How to Recover the Economy

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Recover the economy? Pretty bold title, eh?

It’s way too easy to misdiagnose what ails the economy these days. Then again, how do you not misdiagnose a condition when you’re seeing the wrong type of doctor? A podiatrist is as likely to catch your brain tumor as a cardiologist is able to treat you for kidney stones. Similarly, and far too often, those who claim to be able to fix the economy, such as then candidate Barack Obama and now the field of GOP candidates, are attempting to use Band-Aids in place of stitches or putting a bruised arm in a cast.

recover the economy, promote entrepreneurism

Pres Obama, honorary doctor of economics

Such economic doctors will read a story in the New York Times and conclude that we need to tax the wealthy more, return to the tax code of the 70’s, and utterly unlearn the Reagan philosophies in order to return to a fair policy toward the poor.

That’s a casted bruised arm.

Others might suggest that in order to save the economy, they personally need to swoop in wearing a cape and single-handedly lower tax rates “across the board” so more money flows and business owners create jobs.

Should have used stitches.

Simple fixes cannot act as a long-term strategy to recover the economy, though they may provide a bump that they can take credit for, followed by a slump for which they’ll be able to place blame.

The economy is alive. It is comprised of every person on the planet. Each person has an identity in a worldwide economic game. In this Massively Multiplayer Online Role Playing Game (MMORPG), everyone must follow the rules. Anyone found breaking the rules risks varying punishments ranging from fines to removal from the game for a time while sitting in the State Penitentiary. Of the majority who follow the rules, everyone seeks their own advantage as defined by themselves. Perhaps advantage means personal wealth; perhaps it means spiritual value. Some players form clubs/teams/guilds/unions in order to achieve a greater advantage than would have been possible on their own.

Since the economy is composed of ourselves, there can be only one cause for why the disparity of wealth has increased over the last few decades: we allowed it. When your boss’s tax rate was reduced under any of the past administrations, did you immediately ask for a raise or did you fail to realize that your labors were then more valuable to him? Would you have stepped into a position for an extra $0.50 an hour over what you were making to fill the job made available by someone walking out after having asked for a $3.00/hr raise and not getting it?

Probably the latter and of course you would have, respectively.

Since we cannot trust our fellow man to not undercut us for our own jobs, the only real solution to preventing recessions and depressions–and to recover the economy as it is–is entrepreneurism. More employers means more employees. Lower unemployment means rising wages.

Undoing Reagan era tax cuts only makes it harder on the employers and managers who are now likely leveraged with their own debts they would not be able to pay if their tax rate increases. Lowering tax rates on everyone favors higher income earners dollar-wise and there’s no guarantee that the money will be used to expand a business or even spent at all. It may in fact already be spent and put towards paying off some of that debt.

Having more people own their own businesses has a compound effect: 1) they free up a job for someone to come off unemployment and 2) they hire, directly or indirectly in the form of paying for services or using contractors, people off unemployment.

Unemployment falls. Wages rise. Economy recovers.

Moral for the politicians who want to recover the economy: pass policies that encourage entrepreneurism; pass on those that do not.

The Mystery of Capitalism

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I finally got around to watching Michael Moore’s financial documentary: Capitalism: A Love Story. I don’t normally agree with the guy’s points of view, and this movie was little different. For the most part, his “heavy hitting” points fell on me like stardust–contrived and without weight. There were a few exceptions and maybe I’ll touch on them in a bit.

Capitalism: A Love Story movie poster

Capitalism: A Love Story movie poster

Each segment left me more and more convinced that “capitalism” is the most misunderstood and ill-defined word in the English language. As an economic system, it has been described as evil, as “anything goes,” as nonsense, and as the only fair means of running an economy. From what I can tell, though, especially from what was highlighted in the movie, is that few, if anyone, understand capitalism beyond their limited scope.

Before anyone gets offended at my calling your scope limited, please let me explain using some of my engineering background to illustrate. When an engineer sets himself on a problem in a larger process or system, a solution is often found more easily if the scope is set smaller. For example, in a manufacturing process involving multiple mixing vessels, several material streams, and a complicated control system, if liquid comes out of a tank at the wrong temperature, the engineer would limit his analysis to the inputs and outputs of that tank alone. Similarly, most people when shopping for some widget will look at competitors’ offerings, perhaps at different stores, and make a decision on price and value with limited consideration for anything beyond that scope.

Those same people look at the wealthy CEO’s of large companies who make decisions of hiring and firing, opening and closing plants and offices, and on the pay structure of employees in the company and see that they are making decisions based on the quarterly need of pleasing the stockholders with limited consideration beyond that scope.

These people are guilty of the same mistakes and none of them have embraced Capitalism’s awesome power for good.

Moore primarily pointed to the actions of larger corporations and their dealings with the government to highlight the evil nature of capitalism. The government granting special favors to a few at the expense of the many has no role in Capitalism; what Moore depicted was corporate cronyism.

Moore also belittled the idea that the mechanism by which Capitalism operates is that the people vote with their dollars on what products should be made, the producers of which then make more. What he failed to note is that the scope of Capitalism’s mechanism is not limited to what products are made, but how they are made, and by whom are they made.

Is it no wonder that the American people have as much an understanding of the power of their fiscal votes as for their political ones? Namely, very little.

When you need to buy a shirt, your dollars are encouraging not only the manufacturer of the shirt to make more, but making it the way they made it (virgin fibers vs recycled material) and by whom it is made (Asian sweat shops vs large American factories vs small American businesses). You are also supporting the store at which you bought it (corporate behemoth vs Mom&Pop shop) and their business practices (workers’ compensation and working conditions), as well as the store’s entire supply chain (multi-national distribution network vs locally sourced goods).

There is an immense responsibility inherent in spending your money.


This is spread far more easily than Capitalism and has been for far too long.

As to the people to whom we delegate the spending of much of our income, those we elect to public office, our votes that put them there carry similar weight and needed consideration. Must we have a representative in Congress or the Senate who promises to bring money in the forms of programs and projects or tax cuts to local industries back to our district or state, knowing that in order for our representative to do so he must give something to the others? Must we vote for local benefits when the extra deficit spending will lead to inflation and devalue our money? Those local benefits are likely of lesser value than the lost value of our currency in paying for every other districts’ perks.

How can Capitalism be so evil if everything about it is derived from what we do with our own money? If someone buys pornography, illegal drugs, or arms with the intent to harm, it is not the dollars spent that are sinful. We, collectively, decide what companies thrive and fail and what business practices are acceptable or not, so it is not the system that the Catholic Church should be condemning in the movie, but the people (everybody) using the system to buy everything they use. The greatest differences between Socialism and Capitalism can be summarized as the means by which we vote and the length of term for the consequence of that vote. With Capitalism interested parties attempt to persuade you to vote certain ways with your dollars, votes that can be changed with your very next purchase; In Socialism you elect a politician to make sure everyone else votes the same way with their dollars using government subsidies. If you so desperately want to try another economic system from what we have, try Capitalism because no one alive now has seen Capitalism in the USA.

Brilliance in Humor and the Dark Side of Politicians

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I seem to remember seeing the actual footage of the Marx Brothers, Groucho in particular, acting out a great piece of comedy, although since I cannot find it on YouTube, it must not have ever happened, right? Others claim it was others, but I don’t think I’d remember Winston Churchill in this video memory quite the same way.

The skit goes something like this:
Groucho: Excuse me, miss, would you sleep with me for a million dollars?
Woman: You’re not so bad looking, so, yeah, for a million I’d consider it.
Groucho: Well, since I don’t have a million dollars, would you sleep with me for a hundred?
Woman: Mister! What kind of a girl do you think I am?!
Groucho: We’ve already established that, miss, now we’re just negotiating…
Delivered with cigar in hand, huge mustache, and large rimmed glasses, it’s a classic.
It came up in conversation recently with my wife, but not for a similar reason as the subject of the bit. Herman Cain reminded me of it, actually.
How does Herman Cain, the 2012 Republican primary candidate for President of the United States reminded you of Groucho Marx, you ask?
Actually, Presidents, candidates, and other politicians often remind me of it. The reason is that their great policy that they come out with is generally accepted by the majority of Americans at the time of its inception. Just take a look at a few paraphrased propositions throughout history:
Woodrow Wilson: My fellow Americans, to be able to afford the programs that will cure this economy, would you pay a small portion–just 1%–of your income if you make more than $20,000 (the equivalent of almost $400,000 in 2010 dollars)?
Populous: Well, the poor need help, and I’m only middle class and won’t be taxed at all with this deal, so it sounds good to me.
Franklin Delano Roosevelt: My fellow Americans, to assure that people are cared for after the end of their working years, would you pay 1% of your first $3,000 (about $45,000 in 2010 dollars) of income, with your employer paying an equal amount to provide for the less fortunate among us?
Populous: For the equivalent of about $38 (in 2010 value), I’ll be assured an income after I reach 65? And my parents who are approaching that age will not be a burden to me either? Sign us up!
Barack Obama: My fellow Americans, health insurance is a right. If we all pay premiums, our costs will go down. That’s how insurance works: you distribute the risk. If you already have insurance, you’ll keep your carrier and your doctor.
Populous: I’m already insured, so if you need to force others to buy insurance in order to reduce what I pay, that sounds reasonable.
Herman Cain: My fellow Americans, I propose a new tax structure. Instead of complicated forms and myriad loopholes, let us set the corporate income tax rate at 9%, the personal income tax rate at 9%, and impose a national sales tax of 9%.
Populous: I’d love to only pay 9% income tax and only new products incur the 9% sales tax, so I can control how much tax I pay by controlling my purchases. Sounds good to me.
Of course, Woodrow Wilson eventually left office and Congress and succeeding Presidents saw it prudent to increase the now negotiable rate. Following FDR, Congress raided the Treasury for the trust fund and soon realized they had to bring in more revenues to pay the retirees. Barack Obama’s successors could easily one day make changes to the health care programs, the nature of which can only be speculated. What would Congress do with the opportunity to adjust both a flat income tax and a national sales tax in the years following Cain’s one-day departure from the office?
I like the idea of a flat tax. I prefer the idea of the Fair Tax, the national sales tax, to the exclusion of income taxes. The trouble with the Fair Tax is that you cannot guarantee that there won’t be a return of the income tax one day in the not too distant future. In fact, after thinking this train of thoughts that started with a memory of a video of Groucho Marx, the station at the end of the line is another video, this time out of Star Wars.

Digg WSJ Interview of Geithner

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Check out the interview in this player:

In a follow-up question (starting around 10:00 into the interview) regarding the ties of bail-outs and non-bail-outs and the Secretary himself to Goldman Sachs, its partners and competitors, Mr. Geithner gave a very revealing answer as to why the government is spending like mad:

“If governments in crisis don’t act to repair a damaged financial system, don’t act to provide stability and confidence, don’t act to get credit flowing again, then what we face–as we learned from history: the Great Depression, Japan in the 90’s–what we’ll see is much much more damage. Hundreds of thousands of businesses fail that should not have failed, people lose their incomes, lose their pension values, lose their livelihoods as we saw in the last part of last year. And the basic imperative–it’s a moral imperative not just an economic imperative–is that in a crisis like this to protect those who are innocent of the mistakes that brought us to this place so they do not suffer from the judgments of others. You have to do things to provide stability and confidence and repair the damage caused by that. An that is the necessary thing to do for the country.”

I, for one, find this intriguing, that the government is acting on a moral obligation to protect those who are innocent from the mistakes made by government. Does Mr. Geithner realize the arrogance of such a statement? Does he realize that he is suggesting that this administration will not make mistakes? That there will not be any innocent victims from the actions he, the Congress, and President Obama put forth?

Now that Cash for Clunkers is out of the way and pretty much anybody that was planning on being in the market for a new car in the next 6 months or so and accelerated their purchase plans to take advantage of free money is now out of the market, what will Geithner et al suggest we do for the car dealerships whose sales are now going into a deeper slump for at least the next few months?

Can we yet predict the course of action if/when a public option for health care is created that government will take to protect the innocent when 60% of doctors decide not to take funds from the plan and seek alternate careers if necessary, rather than cooperate with bureaucrats who have not taken the same Hippocratic oath that they have?

What will the government do in 10-20 years when the debt load of this country becomes so large that our standard of living is reduced and children growing up now will look back on how we used to live?

Health Care Crisis?

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Everyone is abuzz with the health care debate but has anyone analyzed the situation, really? The president has said that the current medical insurance system is an archaic remnant from the industrial era, but has his advisers done a root-cause analysis on the problems the industry faces?

One talking point that’s thrown around a bit too much is the idea of pre-existing conditions (PEC’s)and the fact that people can be denied coverage when they have a condition that they’ve been living with for some time. The administration has made PEC’s a focal point for the need for an overhaul, as a beacon that indicates how unfair the insurance companies are, that they won’t even cover someone who is in need of care. I don’t know about you, but if PEC exclusions were banned, who would buy insurance ahead of time? If you find you have cancer, you’d go out and buy insurance to cover your costs. Insurance companies survive now because they take the premiums of everyone who doesn’t need care and pays for the people who do need care. If no one is paying premiums without needing care, the insurance companies will go bankrupt.

Clearly, the administration has thought that far ahead because they intend to require everyone to have insurance. Making insurance mandatory will guarantee that there are enough people not needing care who are paying their premiums to cover the costs of everyone else. If you’re not from NJ or another state that requires auto insurance, this may seem like a good idea. Those of us who are required by law to pay for auto insurance know the consequences: higher premiums and a greater incidence of fraud. When you get in an accident, everyone has insurance and there are enough lawyers around that there is near certainty that a law suit will be brought in order to claim damages against the other party’s insurance. Further, when you get your car repaired, the mechanic will want to know if you have insurance to determine how much he can overcharge you. To assume that such behavior won’t translate to health insurance is just a tad short-sighted.

What’s an alternative solution? I’m glad you asked! But first, a little background:

If we accept that the insurance industry is an archaic remnant of the industrial age that was spawned from employers offering insurance to prospective employees in an attempt to attract the best talent, maybe we should ask what has changed. After WWII, people were still staying with their employers for the majority of their working lives. It made sense that insurance be offered through work because the employee would stay with the company for most if not all of their adult lives. There was no need for PEC’s because very few people lapsed coverage when switching jobs. As people started changing jobs more often over the decades, insurance costs increased in part to PECs, in part to other factors. Employers were struggling to cover everyone so the government decided to help them out by offering a tax break on health insurance premiums. Still, as job mobility increased further, more of the cost burden was shifted to the individual.

So what’s the root cause of the difficulties related to pre-existing conditions? Is it the very existence of PEC’s? No, they were put into effect because of increasing job mobility. Is it too much job mobility then? No, to limit that would be to enslave people to their employer. However, people changing jobs and insurance providers necessitates the existence of PEC’s. What if we lifted the burden of insurance from employers altogether and shifted it to the individual? Too expensive, ok, the government can switch the tax benefit for insurance from the employer to the employee. This would help people who want insurance to pay for insurance while at the same time eliminate the need for PEC’s. With no change in jobs, the only reason to change insurance is to switch to a better policy (“better” to be defined solely by the individual).

So…why is this not a widely-supported suggested solution?