go out and spend at the retail level.

One of the most efficient ways to achieve this is with tax cuts.  Because cuts in tax rates shape economic activity in the long run.  Across the board.  Unlike stimulus spending.  Which is short term.  And very selective.  Some benefit.  Typically political cronies.  But most see no benefit.  Just higher prices.  And continued unemployment.  Which is why Keynesian policies fail to pull economies out of recessions.  Because politicians use them for political purposes.  Not economic purposes.

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The Creative Destruction of the Internet may put Best Buy Stores out of Business

Posted by PITHOCRATES - August 11th, 2012

Week in Review

Best Buy and Circuit City were once fierce competitors in retail electronics.  Big box stores that carried an amazing range of consumer goods from televisions to car stereos to cameras to computers to refrigerators.  Their marketing plan?  Trade volume for margin.  They sold at low prices with low profit margins that mom and pop stores could not match and remain profitable.  But because of their high volume Best Buy and Circuit City could make a profit with those small margins.  Which they padded with those extended warranties.  It was a successful business model.  For awhile.  Circuit City is no longer with us.  And now Best Buy is struggling (see Best Buy founder proposes taking retailer private by Dhanya Skariachan and Nadia Damouni posted 8/6/2012 on Reuters).

Best Buy Co Inc (BBY.N) founder Richard Schulze on Monday made a bid to take the struggling U.S. electronics retailer private just months after being forced out as chairman.

If Schulze succeeds, it could result in the world’s biggest leveraged buyout of the year. But early reaction suggests he faces an uphill battle in taking his once wildly successful company in a new direction…

Best Buy has been closing stores, cutting jobs and trying out a new store format to improve business. It has faced criticism for being too slow to react to a changing retail world, where many use Best Buy as a “showroom” to try out gadgets and then buy them online or elsewhere for less.

It takes money to maintain inventory.  And every Best Buy store has inventory.  It’s a huge cost.  But it also gives them purchasing power.  This is why the mom and pop stores went bye-bye.  With their low sales volume they had small purchasing power.  So the little they bought came at higher unit costs than Best Buy’s.  Which meant they had to charge higher prices to cover those costs.  And now it’s happening again.  Only it’s online sales that are squeezing the profits out of Best Buy.  From suppliers that have no retail stores.  And a more consolidated inventory.  With no sales force or cashiers to pay.  They have high sales volume and low operating costs.  So now Best Buy is getting a taste of what it was like for the mom and pop stores.

We call this creative destruction.  And it’s a good thing in capitalism.  Everyone agrees.  Having a cell phone is better than having a pager that displays a phone number to call.  Then finding a public telephone to make that call from.  Cell phones have hurt the pager industry.  Just as digital cameras have hurt the instant camera industry.  Just like the MP3 player has hurt the compact disc industry.  Which hurt the cassette tape business.  Which hurt the 8-track tape business.  And now the Internet is hurting the big box retail industry.  We call this progress.  And it’s what the people want.  Because it’s the people driving this change.  They’re the ones buying the cell phones, digital cameras, MP3 players, compact discs and cassette tapes.  And it’s the people who are now shopping online.

New technology is always replacing old technology.  When it does it destroys a lot of jobs.  But it also creates a lot of new jobs.  Yes, it’s sad to see some of our favorite businesses go out of business.  But they only go out of business because there is something better out there attracting our business away from those old businesses.  And the day we stop wanting this is the day we give up our smartphones.  Or whatever will have replaced our smartphones in the future.

www.PITHOCRATES.com

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