Saturday, January 24, 2009

Why Bailing Out the Auto Industry is a bad idea.

In the midst of the current economic downturn, many businesses have called for bailouts from the government to save them from their dire circumstances. Admist the top of these to make the news as of late has been the auto industry. Their bailout proves tragic for not only will it fail to address the fundamental issues behind their poor performance, but also give congress leverage over on how to dictate the future activities of the industry.

The fundamental root problem behind the American big auto workers have been their cost structure, which is choked upon by obligations to unions. The high wages companies such as GM must pay for their workers, combined with the numbers of retirees who they are obligated to, has made such a company more of a retirement home first, and a auto producer second. Until these companies can be permitted to shake off such archaic union concessions in order to compete with the cost structures of their foreign competitors, no amount of taxpayer money can truly "resurrect" the industry.

What we have instead of a ressurection will in fact bear closer resemblance to necromancy; a zombie company that cannibalizes on taxpayer rather than healthingly sustaining its own self based on the merit of their products.

~David Morris~

An example of everyday government spending.

The following is an a interesting anecdote taken from the back cover of a book called "Burning Money" by Joseph Peter Grace (ISBN 0025449303). Its a common example of bueracratic processes unfortunately.

"An actual case.
One day the U.S. Navy decided to buy a hammer, the kind you buy for $7 at the corner hardware store. To the $7 cost of the hammer, add:
  • $41 to order the hammer and figure out how to use it.
  • $93 to make sure the hammer worked.
  • $102 for "manufacturing overhead."
  • $37 to make sure there were spare parts for the hammer.
  • $3 for packing the hammer for shipment.
  • $90 for the contractor's "general administrative costs."
  • $56 for the finder's fee.
  • $7 for the "capital cost of money."
The U.S. Navy ended up buying a $7 hammer for $436, and who paid for it? You.

Makes one ponder why anyone would want to trust the government with other aspects of the economy, if they can't even handle a transaction as simple as this without spending wastefully on pork.

~David Morris~

Monday, January 19, 2009

Basics of Economics

Thought I may as well share some basic economic principles shared throughout the science, straight out of my old notebook. For myself as much as for my readers.

Four Principles of Economics

1) Scarcity
- Without some kind of scarcity in everything, there are no reasons to make choices. The ultimate reality is, nature an ultimate scrooge, and the ultimate source of poverty, by virtue of the fact that if we want something, she doesn't just hand it to us magically from the sky. Without scarcity, there is no reason to for people prioritize their desires, and therefore, there would be no trade. Basically, the whole notion of scarcity determines supply and demand, which simply put, means that everything comes with a price-tag save the only two things that really are free (usually): Air and sunlight.

Please, never mix the basic concept of scarcity with the term "shortage." Shortage is a different term in regards to demand somehow exceeding supply beyond what natural market forces would decree. For a recent example, we recently had a shortage of oil brought upon the fact that China was basically hogging all of it for itself via government subsidized of gasoline. This is the sort of crowding out that would properly define a "shortage," not to be confused with the basic concept of "scarcity," by which everything has to come with a price.

2) Only Individuals Choose - There is no "hive mind" amongst human beings. Likewise, there are no choices to be had between individual brain cells. Therefore, all economics begin on the individual level; its hard to determine what a synapse has to do with monetary policy. Likewise, just because you join a group doesn't mean that you've suddenly joined a "group mind" as though everyone is psychically linked and thinking precisely on the same page with the precisely with the same values. Otherwise, why how would people ever leave a group?

This principle also makes another important, basic point: Economies are made purely out of people. There is no economy where there are no individuals. The moon has no economy. However, it can be said that there was one briefly, once you had astronauts being forced to make tradeoffs concerning their life support on the moon.

3) People choose rationally - There is purpose in what people do. A means to their ends. When we aim for a value, we do so deliberately.

4) Unlimited Wants and Desires - People are greedy. Greedy greedy GREEDY. We just are. Its in our DNA as a species. Why are we "greedy?" Because we have imagination. Achieving old goals begets new goals, new ambitions. Without greed, there would be no objectives in our lives. That's not to say all greed is monetary and material, but lets face it, there's always, always, something that you want, something you don't have yet, that you want to strive for. Your mind is always generating a new list of "things for you to achieve and/or obtain", and it won't ever stop until the day you die.

There is nothing intrinsically negative about the reality of unlimited wants, although most people are certainly aware of how it can be. It all depends on how one goes about their ambitions. Whether its done legitimately and voluntarily, or whether its achieved with force and fraud. As I always like to say: "Greed is good, because in order to feed your greed you have to serve others needs. Selfishness is bad, because its when you start to get selfish that then you start stealing."

~David Morris~

Economics with David Morris

Greetings to any and all viewers of this blog. Having recently with a degree in Economics at George Mason University, this fresh young economist decided that it was never too soon to start giving commentary, observations, and predictions behind the economics of the world around us. Hopefully, anyone spotting this humble blog will leave educated, enlightened, or at least persuaded to think.

To give people a heads up, this economist is trained to take somewhat of a more libertarian perspective on public policy. Bear in mind that the author of this blog is in no form and advocate of anarchy, simply aware that things work best when the government is no enemy to the populace. Successful capitalism demands government carries out its critical duty of defining, arbitrating, and above all else, protecting private property rights. Its critical however that people understand that the true primary function of government is that of a legalized monopoly of force. When it forces the wrong types of policies, it certainly has the potential to be more of a problem for an economy than a solution. With the right (and very carefully implemented) policies, it has the potential to refine efficiency.

As an economist who sees his nation often forgetting the tenants and intentions of our US Constitution, hopefully this blog can assist in keeping certain records straight, given the sheer amount of myths, fallacies, and just plain misunderstanding about the subject I've been spending the last 4 years of my life studying.

Economies at the bottom line are made out of individual people, not simply states. And its how people respond to incentives that is the key to understanding the world around us.

~David Morris~

The Recessive Economy - It began with Housing, it'll end with Housing.

Given today's current economic circumstance, people wonder when it will ever end. For now, many people are looking towards the promises of politicians, with their bailouts, stimuli packages, and promises of infrastructure spending hoping as though this will be the source of the solution to today's current financial crisis. Recovery from this recession will happen. This economist however, predicts that recovery will occur from another angle entirely.

The current financial crisis all started with a collapse in housing prices, and recovery for America will begin with a recovery in this sector.

The economic sense is simple. With housing finance issues that constrict the consumer, its only natural that consumer confidence will return once this is dealt with. As prices stabilizes, real stimulus will occur as people qualified for refinancing are saved money each month due to lowered and stabilized housing prices. Take for example, a household paying saved $300 per month every month through a simple mortgage refinance. $300 dollars may seem like a trivile amount, below the radar, but the road to recovery will be built as we take these savings per month and multiply it times thousands of refinances. Unlike the $600 government checks sent out last year (which rationally risk-averse people simply put away in the bank), these small drops in refinanced, stabilized mortgage rates, when multiplied by hundreds, will in due time result in people finally having discretionary spending once more.

This will lead not only in more capital accumulation, in which banks will finally be able to unfreeze their lending. With the mortgage pressure eased on the consumer I predict that they will finally be able to spend on raising the property values on their homes as Americans traditionally do. There will be increased demand in sectors relating to housing: furniture, landscaping, etc. People will want to spend money on their homes again, which means more money for retailers such as Home Depot, Lowes, and furniture stores in general, who will in turn be placing more factory orders for such products, and resulting in more expansion (and a demand for more hires in general).

As people reinvest in their homes, new hires will be inevitable. As America's Joe the Plumbers, Bob the Builders, Larry the Cable Guys, etc get new contracts to service the homes of these people who've gained more discretionary income from months of mortgage stability, its only natural that the volume of these new contracts will incentive small businesses to accumulate new servicemen abroad and the physical capital necessary for them to do their jobs. The economy will recover in this way, once real stimuli is created by dealing with the pressure people face holding on to their homes. It will not come from any democrat plan, though they will no doubt in inadvertently get credit for recovery. If Washington really wanted to have this problem solved sooner then later, then stacking the recovery work occurring in the mortgage sectors with a tax cut will get us there all the sooner. The key is not a one time stimulus; its to give people money they can count on in the long term.

Give America that, and America will put herself back on track.

~David Morris~