Economic Fundamentals

[Lothar]

Many of our discussions in E&C come down to a question of whether we think something is good for the economy. As such, I think it's worthwhile to address the concept of an economy and talk about what makes one good or bad without getting too caught up in \"Bushhitler sucks and Alfred E 0bama is a loser\" type discussions. This thread is for discussing the economy from the perspective of what ideas are good and bad for it, not which politicians you like or dislike (and I won't be shy about deleting off-topic or inappropriate posts; consider this your one and only warning.)

Definition: An \"economy\" is the set of activities relating to production and distribution of goods and services. The US economy is market-based, meaning \"distribution\" is handled through mutually-agreed-to exchange of goods and services either for currency or for other goods and services (rather than goods and services being distributed \"equally\" or \"by need\" or \"taken by force\".) The US economy is also investment-based; we often buy and sell stocks and bonds based on their expected future payoff and risk.

Requirements for a fundamentally sound market/investment economy (note that I haven't said anything about a \"free\" market, so put your pitchforks away):

(1) To produce goods, one clearly needs the necessary raw materials or premade components, as well as the labor and tools to work them into finished products. Services are more heavily weighted towards labor but still often require materials and tools. Thus, both \"people\" and \"stuff\" are required for an economy (and the US has plenty of both.)

(2) Labor laws need to be such that employers and employees both get a worthwhile result from that relationship. That is, workers can work for reasonable pay and employers can pay for reasonable work. Some problems that can come up here: minimum wage can be so high that it excludes certain low-skilled workers from the workforce. Companies can exploit desperate workers either through a too-low minimum wage, or by violating the minimum wage (often by hiring illegals.) Certain contracts (including some union contracts) can allow employees to get paid even though they don't produce results, or give less-valuable employees higher pay or more job security due to irrelevant factors. In general, either employees or employers can get stuck not being able to exchange reasonable pay for reasonable work due to either bad laws or bad contracts.

(3) Because an economy is based on buying or selling, when you agree to buy or sell something, it should be clear what you're agreeing to. This is true on a small scale (knowing that container labelled \"milk\" actually contains milk) and also on a large scale (knowing that you're buying a 12% stake in such-and-such company, which includes such-and-such subunits but not such-and-such external holdings.) Transparency can be enforced through government regulations and/or by consumer reporting groups; either way, transparency is important.

(4) Strong contract laws are important. When an exchange is being made, it's important that both sides of the exchange be legally enforceable -- one side can't take the other side's money or item without giving up the agreed-upon item or money in exchange. And if contracts are broken and can't be completely fulfilled (say, in the case of bankruptcy or mortgage defaults), there needs to be a clearly established precedent for which contracts are enforced to what degree in what order, so that buyers can manage their risks appropriately.

(5) Strong and sensible property laws are important. This includes things like land, houses, and other tangible objects, but also things like stock (ownership of some percentage of a company), and intellectual property. At a minimum, the law should protect people from theft or destruction of their property, or allow recourse in the case of theft/destruction. Appropriate pricing/recourse/protection for intellectual property is a sticky issue, but for this thread it suffices to note that without any protection of intellectual property, there's a strong disincentive to produce it (since you get stuck with the costs but don't get the economic benefit.)

(6) In a market with a form of currency (gold, dollars, or even frequent flyer miles or \"rewards points\"), it's important for that currency to be relatively stable and predictable. This allows people to exchange goods for currency with the expectation that they'll be able to exchange that currency for a similar amount of goods in the future. It also allows people to make long-term contracts or investments (mortgages, bonds, etc.) with a reasonable expectation of what that payoff will be. I'm not particularly interested in hyping a specific method for making currency stable and predictable (such as a gold-based standard), only in saying that having a predictable method is important, as it allows us to manage our risks.

(7) Taxes accomplish two things in an economy: they raise capital for the government, and they provide incentives against certain behavior (by raising the cost or reducing the benefit; conversely, tax breaks can encourage certain behavior). It's important that taxes don't too strongly discourage productive behavior or, worse yet, perversely encourage destructive behavior over productive behavior. Taxes that are too high discourage productivity or even encourage bankruptcy (for example, see the second part of this article). Taxes should raise appropriate amounts of revenue for the government, but should do so in a way that encourages productivity, or at the very least doesn't overly discourage it.

(8) Along with sensible labor laws and non-perverse tax laws, other barriers to economic productivity (including starting a business) need to be minimized. This includes overly burdensome regulatory fees, trade barriers that make it difficult to work with an international market, and so on. Going back to point #1, if it's difficult to get the \"stuff\" you need in order to make your product, it's difficult to do business. There are times when such fees or barriers are appropriate, but they are few and far between.

So, there you have it. To have a sound economy, you need goods and services (that is, you need an \"economy\" to have a good one), sensible labor laws, transparency, enforced contracts and property laws, stable currency, appropriate taxes that don't punish productivity, and minimal other barriers to doing business. (Steve Forbes makes many of the same points.)

[Bet51987]

I enjoyed your entire post and the \"Catalytic Tax Changes\" link. You made a perfect economy for a perfect world but as I was reading I was haunted by two words... Corporate greed. How do you control that and the tentacles that protrude without government intervention.

Bee

[Lothar]

Corporate greed. How do you control that and the tentacles that protrude without government intervention

Recall the comment I made early in the post: I never said anything about "free" markets. I never said anything about eliminating government intervention. In fact, my comments about transparency, sensible labor laws, taxes, enforced contracts and property laws all point toward government involvement in the economy.

I don't think the government needs to stop corporate greed (which is no different from human greed). It only needs to keep it appropriately directed. Everyone wants to get rich, so create an economic system where people get rich by doing things that better other people's lives (and therefore things that other people will pay for), rather than creating a system where people get rich by taking advantage of loopholes, by using the government to shield them from competition, by conning people out of their money, by stealing, and so on.

The economic principles I described don't require a perfect world to work; in fact, we wouldn't need half of them in a perfect world. Quite the contrary, the principles I described (taken as a whole) are the way to build a strong economy in this world, full of greed and laziness and all those other imperfect things.

[Gooberman]

Nice post, I'll try and spend some time on a reply...hopefully it wont be on page 8...

[dissent]

Corporate greed. How do you control that and the tentacles that protrude without government intervention

...I don't think the government needs to stop corporate greed (which is no different from human greed). It only needs to keep it appropriately directed. Everyone wants to get rich, so create an economic system where people get rich by doing things that better other people's lives (and therefore things that other people will pay for), rather than creating a system where people get rich by taking advantage of loopholes, by using the government to shield them from competition, by conning people out of their money, by stealing, and so on.

Yeah, and let's not forget about government greed, since governments are also formed from groups of humans.

"It is a mistake to think businessmen are more immoral than politicians" - John Maynard Keynes

[ccb056]

Greed is good.

[CUDA]

oh and don't forget about the greed of the individuals or unions

[Spidey]

I think your post goes way beyond “an economy” and well into the structure of a “society”.

So I consider your question to be loaded, as it presumes the listed things to be an essential part of the economy in the first place.

Example:

The only taxes needed in an “economy” are those which directly support that “economy” as in providing the infrastructure and such.

[CUDA]

just to fuel to the HC debate.

Would a tax for healthcare support the economy? it would keep the workers healthy enough to work and there fore able to produce more and support the economy.
How about food stamps? it keeps the workers better fed and therefore stronger and able to produce more and support the economy.
Maybe even housing, it would allow the workers to have a better rest at home and therefore in a better mindset to be able to produce more and support the economy.
You could come up with dozens of reasons to increase taxes in the guise of bettering or supporting the economy.

[woodchip]

There comes a point when too many services are supplied and taxes too high, that most people will stop working or at the very least productivity drops to a very low rate making the product uncompetitive in a global market. One only needs look at the USSR 20 years ago to see what happens.

[Bet51987]

I don't think the government needs to stop corporate greed (which is no different from human greed).

I understand, but in a way human greed (I just have to have this new apple product) is much different than Corporate greed (We can make more money if we lay everyone off and move our manufacturing to China) Even with your proposal, corporations will still seek cheap labor overseas and circumvent any restrictions/rules you put in place. If they can improve the bottome line, even by a small amount, they will do it.

I just don't see how your society, which sounds very nice, isn't going to follow the same path we have now.

Bee

[CUDA]

I don't think the government needs to stop corporate greed (which is no different from human greed).

I understand, but in a way human greed (I just have to have this new apple product) is much different than Corporate greed (We can make more money if we lay everyone off and move our manufacturing to China) Even with your proposal, corporations will still seek cheap labor overseas and circumvent any restrictions/rules you put in place. If they can improve the bottome line, even by a small amount, they will do it.

I just don't see how your society, which sounds very nice, isn't going to follow the same path we have now.

Bee

ya and the 2nd highest tax rate in the world doesn't entice companies to stay either,
So we can lay some of the blame for corps going over sea's on uncle sam and the greedy consumer. consumers always want the cheapest cost. (hence the success of Walmart and Target) Labor Unions, higher wages and inflation have made the cost of manufacturing goods here in the U.S. exorbitant<sp?> and not competative in the market place. it is not all about the GREEDY corporations. its evryone's greed. Workers, Government, Corporations and Consumers. EVERYONE wants a bang for their buck, except the Government that just wants your bucks

[dissent]

Every public company exists to make money for its shareholders by providing goods or services for which there is demand. They can do other things as well with their money once they earn it, but if they fail to make money for their shareholders, eventually those shareholders will move their money elsewhere in search of a return, and the business, no matter how noble their mission statement, will go out of business.

It's survive (and possibly prosper) or die, and it's as natural as gravity. To pretend otherwise is bucking human nature.

Oh, and if all corporations had to do was move to China for cheap labor, then why are there still any corporations in America (or anywhere else outside of China, for that matter)? Clearly there are a myriad of other considerations that go into the corporate calculus.

[Will Robinson]

...so create an economic system where people get rich by doing things that better other people's lives (and therefore things that other people will pay for), rather than creating a system where people get rich by taking advantage of loopholes, by using the government to shield them from competition, by conning people out of their money, by stealing, and so on....

You'll have to rid our representatives of a need for outside financing and powerful party support to be elected and re-elected so they can concentrate on formulating solutions instead of loopholes they can trade for election/re-election. Otherwise the representatives will continue to build into the economy the tools for corruption that they so desperately need for survival.

Outlaw lobbiests, simplify the tax code (the loophole motherlode) and provide for strict campaign finance reform and you could free our representatives.

[CUDA]

Outlaw lobbiests, simplify the tax code (the loophole motherlode) and provide for strict campaign finance reform and you could free our representatives.

But with the Fox Guarding the Henhouse that will NEVER happen

[Lothar]

The only taxes needed in an “economy” are those which directly support that “economy” as in providing the infrastructure and such.

You could come up with dozens of reasons to increase taxes in the guise of bettering or supporting the economy.

There comes a point when too many services are supplied and taxes too high

Spidey, the only taxes NEEDED for a sound market economy are those that directly support the points I made in the original post. You need taxes to support a legal system in order to create and enforce good labor laws, property laws, contract laws, and transparency laws. In a system with currency, you also need taxes to support the printing/minting of currency.

Taxes for any other purpose are (as woodchip says) a matter of making tradeoffs. There are worthwhile discussions to be had about any given spending program (infrastructure, education, health care, military). As CUDA pointed out, you can argue that a lot of types of spending would better the economy. My point is that such spending needs to be weighed against alternatives (such as private) as well as against the disincentives produced by the taxes used to fund them.

Remember, income taxes provide an incentive against work; sales taxes provide an incentive against spending; capital gains taxes provide an incentive against investing; death taxes provide an incentive against having a large estate late in life. Any government spending that "betters society" needs to be weighed against the productivity decreases it creates through those disincentives (and government spending that doesn't "better society" should never be done in the first place!)

corporations will still seek cheap labor overseas....

I just don't see how your society, which sounds very nice, isn't going to follow the same path we have now.

the 2nd highest tax rate in the world doesn't entice companies to stay either

Clearly there are a myriad of other considerations that go into the corporate calculus.

When it comes down to it, companies will always seek the best bottom line. An economy that follows the principles I outlined will have a very good bottom line, if not the very best.

Cheap labor is a part of the bottom line, but as dissent mentioned, it's not the only part. If you build a factory in China, you get labor at Chinese rates, you get taxed at Chinese rates, your factory runs under Chinese property laws, you have to deal with Chinese government fees and other barriers, and so on. All eight of my original points still apply.

Jobs don't go overseas just because of cheap labor. Jobs go overseas when the WHOLE PICTURE is better there than here. If you can get cheap labor but you risk having the foreign government seize your factor and declare it "state property", you're not going to do business in that country. If labor is cheap but taxes are significantly higher, you might not come out ahead.

An economy that does well on all eight of my points is not going to export a lot of jobs. CUDA pointed out one reason the US loses jobs: we have the second highest corporate tax rate in the world. As other countries with lower tax rates and capital costs (including labor) have improved their labor/contract/property/transparency laws, stabilized their currency, and removed barriers to doing business (the internet helped this happen), jobs have jumped ship. You can see this same phenomenon between states in the US, like Texas and New York.

In other words, our economy followed the path it's currently on (including outsourcing) in large part because other economies have done a better job of following my eight points, as a whole, than we have. Follow those eight points, and at the very worst, we'll be competitive with every other economy in the world.

[Spidey]

Please address my point, not my example.

[Lothar]

I think your post goes way beyond “an economy” and well into the structure of a “society”.

Of course it does! As my original definition noted, an economy is the set of activities relating to the production/distribution of goods/services. Government and society provide the structure under which those activities take place. When talking about what it takes to have a fundamentally sound economy, one must necessarily discuss such things.

If you believe some of the things I discussed are not necessary for a sound economy, or that they're harmful to a sound economy, feel free to argue your position. But don't complain that the question is "loaded" merely because I gave my position, or because I included the possibility for a broad variety of sound economies (with different currency or tax laws, for example.) Don't give me one example and no other detail and then complain that I focused on the only detail you gave me.

[Bet51987]

I don't have to build a factory in China, India, or anywhere else. They already have factories and eager to build more. I know this because my dad's company \"Widgets Inc.\" not only sends stuff to \"China X\" to get built but his company also sent along a team to show them how to implement cost cutting measures when building \"Widgets\" products. This allows \"China X\" to build it quicker and cheaper allowing \"Widgets Inc.\" to reap a greater profit. It bugs me so we don't talk about that much.

Your society is doomed.

Bee

[Lothar]

They already have factories and eager to build more... This allows "China X" to build it quicker and cheaper allowing "Widgets Inc." to reap a greater profit.

The Chinese are not inherently less valuable, capable, or deserving of work than Americans. There's nothing wrong with Chinese people having factories and doing work.

Why can "China X" build it quicker and cheaper than an American company? I'm willing to bet if you met the factory workers, they have pretty good lives. They're not slave labor; they're not starving or sleeping on the streets; they're not being exploited.

"China X" can build it quicker and cheaper because their government is doing a better job of following some of my 8 points above than ours is. Communist China is doing better at capitalism than the United States of America. They're doing a better job of making businessmen in other countries say "this is a good place to spend my money" than America is.

If you don't like outsourcing, don't complain about China. Complain about America! We can do better.

[Bet51987]

If you don't like outsourcing, don't complain about China. Complain about America! We can do better.

Where did I complain about China?

From what I've quickly searched, the average chinese worker salary is equivalent to U.S. $5000 in 2009. Building electronic circuit boards in China is much more profitable than building them here. Less environmental restrictions, personal hazard restrictions, less sick days, etc, etc.

Your society's corporations, unless you forbid outsourcing, will definately outsource unless you can control greed. I don't think you can.

Bee

[Spidey]

So Lothar, just to check if we are on the same page…You are describing what a society (ours) needs to do to have an economy that suit’s the needs of said society. And not just a “good economy“.

Correct?
…………………….

Bee…

Lothar likes to call people complainers, sorta the way you like to call people haters.

[CUDA]

If you don't like outsourcing, don't complain about China. Complain about America! We can do better.

Where did I complain about China?

From what I've quickly searched, the average chinese worker salary is equivalent to U.S. $5000 in 2009. Building electronic circuit boards in China is much more profitable than building them here. Less environmental restrictions, personal hazard restrictions, less sick days, etc, etc.

Your society's corporations, unless you forbid outsourcing, will definately outsource unless you can control greed. I don't think you can.

Bee

lol Outlaw outsourcing. welcome to $100,000 cars, and $10,000 Television sets. and let me get this right. you want us to impose our workers saftey laws on other countries just because you dont like the way they are treated???

[Spidey]

Just forbid outsourcing, raise the minimum wage to 100 dollars an hour, and you’re all set…

Cept for one thing…we don’t teach manual skills any more in this country. As a matter of fact…manual skill are now looked down upon…we are in the information age, for god’s sake!

[Bet51987]

If you don't like outsourcing, don't complain about China. Complain about America! We can do better.

Where did I complain about China?

From what I've quickly searched, the average chinese worker salary is equivalent to U.S. $5000 in 2009. Building electronic circuit boards in China is much more profitable than building them here. Less environmental restrictions, personal hazard restrictions, less sick days, etc, etc.

Your society's corporations, unless you forbid outsourcing, will definately outsource unless you can control greed. I don't think you can.

Bee

lol Outlaw outsourcing. welcome to $100,000 cars, and $10,000 Television sets. and let me get this right. you want us to impose our workers saftey laws on other countries just because you dont like the way they are treated???

I don't know where you got that but I implied no such thing.

Bee

[Spidey]

Ok you’re busy, so I will summarize…

All the taxes, regulations, rules & labor laws may create an economy that serves the society in more of an overall way, but…

The result is, an economy that is less vibrant & dynamic as a result, and not the opposite.

(that was the point I was trying to make with the economy vs. society thing)

[Jeff250]

Disclaimer: I'm an economics ignoramus.

Lothar, I'm having a hard time analyzing your post, and I think it's because you spend a lot of time laying out the requirements to achieve a good economy, but you never seem to set out what you think a good economy is, in itself. Is it one that maximizes GDB? Creates a strong middle class? Has the fewest poor people? I guess when I was reading it, I kept thinking, \"I guess having that lends itself to a good economy... whatever a good economy is.\"

[Jeff250]

I can't seem to edit my post, but, if you haven't guessed it by now, GDB above should read GDP. (I've been doing a lot of C programming recently, which may explain why I've got \"gdb\" on the brains. )

[dissent]

and here, for the opposite of economic fundamentals, we now have Michael Moore's newest film. Do let me know if Moore will be letting everyone in to see his new \"documentary\" for free, won't you?

[Spidey]

Point #9 Education…

9a. In today’s economy people must be taught not only how to get a job, but also how to create jobs. The days of big daddy company taking care of people from birth to grave are long gone.

9b. Consumer Education…and I’m not talking about knowing how much salt is in a bag of potato chips, I’m talking about understanding how your purchases “actually” affect the economy.

9c. Economics 101...Well this is the most important of all, teaching people the basics of an economy, stripping down all the layers to expose the fundamental thing that is actually going on. Any economy at it’s heart is the buying and selling of labor. The only way an economy will support high paying jobs, is when the consumer is willing to pay more for the products they buy.

To understand this…

The buying and selling of labor must be understood as the most important principal.

When you are on the “job” you are really selling your labor, and when you buy a “product” you are really buying someone’s labor.

So…if you expect to get paid 25 dollars an hour, for your labor, you must in return be willing to pay at least that much for someone else’s labor…because guess who someone else is?…it’s you.

When you go one the market to buy someone else’s labor, but are only willing to pay…say 5 dollars an hour, the only labor on the market for that price is overseas. When you try to sell your labor, there are no buyers.

This leads me to my next point…without the proper education, prople are subject to propaganda and brainwashing.

Examples of brainwashing…

1. You have the right to have a job, and earn a certain amount of money…false.
2. You have the right to cheap consumer goods…false.
3. The Evil Greedy Corporations are all at fault…false.

In fact, the corporations are caught in the middle, between the consumer demand for cheap goods, and the price they need to pay their employees. (remember, no customers for your high priced labor) The only way to keep high paying jobs in this country, is to be willing to pay more when you purchase labor. (if not you…who?)

We have met the enemy…and they are us! Now go ahead and yell and scream at me, because nobody wants to think they are the problem. And go right on cursing the Evil Corporations…while you stand in the unemployment line, wondering why nobody will buy your labor. (give you a job)

Ringgg…
:Hi mom…
:Hi Sweetheart…
:How’s it going…
:I have some bad news…
:Wait, let me tell you my news first…
:Ok…
:I just got this great bargain on Stainless Steel Cookware…
It was half as much as the American Brand…
:That’s nice dear…
:What’s your news…
:Well honey, your father just got laid off…
:Crap, where does daddy work again?
:Sweetie, know your father works at, Weststream Stainless Steel…

[Bet51987]

Do let me know if Moore will be letting everyone in to see his new "documentary" for free, won't you?

Documentary films are not intended to be free but I will definately be seeing this one no matter what it costs.

I wish this thread didn't die an early death.

Bettina

[Spidey]

Yes, it’s a damn shame…frankly most people are clueless to what’s really wrong with this economy, over the last decades. (this recession is only a bump in the road downwards)

So how can you have a debate…The OP never defined what a “Good Sound Economy” is, and I for one can’t see how any of those un-defined (lack of details) 8 points can stop the hemorrhaging of good paying jobs.

Frankly you have to answer the question…who will buy high priced American Labor? The answer seems to be…Nobody! (why should they, nobody seems to make the connection)

You can reduce all the barriers, make all the tax incentives, and sign all the contracts you want…but if you don’t have customers…you aint got squat.

When this economy became a global economy, the slide began, and it won’t end until an equilibrium is reached.

Like this…

Overseas labor costs will rise.
Local labor costs will fall.

All the entrepreneurs in the world can’t put Humpty Dumpty together again, as long as someone is willing to a job at such low wages, they will get the job. (other factors being equal)

………………………………............................

“Peace Sells, But Who’s Buying?”.

[Will Robinson]

....

Documentary films are not intended to be free but I will definately be seeing this one no matter what it costs....

It doesn't matter because Moore doesn't make documentaries anyway, he sells partisan editorials and his fellow liberals call them documentaries because it helps them validate their perceptions of reality.

What you will pay is not just money if you think you are watching an honest documentary.

[Lothar]

The OP never defined what a “Good Sound Economy” is

Keep your pants on. I'll get to it when I have the time.

[dissent]

Documentary films are not intended to be free ...

how's about "documentaries" that purport to be about capitalism? The irony is thick here ... thick, I tell you!

...but I will definately be seeing this one no matter what it costs.

There, you see?

Supply ... AND demand. By God, Bee, there is some hope yet that you may learn some economics!! Just don't count on getting what you need from MM.

[dissent]

bumpage ...


For those of you who like to sneer at ideas like \"free markets\", here's a helpful little article by Thomas E. Woods. With any luck, or in some cases divine intervention may be necessary, you may find yourself questioning some of what you thought you had been taught by \"economists\" like Michael Moore and so many others in the popular media.

I hope you may be inspired to further learn some actual economics, and thereby disabuse yourselves of many of the ridiculous notions that keep populating so many of these threads ....

(....holding my breath in ....3.....2....1........)

[Spidey]

Good article…what “Che” and people like Bee don’t fully grasp is…greed is a \"human\" desire, and like all human desires, such as lust, have a purpose…

Desires are motivating factors that humans need, in order to be more than just a lump of flesh.

…and the trick is to know when enough is enough.

……………………………..

“I blame him for being so incorrigibly incurious. The brighter kids figure out they're being fed propaganda of the crudest and most obvious kind, which is designed to make them obedient little servants of their overlords, who claim to protect them from the evil exploiters they read about in their textbooks. These kids seek out the truth, and discover that the real exploiters are the overlords themselves, parasites on the productive economy, who live on the fruits of other people's labor while blaming the resulting social ills on the various bogeymen the kids have been taught to hate.
The slower kids, by contrast, memorize what the teacher tells them, reproduce it on the test, and repeat it like drones for the rest of their lives.”

[TechPro]

I believe the phrase we're looking for here is: \"Bridle your passions\" which means to temper/manage/control your passions/feelings/desires because there is a time and place for all of them and in the right portion.

Lose control of any of your passions/feelings/desires and you may/will/can do things you wouldn't have done if you had been really thinking about the consequences.

[dissent]

From Marching with Michael Moore

One final note: Just before the film started, Moore asked the audience to turn off any recording devices because the studio did not want bootleg versions of the film getting around. Apparently this socialism stuff has its limits.

ROFLMAO

[Stroodles]

From Marching with Michael Moore

One final note: Just before the film started, Moore asked the audience to turn off any recording devices because the studio did not want bootleg versions of the film getting around. Apparently this socialism stuff has its limits.

ROFLMAO

That is classic. It's silly anyway, there's plenty of fictional raving on the interent anyway. (and in the white house.)