Ron Paul (Republican candidate for President) had an interesting op ed piece in the Wall Street Journal yesterday (Thursday, Oct 20, 2011), claiming that our current economic mess is mainly the fault of the Federal Reserve and calling into question the need to have the Fed at all.
It is true that some economists and analysts have blamed at least part of both the Great Depression and the so-called Great Recession (which may or may not be over now) on incorrect monetary policy by the Fed. In the case of the Depression, they are accused of persisting with deflationary monetary policy even as catastrophic deflation was already happening. In regard to our current situation, they are accused of having an "easy money" policy that expanded the money supply too much.
There were booms and busts and banking panics before the Fed was established; the Fed was supposed to be a solution to that problem. But as often happens with solutions, if they are not based on a total understanding of what the problem actually is, the solution itself becomes a problem, often even worse than the original problem. The booms and busts and panics that happened before the Fed was invented were more frequent than, but not as bad as, the ones that happened after.
Having smart people in charge of managing our currency and economy sounds like a good idea, but it could be that the complexity of these things has outpaced the ability of these smart people to understand them. Economic theory, which is always changing, may be behind the 8-ball on these matters.
What would take the place of the Fed if it were abolished is not clear. At any rate, what are the chances of that happening? Slim to none.
Friday, October 21, 2011
Tuesday, October 18, 2011
A Long View--Part 2
Until the fall of communism, the economies of a large part of the world were held down by their governments. Most of their people were locked into perpetual poverty.
Communism, however, was not the only culprit. India, though nominally capitalist, was heavily socialist. Its economy too was held down by excessive state control.
China's economy had been brutalized by Mao, with various Five Year Plans and the infamous Great Leap Forward. But in the late 1970's, things began to change. The vise-like grip loosened.
Today, though China's government is still heavily involved in the economy, the winds of capitalism and free enterprise are blowing hot and heavy. The Chinese economy is growing like crazy. And they seem to be kicking our butt.
China has the advantage that Japan had 30 to 40 years ago--low-cost labor that can do quality work. And their population is huge. It would seem that it would take a very long time for their wages to rise, as Japan's did, to the level of developed nations.
India, too, has reduced government control of its economy, and it too is growing rapidly. It too has a large population that works for wages far lower than those in the US.
Other areas of the world are entering the so-called global economy. Most of Asia is proceeding with rapid growth.
All these billions of people producing low-cost products and services represent a down-draft for wages and prices in the US.
To look at it in a positive way, after so many years of talking about lifting people in poor countries out of poverty, now we are doing it. We are doing it by buying products made in their factories and by buying services out-sourced to them by American companies.
Wages in China are actually starting to rise a little. Thus it would appear that their supply of cheap labor is not quite as infinite as we might have thought.
This is a fluid situation, not one that will always remain the way it is now. Maybe China will catch up and pass us. But we thought Japan would do that. They didn't. However, it is certainly true that China is much bigger than Japan.
But the question is not one of who will be bigger or richer. The question is whether wages and standards of living will reach some kind of equilibrium.
And, since the pie we share is not static but ever growing, can that equilibrium be at a high level? Can we avoid having our standard of living pulled down by theirs? Can we raise theirs up instead?
In reality we may be experiencing some degree of drag on our standard of living from the current lack of equilibrium.
We could erect trade barriers against cheap products from overseas. But the lessons of the past seem to indicate that trade barriers lead in one direction: down. Everybody loses.
We have embraced and pursued free trade. It is dangerous and uncomfortable. But we feel that the competition makes us stronger.
Other nations may pursue us and come close to catching up. But so far no one has been able to lead like we can.
It is easier to pursue than to lead.
Communism, however, was not the only culprit. India, though nominally capitalist, was heavily socialist. Its economy too was held down by excessive state control.
China's economy had been brutalized by Mao, with various Five Year Plans and the infamous Great Leap Forward. But in the late 1970's, things began to change. The vise-like grip loosened.
Today, though China's government is still heavily involved in the economy, the winds of capitalism and free enterprise are blowing hot and heavy. The Chinese economy is growing like crazy. And they seem to be kicking our butt.
China has the advantage that Japan had 30 to 40 years ago--low-cost labor that can do quality work. And their population is huge. It would seem that it would take a very long time for their wages to rise, as Japan's did, to the level of developed nations.
India, too, has reduced government control of its economy, and it too is growing rapidly. It too has a large population that works for wages far lower than those in the US.
Other areas of the world are entering the so-called global economy. Most of Asia is proceeding with rapid growth.
All these billions of people producing low-cost products and services represent a down-draft for wages and prices in the US.
To look at it in a positive way, after so many years of talking about lifting people in poor countries out of poverty, now we are doing it. We are doing it by buying products made in their factories and by buying services out-sourced to them by American companies.
Wages in China are actually starting to rise a little. Thus it would appear that their supply of cheap labor is not quite as infinite as we might have thought.
This is a fluid situation, not one that will always remain the way it is now. Maybe China will catch up and pass us. But we thought Japan would do that. They didn't. However, it is certainly true that China is much bigger than Japan.
But the question is not one of who will be bigger or richer. The question is whether wages and standards of living will reach some kind of equilibrium.
And, since the pie we share is not static but ever growing, can that equilibrium be at a high level? Can we avoid having our standard of living pulled down by theirs? Can we raise theirs up instead?
In reality we may be experiencing some degree of drag on our standard of living from the current lack of equilibrium.
We could erect trade barriers against cheap products from overseas. But the lessons of the past seem to indicate that trade barriers lead in one direction: down. Everybody loses.
We have embraced and pursued free trade. It is dangerous and uncomfortable. But we feel that the competition makes us stronger.
Other nations may pursue us and come close to catching up. But so far no one has been able to lead like we can.
It is easier to pursue than to lead.
Monday, October 17, 2011
A Long View--part 1
After World War Two, a large proportion of the factories in the developed world had been bombed out--except in the United States. The US's industrial capacity was a key reason it had won the war. Its ability to produce tanks, planes and ships was unmatched. When the war ended with Europe, Russia and Japan mainly in rubble, demand for peacetime production was high, and US industry obliged. Times were good for factories and their workers. Wages rose, and unions were strong.
Demand for military production continued as well, since the Soviet Union was a major threat to Europe. And we were providing funds to rebuild Europe.
Over the next couple of decades, Europe revived, and Japan re-emerged as an industrial power.
Wages in Japan started out low, giving them an advantage over factories in the US. The US began to experience the rising tide of imports from Asia. The impact seemed to be particularly severe in the auto industry. The US ended up making a series of deals with Japan in which Japan agreed to limit its exports of autos to the US. This seemed to help, but on the other hand, Japanese car makers sent over more expensive cars rather than the hordes of cheap ones. Thus they did not lose much money on the deal.
Meanwhile Japanese wages and general standard of living rose until it reached the range of that of the US and Europe. Japan became part of the developed world. It lost its low-wage, low-cost advantage over the US and Europe. Yet its manufacturers were still almost legendarily efficient, profitable and high-quality. They continued to be a formidable competitor.
In the 1980s the Japanese overextended themselves, running up huge debts to invest in US assets. Some of the assets they bought at their high water mark seemed to be symbolic of a Japanese economic victory over the US.
The government-directed industrial policy of Japan also reached a point where they were done catching up, and if they were going to really overtake the US, they would have to lead the world in new directions in technology and innovation. Artificial intelligence seemed to be a new frontier with huge potential. They embarked on a course to advance heavily in that area.
But the debts they ran up in over-expanding into the US, plus the unexpected difficulty encountered in developing artificial intelligence, led to Japan's "lost decade." Growth ground to a halt, and unemployment rose. The government began a long period of deficit spending to try to stimulate the economy. Yet structural problems in various areas of their economy, particularly their finance industry, have kept japan from recovering from their slump. The lost decade has stretched out into another decade.
Japan is still one of the largest economies in the world, but it does not at this time appear to be a threat to overtake the US.
Part 2 will consider China.
Demand for military production continued as well, since the Soviet Union was a major threat to Europe. And we were providing funds to rebuild Europe.
Over the next couple of decades, Europe revived, and Japan re-emerged as an industrial power.
Wages in Japan started out low, giving them an advantage over factories in the US. The US began to experience the rising tide of imports from Asia. The impact seemed to be particularly severe in the auto industry. The US ended up making a series of deals with Japan in which Japan agreed to limit its exports of autos to the US. This seemed to help, but on the other hand, Japanese car makers sent over more expensive cars rather than the hordes of cheap ones. Thus they did not lose much money on the deal.
Meanwhile Japanese wages and general standard of living rose until it reached the range of that of the US and Europe. Japan became part of the developed world. It lost its low-wage, low-cost advantage over the US and Europe. Yet its manufacturers were still almost legendarily efficient, profitable and high-quality. They continued to be a formidable competitor.
In the 1980s the Japanese overextended themselves, running up huge debts to invest in US assets. Some of the assets they bought at their high water mark seemed to be symbolic of a Japanese economic victory over the US.
The government-directed industrial policy of Japan also reached a point where they were done catching up, and if they were going to really overtake the US, they would have to lead the world in new directions in technology and innovation. Artificial intelligence seemed to be a new frontier with huge potential. They embarked on a course to advance heavily in that area.
But the debts they ran up in over-expanding into the US, plus the unexpected difficulty encountered in developing artificial intelligence, led to Japan's "lost decade." Growth ground to a halt, and unemployment rose. The government began a long period of deficit spending to try to stimulate the economy. Yet structural problems in various areas of their economy, particularly their finance industry, have kept japan from recovering from their slump. The lost decade has stretched out into another decade.
Japan is still one of the largest economies in the world, but it does not at this time appear to be a threat to overtake the US.
Part 2 will consider China.
Friday, October 7, 2011
Recession?
There has been a lot of hand-wringing in the media, especially the financial press, about whether we are about to experience the second dip of a double-dip recession. At the same time there are people who say that, with 10% unemployment, why should we say we are not in a recession now?
It may indeed turn out that future economists will look back at this period of time--especially if we do have another dip--as one long recession. The anemic growth that we do have is totally created by government action: stimulus spending by Congress and easy money by the Federal Reserve. The conditions that created the recession have not yet been resolved.
On the other hand, the doomsday predictions from some quarters of a catastrophic failure of our economy and indeed our civilization have not come to pass, despite the fact that the potential did definitely seem to be there for a very hard landing. We are not out of the woods yet (see Europe), but maybe we will survive.
Though conditions existed in 2008 that could have led to as big a collapse as the one that led to the Great Depression, there are three huge differences in how the crisis has been handled compared to how things were handled at the beginning of the Depression.
1. In 1929 and 1930, nothing was done to stop the world's currencies from deflating catastrophically. In today's crisis, everything possible was done to prevent that, and so far it appears that those efforts have been successful.
2. In the Depression, banks were allowed to fail, and they did in droves, with disastrous effect. People's life savings were wiped out. Many (but by no means all!) ended up with no money, no job and often with no place to live. In 2008, banks were not allowed to fail; they were bailed out. This was a necessary action, distasteful as it was to many people.
3. At the beginning of the Depression, taxes were raised significantly. Though there are voices calling for more taxes today, so far everyone has been sensible enough to realize that that would be a bad thing for the economy.
Stimulus spending has also been used more extensively now than during the Depression, but it depends on which economist you talk to as to whether that is a good thing or not.
In short, it appears that we have actually learned something, and we are not totally repeating the mistakes of the past. We may have done just as bad a job when it came to getting ourselves into this mess, but the people who have been handling it have been aware of the things that were done wrong during the Depression, and they have done something different. This, I guess, is progress.
The market forces that always handle and heal the causes and lingering effects of a recession are at work, and they will resolve these things in time. (Two or three more years perhaps.) Then we will have a real recovery, and it will be a good one.
It may indeed turn out that future economists will look back at this period of time--especially if we do have another dip--as one long recession. The anemic growth that we do have is totally created by government action: stimulus spending by Congress and easy money by the Federal Reserve. The conditions that created the recession have not yet been resolved.
On the other hand, the doomsday predictions from some quarters of a catastrophic failure of our economy and indeed our civilization have not come to pass, despite the fact that the potential did definitely seem to be there for a very hard landing. We are not out of the woods yet (see Europe), but maybe we will survive.
Though conditions existed in 2008 that could have led to as big a collapse as the one that led to the Great Depression, there are three huge differences in how the crisis has been handled compared to how things were handled at the beginning of the Depression.
1. In 1929 and 1930, nothing was done to stop the world's currencies from deflating catastrophically. In today's crisis, everything possible was done to prevent that, and so far it appears that those efforts have been successful.
2. In the Depression, banks were allowed to fail, and they did in droves, with disastrous effect. People's life savings were wiped out. Many (but by no means all!) ended up with no money, no job and often with no place to live. In 2008, banks were not allowed to fail; they were bailed out. This was a necessary action, distasteful as it was to many people.
3. At the beginning of the Depression, taxes were raised significantly. Though there are voices calling for more taxes today, so far everyone has been sensible enough to realize that that would be a bad thing for the economy.
Stimulus spending has also been used more extensively now than during the Depression, but it depends on which economist you talk to as to whether that is a good thing or not.
In short, it appears that we have actually learned something, and we are not totally repeating the mistakes of the past. We may have done just as bad a job when it came to getting ourselves into this mess, but the people who have been handling it have been aware of the things that were done wrong during the Depression, and they have done something different. This, I guess, is progress.
The market forces that always handle and heal the causes and lingering effects of a recession are at work, and they will resolve these things in time. (Two or three more years perhaps.) Then we will have a real recovery, and it will be a good one.
Tuesday, September 27, 2011
Market ups and downs
I usually don't like to comment on the stock market. There are plenty of people who do that, and I am not an investment advisor.
Nevertheless I would like to point out that the stock market is always a little bit disconnected from reality. The underlying value of the companies and the dividends they pay are only parts of what drives stock prices. Other factors are economic conditions, growth projections for individual companies, and various emotions such as fear, greed, etc.
When the Dow goes down 500 points like it did last Thursday (Sept 22), it gets some people worried. The comments on TV can sound a bit doomsday-ish (yes, I just made that word up). Then the following Monday (Sept 26) it goes up a couple of hundred points, and everyone feels much better.
The stock market generally doesn't cause the economy to do anything. Even in 1929 (despite the popular wisdom on the subject) it was not the stock market crash that caused the depression (in my opinion). The crash was only one of many symptoms of what was going on.
If one must invest in the stock market, one sensible way to do it is to choose companies that pay reliable dividends. In today's low interest rate environment, dividends are attractive because they give a much higher rate of return than interest on bank deposits. Of course there is a risk of losing your investment, whereas bank deposits are guaranteed by the government up to a certain amount.
Investing for capital gain is a whole different ballgame. Common investment advice for that is to invest in stocks for the long term when you are young, so that stock market ups and downs are evened out over the years. That generally yields better results than just putting your money in the bank. Then when you get near retirement age, get out of stocks and just put the money in the bank. That way you would avoid a possible downturn form which you may not have time to recover.
Investing to try to make a lot of money has a very common result: people lose a lot of money. In fact I would venture to say that the majority of people who invest with that motivation end up losing money. There are a few very smart people who make money at it. Then there is everyone else. A lot of people go in thinking they are smarter than the market, then learn otherwise. There are also a lot of methods and schemes being sold.
Not everyone can make money in the stock market. It's a game in which there are winners and losers. The small players are often losers.
Economic uncertainties such as those we have today can drive market sentiment. The trend of the stock market (up or down) can be an indicator of what the economy is going to do in the near future. But there are many other indicators, and no single one is an infallible predictor of the future.
People shouldn't get too excited about market ups and downs. Extreme moves may be worth noting. But even extreme one-day moves, in recent decades, have not had the catastrophic effects they sometimes seem to portend. The trend is more important than any single day.
Nevertheless I would like to point out that the stock market is always a little bit disconnected from reality. The underlying value of the companies and the dividends they pay are only parts of what drives stock prices. Other factors are economic conditions, growth projections for individual companies, and various emotions such as fear, greed, etc.
When the Dow goes down 500 points like it did last Thursday (Sept 22), it gets some people worried. The comments on TV can sound a bit doomsday-ish (yes, I just made that word up). Then the following Monday (Sept 26) it goes up a couple of hundred points, and everyone feels much better.
The stock market generally doesn't cause the economy to do anything. Even in 1929 (despite the popular wisdom on the subject) it was not the stock market crash that caused the depression (in my opinion). The crash was only one of many symptoms of what was going on.
If one must invest in the stock market, one sensible way to do it is to choose companies that pay reliable dividends. In today's low interest rate environment, dividends are attractive because they give a much higher rate of return than interest on bank deposits. Of course there is a risk of losing your investment, whereas bank deposits are guaranteed by the government up to a certain amount.
Investing for capital gain is a whole different ballgame. Common investment advice for that is to invest in stocks for the long term when you are young, so that stock market ups and downs are evened out over the years. That generally yields better results than just putting your money in the bank. Then when you get near retirement age, get out of stocks and just put the money in the bank. That way you would avoid a possible downturn form which you may not have time to recover.
Investing to try to make a lot of money has a very common result: people lose a lot of money. In fact I would venture to say that the majority of people who invest with that motivation end up losing money. There are a few very smart people who make money at it. Then there is everyone else. A lot of people go in thinking they are smarter than the market, then learn otherwise. There are also a lot of methods and schemes being sold.
Not everyone can make money in the stock market. It's a game in which there are winners and losers. The small players are often losers.
Economic uncertainties such as those we have today can drive market sentiment. The trend of the stock market (up or down) can be an indicator of what the economy is going to do in the near future. But there are many other indicators, and no single one is an infallible predictor of the future.
People shouldn't get too excited about market ups and downs. Extreme moves may be worth noting. But even extreme one-day moves, in recent decades, have not had the catastrophic effects they sometimes seem to portend. The trend is more important than any single day.
Thursday, August 25, 2011
More on American Way
We do a lot to try to give everyone a fair start at the starting line. But once the race is underway, how much should we do to regulate its progress? We do realize that we can't guarantee that everyone finishes together, i.e., not everyone can end up with the same income and the same amount of money. Individual differences in ability, motivation, etc., account for differences in result. To the degree that there are unfair barriers for some and unfair advantages to others, we try to eliminate those. But we can't eliminate the individual differences that result in differences in economic outcome. Some people believe that we should guarantee that everyone ends up with the same result, but that has been tried, and it failed miserably. (There have been voluntary associations of people that have worked successfully that way, but not a national government.) Nor is selfishness the ultimate answer, despite Ayn Rand's assertions, because most people do want to help others.
Our system, as envisioned by economist Adam Smith a couple of centuries ago, has built in rewards and penalties. Having a well-functioning economy requires productive activity from its participants. The rewards for production and the penalties for lack of production are important factors in our system. Trying to regulate that and modify it probably slows down economic activity.
On the other hand, our fear of having excessive differences between rich and poor is probably a legitimate concern. If we could think of ways of helping those who need help without penalizing the production of the most productive, and without damaging the incentives of those being helped, that would be ideal.
(Of course, making a lot of money is sometimes not the same thing as being productive. We have laws to prevent people from making money dishonestly. Also we should not assume that everyone who makes a lot of money is somehow doing it dishonestly. Most of them are good people. It's the bad apples that give them a bad name.)
It would be nice if we could keep in mind that we are all in this together, and all help as best we can.
Our system, as envisioned by economist Adam Smith a couple of centuries ago, has built in rewards and penalties. Having a well-functioning economy requires productive activity from its participants. The rewards for production and the penalties for lack of production are important factors in our system. Trying to regulate that and modify it probably slows down economic activity.
On the other hand, our fear of having excessive differences between rich and poor is probably a legitimate concern. If we could think of ways of helping those who need help without penalizing the production of the most productive, and without damaging the incentives of those being helped, that would be ideal.
(Of course, making a lot of money is sometimes not the same thing as being productive. We have laws to prevent people from making money dishonestly. Also we should not assume that everyone who makes a lot of money is somehow doing it dishonestly. Most of them are good people. It's the bad apples that give them a bad name.)
It would be nice if we could keep in mind that we are all in this together, and all help as best we can.
Sunday, August 21, 2011
Regarding July 4th post
A lot of ground was covered in the Fourth of July post, and some elaboration may be in order:
The question of whether any particular group (ethnic, racial, religious, etc.) may or may not have higher or lower average attributes of any kind (such as intelligence or talents of any kind) is irrelevant to the fact that individuals vary widely within the group. If there are differences in averages between groups, they are minor compared to the differences amongst individuals within the group. In other words, in the racial group of green people (if there were such a group), there would be some very stupid people, some very brilliant people and everything in between. The same is true of any major group. Our task as a modern society is to find the ones who can contribute the most and allow them to do so, despite whatever objections anyone may have to the group they belong to. Our system, our "American way" if you will, seeks to allow people to rise if they are able to do so, and attempts to eliminate barriers of prejudice, poverty, etc.
Even if it were true that there would be more brilliant people per capita in one group than another, that would not alter the fact that there are brilliant people in every group, and we need their talents.
The important thing is that we want to evaluate individuals as individuals, not as members of whatever group they belong to.
The question of whether any particular group (ethnic, racial, religious, etc.) may or may not have higher or lower average attributes of any kind (such as intelligence or talents of any kind) is irrelevant to the fact that individuals vary widely within the group. If there are differences in averages between groups, they are minor compared to the differences amongst individuals within the group. In other words, in the racial group of green people (if there were such a group), there would be some very stupid people, some very brilliant people and everything in between. The same is true of any major group. Our task as a modern society is to find the ones who can contribute the most and allow them to do so, despite whatever objections anyone may have to the group they belong to. Our system, our "American way" if you will, seeks to allow people to rise if they are able to do so, and attempts to eliminate barriers of prejudice, poverty, etc.
Even if it were true that there would be more brilliant people per capita in one group than another, that would not alter the fact that there are brilliant people in every group, and we need their talents.
The important thing is that we want to evaluate individuals as individuals, not as members of whatever group they belong to.
Monday, July 4, 2011
4th of July, 2011
The American Way
To some, the American Way is right up there with Truth and Justice, just like in the intro to the old Superman TV show. ("...to fight...for truth, justice and the American Way!") But what is the American way anyway (and what does it have to do with business and economics)?
Probably the biggest part of the American way—and something that still drives us today--is the first self-evident truth stated in the Declaration of Independence on this date 235 years ago:
All men are created equal.
Of course we add women to that now.
And of course we all know that no matter how much of an article of faith that statement is, individuals do vary almost infinitely in their talents, abilities, motivations, honesty/dishonesty, etc.
But in the context of 1776, that statement was pointed straight at the heart of the basic social order of the Old World. In those days, an individual’s life was determined by his birth. If he was born into a lower class, he stayed in that lower class. If he was born into an upper class, he stayed there, even if he was a total idiot.
Many societies throughout history have been stratified in that way. But it overlooks what could be called an inconvenient truth: that people with talent, brains or “the right stuff” can come from any level of society and any race or ethnic group.
And what is the basic injustice? I would argue that it is summed up pretty simply as this: not treating a person the way he or she deserves to be treated.
If a person has talents and potentials that cannot be used because of an accident of birth, it is an injustice. Not only that, but it is a serious loss for the society as a whole. We need talented people, and we need to find them wherever they may be.
Inspired by the idea that all are created equal, we have tried to do all we can to give everybody a fair chance in life. Early on we instituted universal free public education. More recently we have created programs like Head Start to try to break down obstacles presented by extreme poverty in early childhood. We have also done our best to make a college education available to anyone who wants it. We have state universities, federal grants and loans and an extensive centralized system of evaluating financial aid applications. Individual colleges and universities also have scholarship programs to ensure that talented students from low-income backgrounds can attend their school.
The bottom line is that if any person has a desire for higher education and has a brain cell or two to rub together, it will not be a lack of money that will prevent it. Life issues may intervene, but probably not money for tuition.
We also have laws and rules against discrimination by superficial things like skin color, religion, etc.
And we have many other programs, policies, laws and crusades that militate towards the proposition that all men (and women) are created equal.
It could very well be that we overdo it at times—that we often ignore that reality that individuals vary from one to the other. But from the viewpoint of the society (and the economy), what do all these things do?
You might say that more than anything else, they stir the pot. The society needs talented people, and all these programs etc give them an opportunity to rise. This is good for the society, and for the most part (I say “the most part” because some of these efforts are counter-productive and have excessive costs), it is good for the economy.
The converse side of the American way is that clunkers have the opportunity to fall. Some people are born rich, but they don’t all stay that way. “A fool and his money are soon parted.” There are plenty of opportunities for people to blow their money, make foolish choices, fail at pet projects, etc. We don’t need people at the top who are dead weight.
Another part of the system is that even people who are born rich and stay that way by doing nothing except collecting interest and dividends, well, even they are contributing something. Their money is invested in banks and stocks, and therefore it is being used by entrepreneurs, corporations, etc, who know how to use it to make more money, create wealth, hire people and generally keep the economy buzzing.
The American Way is a complex and varied thing, and it is also part of what has made our economy the strongest in the world.
To some, the American Way is right up there with Truth and Justice, just like in the intro to the old Superman TV show. ("...to fight...for truth, justice and the American Way!") But what is the American way anyway (and what does it have to do with business and economics)?
Probably the biggest part of the American way—and something that still drives us today--is the first self-evident truth stated in the Declaration of Independence on this date 235 years ago:
All men are created equal.
Of course we add women to that now.
And of course we all know that no matter how much of an article of faith that statement is, individuals do vary almost infinitely in their talents, abilities, motivations, honesty/dishonesty, etc.
But in the context of 1776, that statement was pointed straight at the heart of the basic social order of the Old World. In those days, an individual’s life was determined by his birth. If he was born into a lower class, he stayed in that lower class. If he was born into an upper class, he stayed there, even if he was a total idiot.
Many societies throughout history have been stratified in that way. But it overlooks what could be called an inconvenient truth: that people with talent, brains or “the right stuff” can come from any level of society and any race or ethnic group.
And what is the basic injustice? I would argue that it is summed up pretty simply as this: not treating a person the way he or she deserves to be treated.
If a person has talents and potentials that cannot be used because of an accident of birth, it is an injustice. Not only that, but it is a serious loss for the society as a whole. We need talented people, and we need to find them wherever they may be.
Inspired by the idea that all are created equal, we have tried to do all we can to give everybody a fair chance in life. Early on we instituted universal free public education. More recently we have created programs like Head Start to try to break down obstacles presented by extreme poverty in early childhood. We have also done our best to make a college education available to anyone who wants it. We have state universities, federal grants and loans and an extensive centralized system of evaluating financial aid applications. Individual colleges and universities also have scholarship programs to ensure that talented students from low-income backgrounds can attend their school.
The bottom line is that if any person has a desire for higher education and has a brain cell or two to rub together, it will not be a lack of money that will prevent it. Life issues may intervene, but probably not money for tuition.
We also have laws and rules against discrimination by superficial things like skin color, religion, etc.
And we have many other programs, policies, laws and crusades that militate towards the proposition that all men (and women) are created equal.
It could very well be that we overdo it at times—that we often ignore that reality that individuals vary from one to the other. But from the viewpoint of the society (and the economy), what do all these things do?
You might say that more than anything else, they stir the pot. The society needs talented people, and all these programs etc give them an opportunity to rise. This is good for the society, and for the most part (I say “the most part” because some of these efforts are counter-productive and have excessive costs), it is good for the economy.
The converse side of the American way is that clunkers have the opportunity to fall. Some people are born rich, but they don’t all stay that way. “A fool and his money are soon parted.” There are plenty of opportunities for people to blow their money, make foolish choices, fail at pet projects, etc. We don’t need people at the top who are dead weight.
Another part of the system is that even people who are born rich and stay that way by doing nothing except collecting interest and dividends, well, even they are contributing something. Their money is invested in banks and stocks, and therefore it is being used by entrepreneurs, corporations, etc, who know how to use it to make more money, create wealth, hire people and generally keep the economy buzzing.
The American Way is a complex and varied thing, and it is also part of what has made our economy the strongest in the world.
Tuesday, June 28, 2011
Did you know?
Farmers (generally) are doing well. Prices are up, loans are cheap, profits are flowing.
Science continues to make advances that make better crops, lower costs, etc.
Science continues to make advances that make better crops, lower costs, etc.
Sunday, June 19, 2011
Housing rules
A long-time rule of thumb for the US economy is that it follows, in large part, the direction of the housing industry. Recessions and recoveries often follow booms and busts in housing. Housing, in turn, would usually follow increases and decreases in interest rates. When interest rates went down, more people could afford mortgages. The demand for new houses would pick up, leading to increased employment in the building trades. New houses also meant that people needed stoves, refrigerators and a host of other durable and non-durable goods. Factories would need to hire more people to meet renewed demand, and the economy would go into an upswing.
Usually this upswing would follow a period of comparatively high interest rates, during which demand for housing had fallen. Home valuations would often stagnate during these times. Sometimes prices would even fall due to decreased demand. When the break in interest rates came, the combination of low rates and buyer-friendly real estate prices would usually lead to a brisk recovery.
The real estate boom that ended in about 2007 has been called the longest and most sustained such boom in living memory. In the aftermath, we are continuing to see weakness in the housing industry, despite the fact that about four years have gone by since the collapse.
The Federal Reserve has attempted to revive the economy by pouring money into it and by keeping interest rates at rock-bottom levels. Such measures usually work, but as noted above, the housing market has usually by this point come back down to an affordable level, and excess capacity has been used up. So far that has not happened this time. We could reach the bottom any time now, but at this point we do not know exactly when. In reality we will not know until we see the statistics reverse direction and start to move upward. We will only know about it after the fact, when all the numbers have come in and have been added up.
One funny thing about us as economic creatures is that we commonly tend to think that the current trend will go on forever. When housing prices are going up, we think they will always go up. When they go down, we fear that the decline will go on interminably. But trends do change.
In my opinion, the Federal Reserve has an interesting situation that it is continuing to deal with. The housing decline is a severe deflationary force in the economy. The actions the Fed has taken, which many people point to as alarmingly inflationary, have not stopped the deflation of that segment of the economy. Other segments of the economy show signs of inflation, but housing has continued to go down.
Since housing is such a major force in the economy, the Fed's actions are a little bit like spitting in the wind. The analogy is not perfect, because the Fed's actions have had an effect--mainly in preventing disaster. But the economy cannot recover fully until housing completes its shakeout.
Of course we have not covered here all the things that have gone wrong or been done wrong in the last few years. However, the trend of the housing industry still stands as a key indicator to watch.
Usually this upswing would follow a period of comparatively high interest rates, during which demand for housing had fallen. Home valuations would often stagnate during these times. Sometimes prices would even fall due to decreased demand. When the break in interest rates came, the combination of low rates and buyer-friendly real estate prices would usually lead to a brisk recovery.
The real estate boom that ended in about 2007 has been called the longest and most sustained such boom in living memory. In the aftermath, we are continuing to see weakness in the housing industry, despite the fact that about four years have gone by since the collapse.
The Federal Reserve has attempted to revive the economy by pouring money into it and by keeping interest rates at rock-bottom levels. Such measures usually work, but as noted above, the housing market has usually by this point come back down to an affordable level, and excess capacity has been used up. So far that has not happened this time. We could reach the bottom any time now, but at this point we do not know exactly when. In reality we will not know until we see the statistics reverse direction and start to move upward. We will only know about it after the fact, when all the numbers have come in and have been added up.
One funny thing about us as economic creatures is that we commonly tend to think that the current trend will go on forever. When housing prices are going up, we think they will always go up. When they go down, we fear that the decline will go on interminably. But trends do change.
In my opinion, the Federal Reserve has an interesting situation that it is continuing to deal with. The housing decline is a severe deflationary force in the economy. The actions the Fed has taken, which many people point to as alarmingly inflationary, have not stopped the deflation of that segment of the economy. Other segments of the economy show signs of inflation, but housing has continued to go down.
Since housing is such a major force in the economy, the Fed's actions are a little bit like spitting in the wind. The analogy is not perfect, because the Fed's actions have had an effect--mainly in preventing disaster. But the economy cannot recover fully until housing completes its shakeout.
Of course we have not covered here all the things that have gone wrong or been done wrong in the last few years. However, the trend of the housing industry still stands as a key indicator to watch.
Sunday, January 30, 2011
Smack dab in the middle
As mentioned in the previous post, the Roman Empire was centered around the Mediterranean Sea. It is interesting to note, in looking at a map, that Rome is literally near the middle of it, being on a strip of land (i.e., Italy) that sticks out into that sea.
Travel and trade by water have been extremely important in Western history, going back to the rise of the Greeks. The Mediterranean became a medium of communication that linked the ancient world into a community.
The Roman army had been superior on land for a long time, but it was not until it built a powerful navy that it was able to control the Mediterranean and complete its conquests. Its location near the middle of the Mediterranean would have been very fortunate for naval operations. Probably even more important would have been its location as a hub for trade.
It may or may not be appropriate to compare the United States to Rome, but it may be worth noting that the US is located in a fantastic trading position right in the middle between two gigantic trading areas: the Atlantic and the Pacific. As mentioned in the previous post, this is a powerful position.
It is interesting to note, also, that oceans tend to provide communication between the lands on their opposite shores, thus bringing them together as much as separating them. The people along the coasts of the oceans sometimes have more in common with each other than with people further inland on their own continent. For example, the culture and politics of Massachusetts sometimes seem more similar to Western Europe than to, say, Texas. California is obviously different from most of the rest of the US, and it is especially interesting that the California counties along the Pacific coast are politically the most different while the inland counties are more like the American heartland.
Similarly, the coastal areas of China are a little bit different from its inland areas. Prosperity has so far come mainly to the coastal areas, though it is spreading inland.
We tend to think of countries and civilizations as land based entities, but the roles played by ocean trade, travel and migration have really been far more important in western civilization. The United States is at the crossroads of the world in many respects, and as such it should continue to be a land of opportunity despite its problems.
Travel and trade by water have been extremely important in Western history, going back to the rise of the Greeks. The Mediterranean became a medium of communication that linked the ancient world into a community.
The Roman army had been superior on land for a long time, but it was not until it built a powerful navy that it was able to control the Mediterranean and complete its conquests. Its location near the middle of the Mediterranean would have been very fortunate for naval operations. Probably even more important would have been its location as a hub for trade.
It may or may not be appropriate to compare the United States to Rome, but it may be worth noting that the US is located in a fantastic trading position right in the middle between two gigantic trading areas: the Atlantic and the Pacific. As mentioned in the previous post, this is a powerful position.
It is interesting to note, also, that oceans tend to provide communication between the lands on their opposite shores, thus bringing them together as much as separating them. The people along the coasts of the oceans sometimes have more in common with each other than with people further inland on their own continent. For example, the culture and politics of Massachusetts sometimes seem more similar to Western Europe than to, say, Texas. California is obviously different from most of the rest of the US, and it is especially interesting that the California counties along the Pacific coast are politically the most different while the inland counties are more like the American heartland.
Similarly, the coastal areas of China are a little bit different from its inland areas. Prosperity has so far come mainly to the coastal areas, though it is spreading inland.
We tend to think of countries and civilizations as land based entities, but the roles played by ocean trade, travel and migration have really been far more important in western civilization. The United States is at the crossroads of the world in many respects, and as such it should continue to be a land of opportunity despite its problems.
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