Production, not consumption drives economies

It is often said that we live in a consumer-driven economy, with the implication being that not only does the economy primarily serve the consumer, but there seems to be an implicit corollary to this statement that since consumer activity (or consumption) directs the economy, that a reliable method to increase the size of an economy is to increase the consumer activity of consumption.  This incorrect belief assumes that the correlation between an increase in a society's wealth and the increase in consumption of that wealth means that the consumption of that wealth is what created the wealth in the first place¹.

To enrich the members of our society we have to produce more wealth for them to be able to consume.  While being able to consume wealth may be the motivation for its production, but consumption itself does not create more wealth any more than consuming a bowl of oatmeal causes more of it to appear in your pantry.

People consume goods and services, and not money, so wealth is definable as the quantity of goods and services available, and this is the measure of an economy.  The only possible way an economy is grown is by increasing the production of wealth. I say only possible way, but it's simpler than that - since a growing economy is defined as one where wealth is increasing, the only real way to increase wealth is to increase the rate of its production, unless, of course, one believes that wealth may be increased by use of either magic or pixie dust.

• This requires capital investment in either new (higher output) equipment or research and development into more efficient methods of production.  
• Only those people who have been able to amass and manage large amounts of capital are able to afford to both make those investments and support themselves comfortably.
• Only if there is the possibility of reward will they risk the sure thing of keeping their money with the possibility of losing it on an investment that can go bad.  
• Only the threat of losing their investment will incentivize them to do the necessary work to be determine that their money and the resources that will be consumed by it's spending will actually produce more wealth than is consumed.

Getting more money into the hands of consumers by allowing them to earn the money through their production of wealth will improve the economy.  But the increase in consumer spending is an effect, not a cause of increased prosperity.  When more wealth is produced it follows that more can (and will) be consumed and not the other way around.

I admit that this may sound about as ridiculous a point to argue as arguing that the earth is a sphere or that 2+2 really is 4, but I keep hearing people arguing, in effect, that 2+2 may equal 5 for sufficiently large values of 2.  The explanations are always long and involved, but they amount to nothing more than hand waving to distract from their hollowness.

I therefore assert that when people start talking about how getting more money into the hands of consumers will help the economy, and when they propose that it be done by either first taking that money from others or by just printing it, then either they are ignorant or they are lying.  I suspect that either explanation is equally probable for the current political class today.

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Notes

1. ^For the purposes of my explanation of why this is a stupid idea, I am assuming the impossibility of time travel, the existence of which I am willing to concede would be a possible means for goods and serviced could be utilized prior to their creation.  Of course if you want to debate this point with me you should first debunk Hawking's chronology protection conjecture.

Bipartisanship for our lifetime...

So I heard Representative Eric Cantor (Virginia) state earlier this week his intention to repeal Obamacare and replace it with Cantorcare, which, apparently, means that only the "popular" provisions, i.e. requiring insurance companies to provide coverage to people with pre-existing conditions AND requiring companies that provide insurance to children to cover those children to the age of 26.

I don't know if Cantor thinks he can compromise with Obama, and that maybe this will be a way to get a less-bad law in place of the current one, but this current batch of Democrats have proven time and again that they do not honor their commitments.  And if they do succeed, then their fingerprints will be on the destruction of our health care and health insurance markets.  Consider:

• Insurance for pre-existing conditions is not insurance, it is welfare.  Insurance is when you pay into a common risk pool to cover future (unknown) risks.  If it's something you already have, then it's not a risk, it is a reality, and to have someone else pay for your reality is welfare, not insurance.
• Children to the age of 26.  So what is already happening here is companies are beginning to refuse to offer policies on children.  Nevermind the classification of a 26 year old person as a child, but in our current nanny-state country, that somehow seems to fit.

The real problem here is that they are not "forcing" insurance companies to do squat, they are "prohibiting" me from entering into agreements with those companies under terms outside of what they "deem" acceptable.  Who are those idiots to decide for me?

I will never support any Democrat because of what they have collectively done to my country these past 4 years that they've controlled Congress.  For the Republicans to repeal the abominable restrictions on my freedom in Obamacare I expect and demand.  But for them to replace it with their own version will force me to refuse to support them either.  Ever.  Might not be a bad thing for me to give up my interest in politics.

to paraphrase Orwell, "The voters outside looked from democrat to republican, and from republican to democrat, and from democrat to republican again; but already it was impossible to say which was which."

Understanding The Trade Deficit and How It Can Be Fixed

To understand what a trade deficit really is, I think it best to illustrate the abstract with a concrete example. Look at the following financial transactions of a "Mr. T" (this was an actual person whose full name was not given, but from whose financial ledgers this example is drawn):

• T exports to France a shipment of cotton valued at $200,000.  Shipping costs amounted to $80,000, and the shipment sells in France for $320,000 making a $40,000 profit.
• T spends his $320,000 purchasing French goods which he ships back to the United States at a cost of $32,000 (bringing the total cost of the shipment to $352,000)  He is able to sell this locally for $422,400 realizing a $70,400 profit.

From the point of view of the U.S. customhouse, Mr. T exported $200,000 in goods and imported $352,000 in goods, thus concluding that the sum of his transactions resulted in a $152,000 trade deficit.  Somehow, in spite of the $110,400 profit made by T, this is a "bad thing."

Some time later, T sent another shipment of $200,000 worth of cotton to France, but the vessel carrying it sank, resulting in a loss of $200,000 for T.  From the point of view of the U.S. customhouse however, they recorded exports of $200,000 and no imports, resulting in a $200,000 trade gain.

Clearly, this example shows the way forward for us to rectify our trade deficit in very short order.  The United States should:

"...after entering entering into the custom-house her articles for exportation, cause them to be thrown into the sea.  By this course her exportations can speedily be made equal to her capital; importations will be nothing, and our gain will be, all which the ocean will have swallowed up." -- from "Sophismes Econimiques" by Frederic Bastiat

I pity the fool country which follows that course...

Shades of grey....

It’s not that I don’t see the shades of grey, it’s that in many cases I see them up close, and I can see the little black and white dots that make up the grey.  And they are black and white.  I think it’s just that so many other people focus so much on the “big picture” that they lose sight of the details (wherein the devil lies).


Many people cannot see the trees for the forest.


To expound upon this, I also assert that a good does NOT “cancel out” an evil.  Life is not arithmetic. You cannot simply take the sum total of all the good and all the evil and that is what you either owe or are due.  When you accumulate good karma or bad karma, you must satisfy both before your balance is clean.  If I save a person from dying, that does not mean that I am now allowed to kill someone else.  Yet somehow people think that it’s ok to do a little harm here or there so long as the greater good is served.  Maybe, but only if it’s done because to not do it would cause a greater amount of harm, and even then, I believe that you must accept responsibility for the harm you have done.


So why all the fuss about details?  Well, the problem with doing something ill "for the greater good" is  that one can never foresee all the possible consequences of one's actions.  We must therefore accept the unintended consequences of our actions as a part of the price for pretending that there are shades of grey.

Hybrid car burns down warehouse

So there was a warehouse fire in San Carlos last week (9 November 2010), caused by Neil Young's hybrid car being left to charge unattended. What if your neighbor had one and left it to charge overnight while he slept.  His house could catch fire, burn and catch YOUR house on fire in the process. Given the newness of these cars, and the obvious danger this un-tested technology poses to the public I think it would only be appropriate for the feds to announce a moratorium on hybrid and electric cars. 

Hey, if that's a good enough strategy for oil drilling off the Louisiana coast, then it's a good enough strategy for the "Environmentalist" activists in California.

Remembering 1942

Today is the 68th anniversary of the Wickard V. Filburn decision.  This court case extended the encroachment of the federal government into activity in the individual states by way of the "Commerce Clause" in the U.S. Constitution.

Article 1, section 8, clause 3 grants to the U.S. Congress the power:

To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes;

The events leading up to this case were these:

• The Agricultural Adjustment Act of 1938 established limits on the amount of wheat any given farmer was allowed to grow.
• In July of 1940 Filburn was given notice that he would be allowed to plant wheat on 11.1 acres.
• In the Fall of 1940 Filburn planted 23 acres of wheat.
• In the Spring of 1941 he harvested an additional 239 bushels of wheat from the 11.9 acres he had planted in excess of his allotment.  He never sold any of this excess wheat, but kept it for his own consumption.

The U.S. Supreme Court in 1942 overturned the Federal District court ruling that found for Filburn holding that even though none of the excess wheat was ever sold, the fact that he grew it meant that he did not have to buy it elsewhere on the market, and thus by deciding to not engage in commerce, he was, in fact, engaging in interstate commerce, and his actions were therefore subject to be regulated by the federal government.

I would like you to consider:

1. Is there any activity in which you can engage in which it is impossible to involve commerce of some form?
1. If it could possibly involve commerce, then by the logic of the Marshall court, it is subject to the laws of the federal government, even if you decide to not engage in commerce.
2. The 10th amendment  states: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."  If all activity is under the purview of federal authority, then what does this mean?

It is under this "interpretation" of the Commerce Clause that the federal government has used to justify its ever expanding usurpation of power from the people and the states to who the federal government is supposed to serve. This is the justification for:

• Federal Criminal Drug Laws
• Federal regulation of a local Chicago meat market
• The subjugation of a local Pennsylvania steel manufacturer to the National Labor Relations Boar
• Many more federal laws regulating individual conduct, many of which may have laudable goals, but are really the responsibility of the State and local governments, who are really in a better position to craft rules appropriate to their local populations.

California Democrat Representative Fortney Stark pretty much summed up this attitude recently when he infamously said "The federal government, yes, can do most anything in this country."  Jerk.

Friedman on the four ways money can be spent

There are four ways in which you can spend money.

1. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. 
2. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. 
3. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! 
4. Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.

-- Milton Friedman