Thursday, April 23, 2009

A Layman's Look at Economics

I heard it again this morning, a brief reference in a radio report to the "real economy." It is tucked in an obscure story about the economics of "developing nations," the proletarian footnotes in the global financial meltdown. A point was being made that the economies of countries in the developing world (that's what we call today's equivalent of colonial holdings) lack the depth and sophistication of the world' bigger economic engines, the global financial meltdown threatens to harm their REAL economies, which has measurable impact on the global economy. Those "real" economies are distinct from their respective FINANCIAL SECTORS. In other words, the financial sectors can do all kinds of tricks with money, credit and the like, but real value derives not from crunching and tumbling numbers on paper, but from actual work and production by real people going to real jobs producing actual goods and services being paid for by real customers contributing to actual profits which reward the original producers of those goods and services.

This is not rocket science. I don't know how many different ways to state it, but this economic sinkhole has been recognized from pre-history. The sacred texts of most of the world's faiths refer to an economic abuse quaintly referred to aw usury. The term has a number of different definitions, all of which are meant to draw a line between good lending and bad lending, but no matter wnose definition you choose, good lending usually means that which I do and bad lending means what I am not permitted to do, although I would love to be getting a better return doing the same thing.

Here is a great line from Judge Posner I came across this morning.

“If you’re worried that lions are eating too many zebras, you don’t say to the lions, ‘You’re eating too many zebras.’ You have to build a fence around the lions. They’re not going to build it.”

That's from Americans for Fairness in Lending (AFFIL). I don't know anything about it, but they seem to have their head on straight.

My time is more limited this morning than my already tiny influence, so rather than drone on to make myself feel better, here are some links that taken together make for a good rant. Today's economic meltdown didn't sprout into being last year. (It is the global economic equivalent of the "dead zones" now blooming at the ends of most of the world's rivers as they dump various toxic blends of chemicals into the world's oceans. The chemicals, remember, are all generated with the best of good intentions, in some cases preventing starvation and/or disease among many of God's children. Unfortunately, when allowed to drain into rivers which deliver them into oceans, the effect is that large and growing sections of those oceans become uninhabitable by the seal life that once flourished there. Yesterday was Earth Day and this is my little recognition of that fashionable observance. Something like an obscure jouornalist's reference to "real economies." Sadly, way under most radars.)

Four years ago when the Social Security System was under discussion and smart people in Washington were seriously contemplating what they called privatizing the system, I put up a rant pointing out the difference between SOCIAL security ann INDIVIDUAL security. No one seems to know the difference. This was part of that rant...
With carve-out individual accounts, we erode social protections at a time when we also seem to be witnessing the collapse of the corporate defined-benefit pension system. If we go to a retirement system that is entirely individual accounts, we also lose opportunities for income redistribution. [quote from Will Wilkerson. See link for context.]
Two comments.
First, anytime the phrase "income redistribution" is used out loud, in public or in print, with no sense of shame or apology, I know that the person using it may as well be advocating Communism. I have been labeled Socialist and worse myself, so we'll just have to let the matter pass without further comment on my part. I have no interest in debating the phrase, but I want plainly to admit that I recognize the inflamatory effect that the phrase has on a good many people. People who have no problem with large estates being passed to heirs who never hit a lick at a snake in their life but thanks to an accident of birth can enjoy a lifetime of self-indulgence if they choose. "Income redistribution" in that instance takes the form of pissing it all away.

Second, a more important point about "the collapse of the corporate defined-benefit pension system" that he mentioned.

The Pension Benefits Guaranty Corporation did not just blossom into existence because a lot of politicians in Washington had a fit of generosity one session and decided to do something nice for folks. It was a political response to thousands of employees losing retirement benefits because the outfits for whom they worked went out of business with no safety net for those liabilities. It didn't happen because of the depression, by the way. It happened decades later when that great American economic engine we call Free Enterprise had plenty of time to prevent and protect against disasters like "How can we protect our people in case we go out of business?"

If memory serves, I think that a lot of companies didn't even officially "go out of business." There was an era of mergers and acquisitions, hostile takeovers and the like that also contributed to the problem, with a lot of "private" pension benefits' being leveraged out of existence or liquidated outright, also resulting in pensions evaporating before the eyes of people whose only remaining pinch of the economy became their Social Security income.

When the market crashed last September my first reaction was a flashback to this post: Where would the country be now if part of the Social Security System (ersatz) money were linked to securities?
Considering the wounds and scar tissue done to private plans that will not recover until inflation has gutted their respective losses1, the question still gives me cold chills.

In September, 2004, my rant on Outsourcing which mentioned mergers and acquisitions seems now to have been prescient. If you go to this link, let the reference to the "real economy" mentioned at the start of this post ring quietly in the background.

It's not fashionable to ask where profits come from, however. It's like asking if someone has had cosmetic surgery or was fortunate enough to come into a lot of money following the recent death of a loved one. We want the dealership from which we get our car to be profitable enough to keep up with the warranty service, but we don't want any profit to that dealer from our purchase, and we sure as hell don't want to pay dealer prices for service. Profit is what happens when a company makes a good deal with someone else. When I have to make the same deal, however, they are taking advantage of me.

Not everyone thinks like this, of course. There are lots of people who cheerfully pay a dear price to be the first or latest in their peer group to see a movie or own a certain fashion or travel to some wonderful destination. Big tips, ostentatiously bigger than the norm, are sometimes found by delighted service people who don't care that they say more about the ego needs of patrons than the quality of their service. And I think there are a few people who take a balanced view of profits and don't get disturbed about their contributions to someone else's pofit.

In the face of all this resistance on the part of customers, clients and patrons to cut them out of reasonable profits businesses are forced to be imaginative about being able to report ever higher profits. The word "bubble" comes to mind first, because that is the easiest track to profits in the short term. We have seen it many times, from the famous tulip bulbs to the California Gold Rush to the explosion of dotcoms. In the end the bubble bursts (hence the term) but there are what I would call "serial bubbles" (see "serial monogamy") in real estate, fashions, entertainment and advertising. I heard a couple of weeks ago that insurance stock prices go up when a hurricane hits because historically that is when premiums go up, not only to cover "losses" due to weather, but improved profits as well. Why do insurance companies jack up the prices at just the time that their policy holders can least afford to pay more? Because they can.

A few years ago, and to some extent continuing today, the phenomenon of "mergers and acquisitions" yielded breathtaking "profits". When two companies in the same line of work merge it is a win-win situation (except for the people whose jobs are sacrificed for the deal) because the new, stronger company has one less competitor in the marketplace (whew!) as well as a more efficient operation, because the payroll departments, accountants, ad agencies and other support operations can be performed by one department instead of two. All this improved efficiency translates into profits.

Speaking of accounting, now there is the toolbox from which a lot of profits can be made to flow. When they get the cooperation they need from operations there is practically no end to the profits that can result. Just ask the people at Enron how easy it can be.

Have you noticed that so far that nothing has been mentioned about productivity? That is my point. The only real source of profits haas to be that something has been produced. Moving the furniture around does not produce anything, unless you are paid to be an interior decorator. Mergers might squeeze a few cents from the economy of scale, but they real improvements, if you can call them that, is that there is more to report for profits because fewer people are being paid.

The post was about outsourcing, but you get the idea.
Come to think of it, outsourcing is nothing more than a miniature version of a merger/acquisition.

Here is Elizabeth Warren for your amusement.

The Daily Show With Jon StewartM - Th 11p / 10c
Elizabeth Warren Pt. 2
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