Towards a More Practical View of Economics

When some people hear the term economic theory, they often act indifferent or roll their eyes. This is because for years, many have equated it with a type of intellectual game playing.

Unfortunately, few modern theories have as much day-to-day impact on people’s lives as economics. Also, since economics is the silent partner of politics, few issues escape its grasp. In fact, when one applies a follow-the-money approach to political topics, they often find that across the spectrum, many issues have their origin in economic theory.

Because economics is misunderstood, it can be hard to discuss beyond the usual clichés. Therefore, when anyone mentions the possibility it can become more practical, many shrug and say, “Here we go again.” This confusion is compounded by how some theorists seem to setup axioms out of premises before all data is collected. As a result, economics is sometimes viewed as a statistical mishmash of competing ideas arranged in an arbitrary fashion.

But is economics really just a game? How can it be just a game when so much of what we do in life revolves around some kind of monetary exchange?

One of the reasons modern economic theory puzzles many is that much of it seems counter-intuitive. The abstract nature of modern economics, just like the abstract nature of modern physics, proves to be a barrier.

For instance, to the average American who’s struggling to pay down debt, the fact that our government can seem to function with a large amount of growing debt appears somewhat illogical. When politicians and economic experts talk about Debt-to-GDP ratios, and favorable levels of debt, many average Americans shrug as if it’s yet another example of political-economic gamesmanship.

In addition, to the average American that looks upon their family as a self-enclosed economic entity, the ever-present concept of globalism seems confusing. To many, the American nation is still the largest economic entity we envision. Therefore, getting used to the whole globe as an economic entity can appear abstract. Yes, most Americans understand globalist trade concepts and the importance of global trade. After all, since the days of Marco Polo and the Silk Road, individuals and countries have enriched themselves through trade. However, that’s not what creates confusion for many.

What puzzles many about globalism is how some American-based multinational corporations pursue loopholes to drastically lower their taxes. On occasion, these companies hint at the fact that such tax practices are a necessary part of globalist trade. Although the American corporate tax rate is high on paper, they often pay much less than what the official rate implies. Unfortunately, the reputation of corporations that pay taxes fairly is damaged by the tax avoidance pursued by some.

Adding to the bewilderment many have with modern economics is the fact that corporations are now viewed as people in legal terms. Therefore, many think that as people, corporations could pay a fair share for the roads, bridges, ports, and airports they use to conduct trade.

Probably the most confusing part of economic theory is how it’s used in the political arena. As is well known, both parties have economic experts and economists at their disposal who polish the rhetoric politicians employ. As most Americans attest to, there’s a tug-of-war between the Republican embrace of the more Free-Market approach of the Supply-Side revolution starting in 1980, and the more socialist Democratic approach of government-based Keynesian ideas used to maintain economic demand. 

In reality, although America has swung between Republican and Democratic directions the past 30 years, the economic dogma espoused by both seems to have resulted in the system that some call Corporatism. In a sense, Corporatism, as reflected in the political talk of Public-Private partnerships, has arisen since implementing the economic views of both parties in total has proven difficult. Therefore, the political-economic theorists that predicted Corporatism are correct to say this system could grow out of modern political rivalries. Although some say Corporatism resembles Socialism insofar as there’s a strong government hand in the economy, it differs by leaving the means of production in private hands.

As for developing a more practical economic view if indeed we’re living in the age of Corporatism, there are many proposals.

First off, since the post-Keynesian economic model has allowed for large amounts of unstable debt to accumulate in many advanced countries, there’s a need for debt limits that are achieved transitionally without imposing high levels of austerity. In line with keeping debt lower, the debt-risk posed by those wanting more finance deregulation needs to be recognized. After all, if another finance crash creates a freezing of liquidity assets similar to what we had in 2008, billions of dollars of outstanding derivatives contracts may trigger the need for another bank bailout. Obviously, another bailout would be added to our nation’s debt again.

Regarding debt reduction, we could actually increase tax revenue from corporations by both cutting their official tax rate, and then closing certain loopholes. This policy could help reduce debt, while also improving the negative public image many have of corporations due to how some pursue tax avoidance.

In addition, since many central banks have been pushing for lower interest rates the past 15 years as a means to stimulate certain areas of the business cycle, there needs to be recognition that we need to slowly allow interest rates to return to historic levels so the natural ebb and flow between saving and spending can be restored. As many economists note, such unnaturally low levels of interest rates, if continued, will make it hard for us to not only stimulate the economy for future growth, it’ll make it hard to stimulate the economy to reduce the chronically high levels of underemployment we now have.

Since chronic underemployment has become an outgrowth of globalism in many advanced countries, it’s apparent that relying on historically low interest rates as the main way to boost employment has led to a situation begging for creative solutions. As many have said, America could deal with its high level of underemployment by borrowing ideas from both right and left of the political-economic spectrum. These ideas include creating infrastructure improvement jobs and streamlining small business regulations to encourage true entrepreneurship. 

And finally, although globalism’s here to stay and has benefits, it’s obvious that although recent trade pacts reinforce large multinational entities, that the most important entity for each nation… remains that nation. Therefore, if politicians can honestly find ways to look out for all aspects of our nation more, America’s economic outlook could improve. 

Hopefully, with more involvement from ordinary citizens, economics will start to lose its reputation as a confusing line of thought, and become more an everyday part of everyone’s lives.

 

 

 

 

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2014 in review

The WordPress.com stats helper monkeys prepared a 2014 annual report for this blog. Here’s an excerpt:

A San Francisco cable car holds 60 people. This blog was viewed about 1,400 times in 2014 by 54 countries around the world. If it were a cable car, it would take about 23 trips to carry that many people.

The Politics of Economic Opportunity

In the wake of recent controversies in Ferguson, many Americans are bewildered. This is because not only is it hard to determine actual facts of the Michael Brown case in the flurry of conflicting reports and opinions, it’s difficult to separate one’s political affiliations from how one looks at the situation. However, no matter what one thinks of Ferguson personally, it’s clear the tragedy there is somewhat a reflection of questionable economic policies. As many know, crime rates and social discontent are often higher in poor areas such as Ferguson. Also, by being part of the metropolitan area of Greater St. Louis, suburban Ferguson exemplifies many features of America’s densely populated areas. 

Sadly, America’s current political-economic dogma can create a cancel-out effect on issues like Ferguson. As we’ve seen, some party faithful on the left and right treat the issue like a political football thrown back and forth rhetorically from one side to the other. Ironically, this intense political rhetoric can sometimes serve to reinforce a status quo that can sacrifice truth to party dogma.

As many know, the poverty that leads to much discontent was not eliminated 50 years ago when “The War on Poverty” was declared. To some, things are maybe worse today. Why many ask, is it so hard to eliminate poverty and the social ills that go along with it?

One of the main social ills of poverty is both high unemployment and high underemployment. As economists have pointed out recently, America’s unemployment figure is actually higher than officially reported since those who’ve given up on work are no longer counted. When this is coupled with how many are underemployed, it’s clear we have many idle poor. In parts of densely populated areas like Greater St. Louis, unemployment and underemployment is high.

On a common sense level, there’s probably not a single American who doesn’t recognize the value of hard work. As many know intuitively, the sense of accomplishment that being employed can do for someone is incredible. Therefore, why is it in America that we have far too few jobs to go around?

Part of the problem with having too few jobs is that political dogmas on both sides reinforce somewhat outmoded economic theories. This is shown through political rhetoric. For instance, Democratic leaders still make overtures to the base of their party that wants more Socialism. Therefore, some Democratic leaders will employ rhetoric derisive of business and corporations to bolster support. This rhetoric serves to keep the base in line by keeping alive the hope that someday a more Socialist utopia can be realized. On the right, the Republicans try very hard to appeal to a base that’s very much interested in a total Free-Market theory that sounds great on paper, but isn’t really practiced anymore.

As we all know, not only has Communism been discredited, but also true Socialism has faded in strength since the 1980s. Along with both of those factors, totally unregulated Free-Markets are not really in vogue. Therefore, if both political parties are adhering to rhetoric espousing economic theories that aren’t totally accurate, what are we to do?

For starters, the main thing we can do as informed citizens is encourage politicians to be more honest about the fact our economy now is more reflective of Corporatism. Basically, Corporatism blends Free-Market and Socialist ideals while being neither. Therefore, Corporatism offers different challenges and opportunities. After all, major economists like Joseph Schumpeter predicted Corporatism clear back in the 1940’s. Although some view Corporatism as only a controversial theory, there’s adequate proof from a purely business model perspective, that corporations have validity. The main problem many of us have with corporations is the amount of power some corporate sectors have over the political process and government.

Regarding high unemployment and underemployment, there are pragmatic solutions to both that can be addressed if both parties become more honest about Corporatism and less rigid about adhering to older concepts. Practical solutions to high unemployment come in many forms.

One unemployment solution is to follow the lead some economists advocate and increase spending on America’s crumbling infrastructure. The increased spending could add employment. Obviously, simply applying fiscal policy will have a multiplier effect that’ll create more jobs. However, other ways to achieve this would be to actually create jobs, some temporary, and some permanent through the government for infrastructure. These jobs could target the unemployed and be used to not only provide employment, but also reduce some welfare payments. Therefore, by tying employment to ways to partially reduce welfare dependency, infrastructure spending could be done in a way that doesn’t add tremendously to debt.

If unemployment is successfully reduced, the Federal Reserve may then be tempted to allow interest rates to rise so the poor and middle class could begin saving money again through banks. As many know, interest rates are kept low to stimulate employment.

All of these factors could improve social stability by reinforcing the concept of work and responsibility, as well as saving.

Other ways to increase employment would be to streamline the byzantine and confusing regulations, taxes, and zoning laws setup in large Metropolitan areas. This process would have the net effect of promoting small business growth. In turn, this would lead to greater employment, serve to naturally stimulate the economy, and improve social stability by providing incentive for upward mobility.

All of the above are practical ideas that have been advocated by many on the right and left for years to help create more meaningful jobs. The problem with implementing these ideas has mainly been the dogma of both political parties. However…now that the threat of large-scale Socialism and Communism is largely gone for the right-wing, and now that the threat of a totally unregulated Free-Market is gone for the left, we can look at realistic economic solutions for today.

Although Corporatism offers many challenges and problems, admitting that this is today’s economic system may actually give us a starting point to make things better. Once we understand our new economic system and how it differs from the old, we can maybe start to identify how to cure systemic issues such as high unemployment and underemployment.

Hopefully, the Ferguson tragedy can mark a turning point away from problems promoted by lack of opportunity, instead of being a harbinger of things to come.

The Dogma of Modern American Politics

Recently, politics in America has evolved at times into a crudely absolutist yelling match. Although politics has never been for the tame of heart, it goes without saying that many people, from academics to everyday observers, have noticed a change in America’s political tone.

When one observes the difference in style between a political TV show from 25 years ago and one today, it’s apparent that debate in a logical manner has now taken a backseat to the caricature permeating much of today’s political theater. The attitude has evolved into a “win at all costs” mindset. However, if winning has become everything recently, who’s really winning the spoils? Are the winners the American people as a whole, or just a subgroup of America?

As America becomes enamored with division, we’ve become factionalized and Balkanized rigidly along lines promoted by political players. Repeatedly we’re told the “other side” is either almost unfit to lead, or will quickly lead America to an imminent decline. The dogmatic language that party machines, political players, and talking heads use to rally the masses of their party often infers that the “other side” may be subverting America.

Where does the truth lie? Is one side of the political aisle always virtuous and good, while the other always totally bad and malevolent? And if this is true…which side is right?

Historically, the beauty and strength of America has resided in how our Founding Fathers used self-evident and apparent truths to formulate the intricately powerful documents that allowed us to thrive for over 200 years. When one looks at the fragile history of nations, the American experiment till recently has been a resounding success.

A main reason America has been a success is because there’s been a theoretical basis that dissenting ideas should be respected. Yes, over the years there have been clear winners and losers. However, our checks and balances always gave us the ability to look to the whole of America as greater than the sum of its parts. In line with this, our checks and balances have historically given hope to those who lost that someday their grievances would be aired.

Nowadays…the win at all costs political mindset promotes a strong sense of alienation with those that lost. This sense of division then creates an incentive for the losing side to retaliate against the other side when they hold the keys of power. Obviously, today’s heightened rivalry between political parties can promote an erosion of America’s cherished checks and balances.

As children of the Enlightenment, our Founding Fathers realized that checks and balances offset mankind’s historic tendency to search for an absolute truth that could be used as pretext for exerting absolute control over fellow human beings. Being of this era, they also realized that religious freedom was important since many Americans escaped absolutist religious persecution in Europe.

In looking to harness the power of apparent truth and common sense, our Founding Fathers realized the best way to work towards a more perfect union was to realize that checks and balances controlled man’s imperfections. In a sense, they believed the path to perfection lie in devising a system that checked the power of absolutist thought to take hold.

Ironically, when one flashes forward to today, we see absolutist dogma rising in America’s political sphere. This dogma threatens America’s resolve.

On economic terms, the recent past has seen both political parties attack each other for being either too Free-Market or too Socialist. Politicians being what they are, many aren’t honest that perhaps a more accurate assessment of our economic system now is Corporatism. Some economists predicted Corporatism as an economic model years ago as an outgrowth of Free-Market Economies blending with aspects of Socialism.

Unfortunately, the term Corporatism can connote to some that all corporations are inherently bad. In a nutshell, since corporations are America’s dominant business model, it’s hard to conclude all corporations are inherently bad. In many ways, the corporate model is incredibly productive and efficient.

When one identifies negative aspects of Corporatism, it’s because some major corporations exert powerful influence on governments. This factor, and the fact that corporate power seems to be growing due to globalism, is what causes concern.

Political dogma being what it is, most political players aren’t truthful about Corporatism since it upsets their ability to demonize the other side. However, truth be told, many political players are aware of Corporatism.

For example, many leading Republicans who championed the cleansing effects of Free-Markets and deregulation were strong supporters of the Bank Bailout that ran counter to Free-Market theory. Some may call the bailout an example of Corporatism. On the flip side, Democrats who claim corporations control Republicans aren’t honest about how many Democrats also support America’s finance corporations in addition to other large corporations.

Although recent Supreme Court activity has solidified corporate power and personage, it’s not well known that corporate personage dates back to the late 1800’s. Ironically, when one looks to the early days of America and how government then could dissolve corporations, one realizes how corporate power has grown.

In addition to economics, there are other areas in modern America that reflect how political dogma can lead to confusion. Because of this, many of us who love America are concerned. We worry that if current trends continue, America could lose some of the checks and balances that made it unique.

 

 

Wealth Inequality and the Middle Class

Few issues get as much press as wealth inequality. Since the dawn of civilization and days of the monarchies, this has been a hot-button issue. As we’re seeing lately, with wealth inequality increasing in America, this issue won’t go away.

Although it’s tempting to advocate decreasing wealth inequality by just raising taxes, it’s well known that successfully raising taxes free of loopholes is very difficult to do. In addition, there are other surprising variables involved with this issue.

As noted by many, the economic strength and stability of America’s middle class, has declined the past twenty years. Obviously, factors such as globalism have played a role in this. In addition, the middle class has been strongly hampered by the Great Recession of 2008.

Our tentative recovery from the Great Recession of 2008 is shown by the fact that America’s unemployment rate is high, with many skilled workers unable to get work in their fields. Although our employment situation has definitely improved, there’s still caution about it due to the fact there now appears to be an under-reporting of unemployment. Under-reporting can arise when people give up on finding work and are no longer claimed as unemployed. When these factors combine with how record low interest rates have reduced the middle class’s ability to earn interest at banks, we see frustration.

The fact that interest accrued at banks is now so low is one reason polls have shown many Americans are thinking of putting off retirement. This is because many senior citizens are known to augment their fixed income Social Security with money earned off bank CDs. For example, if a retired couple now has a $100,000 bank CD, they’re faced with making only around $1,000 interest per year. In the past, a $100,000 CD often could generate $5,000 per year or more in interest. To senior citizens living on a fixed income, America’s record low interest rates have hampered their ability to support themselves.

Another way record-low interest rates hurt senior citizens is the fact that a primary source of revenue for pension plans has been various types of bonds. America’s current public employee pension crisis has been worsened by how low interest rates weaken bond yields. A weakened bond market adds to pension funds being depleted quicker.

In terms of economic success, the main area our economic recovery from the Great Recession of 2008 has worked is with the stock market and corporate earnings. And yes…this is good news. The reason it’s good is since many Americans work for corporations, and because much retirement wealth is in 401K-type accounts, many hope their job is secure, and another downturn doesn’t occur before they cash in their retirement.

Although average Americans are grateful the economic recovery in corporate America has helped them, there’s still controversy. Why, they ask, has middle class stability stagnated while the power of the elite has grown?

Ironically, many claim the very same policies that sparked an economic revival for the stock market have resulted in a rise of inequality. Since 2009, America’s Federal Reserve Bank, with the tacit approval of most politicians, has embarked on an unprecedented run of record-low interest rates while pursuing the debt buy-back process-QE. QE, otherwise known as Quantitative easing, is accomplished best with low interest rates. Basically, since America’s buying back it’s own debt with QE, the debt we purchase from ourselves is cheaper when interest rates are low.

QE is controversial since it can be a last ditch resort used by governments to stimulate a slumping economy. Ironically, low interest rates and QE, while effective at jump-starting the stock market, can also make the elite wealthier. Therefore, while many see rising wealth inequality as just a result of the Free Market, there’s evidence that some rise in wealth inequality is actually due to government-set economic policies that run counter to Free Market theory.

The wealthy can benefit from QE and low interest rates because they own a large portion of stocks, stimulated by these policies. In addition, low interest rates make it easier for the wealthy to borrow and profit from large sums of capital now. Although middle class house, auto, and student loans are more affordable with low interest rates, the middle class often can’t embark on the lucrative capital-growing process that low interest rates offer the wealthy.

As a result of these recent economic trends, there’s now an understandable push to raise the minimum wage. In addition, there’s rebirth of the idea that government should enforce a maximum wage. Although a maximum wage is a stretch for attainability, it goes without saying a minimum wage raise may occur soon.

In light of all this, it’s now obvious that a stable and large middle class is sustained when there’s a balance, as well as a separation, of market and government interests. Although political dogma creates an either/or mindset on economics, the reality seems more complex. Just as there’s proof that some government involvement in the economy has helped the middle class, there are also recent indicators that government-mandated economic policy can hamper average Americans. To restore America’s middle class, the elusive balance of power that used to exist between the marketplace and government needs to be considered again.

A Paradox of the American Economy

A telling point of America’s economy is that the amount of stakeholders in our national debt is maybe higher than ever. Obviously, the recent Bank and Auto Bailouts, in addition to an increase in healthcare subsidies to occur, underscore this. When this combines with a large Defense budget, farm and other business subsidies, plus low corporate taxes due to loopholes, it’s obvious many have a vested interest in our debt. In addition, if more economic areas are added as stakeholders in the future, this heightens the dilemma.

America’s total debt, and the fact it’s basically doubled in ten years, is no abstraction. The stress created by it negatively affects our critical finance and government services. In addition, America’s undermined by a lack of accountability major debt stakeholders sometimes perpetuate. The serious nature of our economic situation is shown by the record low interest rates we’ve had several years. Although low interest rates hurt savers, rates are kept low to stimulate a weak economy, and make our QE Policy of buying back our own debt cheaper.

Ironically, our total debt situation is so severe some politicians now look to cutting Social Security as an answer. The odd part about this is that our nation’s popular social insurance retirement program is mostly solvent—and fixable.

America’s debt dynamic compounds a web of political-economic intrigue. As many warn, America may face another finance meltdown due to the high amount of risk the finance sector still takes on. Tellingly, many prudent voices are speaking up, saying that finance regulation erected after the crash of 2008 doesn’t really address lowering economic risk and increasing solvency. If another downturn occurs soon, the government may find it harder to restart our economy.

Although our current situation, with a high debt to GDP ratio, seems similar to post-WWII America, there are major differences between now and then. These differences highlight that it’ll be harder to achieve the economic security we had then. 

This is because in the late 1940s, fewer areas of the economy had a stake in the continuance of high debt. Compounding this is how US tax policy, through the evolution of corporate and individual tax loopholes, has reduced taxes. The high taxes we had after WWII reduced our debt.

As is well known, modern politicians realize that high taxes are radically unpopular.

Due to the evolution of our political dynamic, America may have recently entered a kind of economic no-man’s land where left and right mostly blame each other for destabilizing debt. In reality both sides are at fault. Over time, the search for rational tax policies that align with a rationally sized government has almost been given up on. In line with this, the popularization of a political media that borders at times on entertainment has made most rational economic talk unpopular.

It’s no coincidence that the subsidization of large business and increase in debt has coincided with the media explosion that occurred after the repeal of The Fairness Doctrine in 1987. In this take no prisoners media environment, an Us vs. Them mindset leads to ratings duels that result in timeworn political-economic clichés being repeated endlessly.

As many claim, the incessant use of these clichés often fails to address many current economic variables.

Although not admitted easily, many politicians now favor policies in the short term that either add to America’s total debt, or don’t do much to lower it long-term. An exception to this was the relatively modest cuts set in place by the Sequester.

Unfortunately, the economic paradox America now faces is that making budget cuts at this particular time may not really help our fiscal problems long-term. This is because politicians have become adept at adding to America’s total debt even while they make specific cuts at certain times.

Perhaps the biggest economic problem that America now faces is philosophical. If we continue to directly and indirectly subsidize many areas of the business economy as we have, it’ll be hard to create a stable America with a lower debt to GDP ratio. Although economic areas such as healthcare and defense are more vital than others, Americans need to realize that subsidizing and assisting many non-essential businesses is taking a toll.

In line with this, if a viable retirement program like Social Security is at future risk because politicians are afraid to make the tweaks needed to fix it long-term, it shows we may indeed be entering a kind of economic no-man’s land. In this new era, it seems that many politicians are starting to work more for themselves and the industries they favor, and less for the average Americans they represent.