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.

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.

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.

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.

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.

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.

Oceans: Power and Prosperity

Though the United State faces many economic challenges, one thing that is unlikely to change is that America has a very advantageous geographical position in regard to world trade. It faces the North Atlantic and Europe to the east. It faces the rapidly growing Pacific Rim area to the West. For a perspective on how important this could be, let's look back in history.

Looking at maps of Western Civilization at several of its high points, one is struck by a curious fact: they seem to be centered around oceans rather than land masses. Other civilizations have grown up around great rivers: Egypt, Mesopotamia, India and China. Western civilization has grown around seas: the Aegean, the Mediterranean, the North Sea, the Baltic and the Atlantic.

One usually thinks of Greece as a land-based entity, but at the height of its power in the days of Athens and Sparta, Greek settlements spread out over the shores of Asian Minor and the shores of the northern Aegean. The Greek world was thus to a large degree centered around the Aegean Sea. (The Greeks also traded far and wide across the Mediterranean.)

Similarly, though we usually think of the Roman Empire as a land-based entity, a quick look at a map reveals a curious fact: It completely encircled the Mediterranean Sea. Indeed, until Julius Caesar conquered Gaul, there really wasn't a whole lot of land mass to the empire in comparison to all that water. In those days, the civilized world was interconnected not only by the famous Roman roads, but also by sea, and held together by trade transported on ships.

To the north, there were trading areas centering around the North Sea and the Baltic Sea.

It was much faster and easier to travel and to transport freight by water than by land. Even today, though we can now carry freight by railroad, it is still easier by ship.

In addition, it appears that as the Western World grew, power flowed to the shores of ever larger bodies of water. The Greek world of the Aegean was superceded by the Roman world of the Mediterranean. Much later, when European powers facing the Atlantic Ocean (Spain, Portugal, England, the Netherlands, France) developed trade on that ocean, those countries became the preeminent world powers. The Western world became more and more built around the Atlantic, with America taking an ever larger role.

Eventually, the United States stretched from coast to coast, and it began to trade on the Pacific, too.

Since the Pacific is by far the largest ocean on earth, by this theory it could become (if it is not already) the richest and most powerful trading area in the world.

But of course the Atlantic is still a powerful trading area. And the United States faces both these oceans. It has the most powerful navy in the world to keep trade safe. The US trades by ocean to all points on earth.

Also America's east and west coasts are linked to all points of the continent by a well-developed railroad system.

By these facts alone, the power of the US economy is likely to remain formidable for quite some time yet. Of course it can decline, and of course other powers can rise. But it is not going away just yet.