The Destruction of the Middle Class: Free College Degrees

Because our educational system is such a worthless piece of crap, most Americans cling to the ignorant belief that if something is good for an individual or a business, then it is automatically good for the economy. Thus many people have been fooled into thinking that if we increase the supply of people getting college degrees, then it will be good for the economy because people with a college degree generally make more money than those people who do not have a degree.

In order to understand why this is not the case, you need to be able to recognize that all economic activity is based upon trade. When I get a job, I am agreeing to trade my labor for wages (I give my labor to the company and in exchange the company gives me wages). I can then take my wages and trade them for the goods and services that I desire. Thus, the only things that are going to have any economic value in our economy are those things that have trade value.

What is the most valuable resource on this planet? Clearly it is air; without air nothing else even matters. Yet, air is practically worthless in economic terms. Why? Because everyone has air, thus it has no trade value.

In the long run, the same thing will happen to the value of a college degree if we make it easier for everyone to get one. The supply of people holding college degrees will go up, thus the trade value of having a college degree will go down.

Imagine if everyone in this country worked really hard and managed to graduate from college with straight A’s. Would this help to rebuild our middle class? No; it would do just the opposite. It would exacerbate the destruction of the middle class. Why? Because companies would no longer have to bid up the wages for people who hold a college degree.

In today’s world people who hold a college degree are generally able to command a higher salary because the supply of degree holders is relatively limited. If we dramatically increase the supply of degree holders, we will necessarily drive down the trade value of a degree. In the process we will actually drag down the wages for current degree holders as businesses would quickly seek to replace them with the “cheaper” newly minted degree holders.

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.

The Value of a College Degree is being Overstated

Because our educational system is such a worthless piece of crap, most Americans cling to the ignorant belief that if something is good for an individual or a business, then it is automatically good for the economy. Thus many people have been fooled into thinking that if we increase the supply of people getting college degrees, then it will be good for the economy because people with a college degree generally make more money than those people who do not have a degree.

There are several problems with this line of thinking. First of all, we need to recognize that higher salaries are not based solely upon whether you have a college degree or not. There have been numerous studies that have shown how physical traits can often help people get higher paying jobs. It may not seem fair, but taller, good looking people tend to be paid higher than shorter, less attractive people.

In addition, certain people will always have more doors open to them because of their connections in life. For example, a rich kid from the suburbs with great family connections will almost always get a higher paying job than an inner city kid with no connections. Also, the star quarterback will almost always be able to open more doors than some no-name inner city kid.

Even more importantly, the degree itself is not the “real” reason why people with a degree tend to earn much more than those people without a degree. A college degree does not have any magical, inherent properties to it that will automatically bestow higher wages upon whoever holds one.

Because we have been trained to believe that a degree will lead to a higher income, those people that desire a higher income will generally pursue a degree. But even if we outlawed college degrees, these same people would still seek out another means of acquiring a higher income. They would study on their own, pick the brains of knowledgeable people at work, etc. (i.e. they will take the steps necessary to acquire the knowledge they need to land a higher paying job).

It just so happens that a college degree is currently the most efficient path to a higher income, but it is not the degree itself that grants the higher wages. The same people who hold degrees and higher incomes in today’s world would be the same ones who had higher incomes in a world without college degrees.

Thus, the pay differential that we see in our economy is not simply due to the degree. Instead, it would be more accurate to say that the degree is merely a reflection of the economic potential of the individual; not a driver of their economic potential.

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.

The Disappearing Middle Class

Because our educational system is such a worthless piece of crap, most Americans cling to the ignorant belief that if something is good for business, then it is automatically good for the economy. By failing to educate people on the fundamental differences between business and economics, we have created a system in which the middle class necessarily becomes hollowed out.

Since the early 1980s, most people have succumbed to the naïve idea that business leaders should solely focus on maximizing the value of their firm. In general, this has been taken to mean that they should try and maximize the profitability of their firm. In order to do so, business leaders will necessarily try and maximize their income while minimizing their expenses.

Since the early 1980s, business leaders have been extremely successful in their efforts to grow their profits. Corporate profits as a % of GDP went from around 6% in 1980 to around 11% today. The number of corporations filing for bankruptcy each year went from an all-time high in 1987 to near an all-time low today. The Dow Jones stock average went from about 2,000 in the early 1980s to around 17,000 today.

Despite the amazing success of businesses, the economy has grown weaker and weaker and the middle class has been gradually eroded. Why?  Because the idea of maximizing profits makes perfect business sense, but it makes ZERO ECONOMIC SENSE!

In economic terms, one person’s income is another person’s expense. If I buy a cupcake from you for $3.00, your income is my expense. So telling businesses to maximize their income while minimizing their expenses, is the same thing as telling them to maximize other people’s expenses while minimizing other people’s income!

Not surprisingly, with every business in our economy trying to maximize their own income while minimizing the income of others, that is exactly what has happened. Some people have seen their income rise (i.e. they have moved up from the middle class), while many others have seen their income fall (i.e. they have been squeezed down out of the middle class).

Those people who can exert the most leverage (business owners, highly skilled workers) have seen their incomes rise. While those with the least leverage (non-union, low-skill workers) have seen their incomes fall.

It is important to note that this process really has nothing to do with global trade or changing technology as many people ignorantly claim; those issues have merely added fuel to the fire. The middle class would have eroded even if we never traded with any other country or adopted any new technologies.

The fundamental problem with our economy is the complete lack of understanding of economics. If we continually make decisions that make ZERO ECONOMIC SENSE (i.e. always look for the lowest price, always try and maximize profits, believe that saving is always good for the economy), then bad things will naturally happen to our economy.

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.

The Economy in the Eyes of the Beholder

As I have said before (and will probably have to say a million times more), despite the obvious intellectual advancements made in more progressive sciences, economists continue to utilize what we might call a Newtonian Framework that they build their economic models upon. This framework is one in which it is assumed that our economy is much like a giant machine that can be analyzed, understood and modeled. That there are specific forces at work in our economy, and that human beings respond to these forces in much the same way that Newton proposed that planets and stars reacted to the physical forces in our universe.

Just as this type of framework misled Newton into thinking of the universe in terms of absolute space and time, economists continue to be misled into thinking of our economy in terms of economic absolutes (ex: saving is always good for the economy, lower interest rates will stimulate demand, that what is true for one economic participant is true for all others, etc.). The reality is that we live in a Relativistic world that can only be understood by looking at the relationships that exist in our world.

Because they believe in economic absolutes, economists ignorantly believe that they will recognize the “truth” when they see it.They know there are problems with their current economic models (although they seem to be rather oblivious to the scope and scale of these problems), but they operate under the delusion that they will be able to immediately recognize a “better” economic model when they see it.

If you bother to study the history of science, you will quickly realize that this type of thinking makes absolutely no sense. Scientists did not embrace Einstein when he first proposed his theory of Relativity; they though him to be insane. The leading experts in Edison’s time wouldn’t even bother attending demonstrations of his work because they felt it to be beneath them; that it wasn’t worthy of science.

Imagine if we put an elephant in the middle of a small room. There is a window in each of the four walls of the room and a person sitting in front of each window looking in at the elephant. From their perspective, each person can only see one side of the elephant (which cannot turn around) and they cannot see any of the other individuals.

We ask each of them to write up a one page description of what they see. We then take the description from the person looking in at the front of the elephant and show it to the person who is looking at the back end of the elephant and ask that person if the description seems to be “true”.

Obviously they are going to say that the description is definitely NOT true because it does not appear to match what they are seeing at all. The description of the front of the elephant will appear to be utter nonsense to the person looking at the back of the elephant.

The same is true in the real world. Each of us is so small that we never get to see the world in its entirety; not even close. So each of us develops a very different concept of reality. Thus the descriptions that come from other people often seem to make no sense to us whatsoever.

Through their studies, Economists essentially train themselves to look through a particular “window”. In doing so, they make it extremely difficult (if not impossible) for themselves to be able to make sense out of any other interpretations of our economy. Thus, they continue to ignorantly cling to their outdated models, naively waiting for a “better” model to come along.

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.

#EconomistsAreMorons

Corporations do not pay Taxes

With all of the current hoopla about corporate tax rates, I thought that it would be useful to help everyone understand that corporations do not pay income taxes. This is because a corporation is simply a legal structure used to define the relationships between the owners, workers and customers of the corporation. It is what is commonly referred to as a “legal fiction”.

In many ways a corporation is just like a marriage. Your marriage defines the legal relationship between you and your spouse, but there is no way for us to implement a “marriage tax” that would be paid for by somebody other than you and your spouse. Similarly, any taxes we impose on a corporation’s income will not be paid for by the “corporation”, but by the people within the legal structure of the corporation (i.e. the owners, the workers or the customers).

Since taxes are expenses, if we decide to raise the corporate tax rate, business leaders will essentially have three choices when it comes to dealing with the added expense. Option 1: They could choose to just “eat” the higher expense and accept that the corporation will be less profitable. Option 2: They could choose to raise their prices in an effort to bring in more revenue. Option 3: They could choose to lower some of their other expenses in order to offset the additional expense.

Since business leaders have been trained to maximize profits, they will be very resistant to option 1. It will essentially be their last choice.

Since we live in a global economy with a seemingly unlimited supply of goods and services to choose from, it is extremely difficult for business leaders to choose option 2. If they raise the price of their goods or services, customers are too likely to decide to buy elsewhere.

Thus the only attractive option is option 3. And what is the largest expense in most corporations?  Wages and benefits.

Over the past several decades we have seen corporate profits rise rather dramatically, while the ability of corporations to raise prices has declined (as reflected in our generally declining rates of inflation). Meanwhile, the wages and benefits paid to the working class have been under tremendous pressure. 

From this it should be clear to you that it is the workers in this country that bear most of the burden of our misguided attempts to tax corporate income.

Today we have millions of people who complain about their low income, but at the same time they clamor for higher taxes to be inflicted upon corporations. But raising corporate taxes would only serve to put even more downward pressure on their own income. Now that, Miss Morissette, is ironic!

Hopefully at some point we will get enough people to understand this and we can move away from the ignorant belief that we should tax a corporation’s income and move towards the more constructive belief that we should tax corporations for not investing in our economy (i.e. we should tax them on their Retained Earnings).

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.

It’s All Relative Janet

As I have said before (and will probably have to say a million times more), despite the obvious intellectual advancements made in more progressive sciences, economists continue to utilize what we might call a Newtonian Framework that they build their economic models upon. This framework is one in which it is assumed that our economy is much like a giant machine that can be analyzed, understood and modeled. That there are specific forces at work in our economy, and that human beings respond to these forces in much the same way that Newton proposed that planets and stars reacted to the physical forces in our universe.

Just as this type of framework misled Newton into thinking of the universe in terms of absolute space and time, economists continue to be misled into thinking of our economy in terms of economic absolutes (ex: saving is always good for the economy, lower interest rates will stimulate demand). The reality is that we live in a Relativistic world that can only be understood by looking at the relationships that exist in our world.

Because economists do not understand this, it is not at all surprising to routinely here idiotic comments coming out of the Fed. One of the more recent examples is the internal debate going on in the Fed over when they should begin financial “tightening” in order to keep the economy from overheating. If economists understood that interest rates are all relative, then they would understand that the Fed has actually been “tightening” for years.

Let us assume that the Fed Funds Rate is currently set at 2%. Would you consider this rate to be “loose” or “tight” (financially speaking)? The only way to answer that question would be to look at where market interest rates stand.

If current market rates were near 10%, then we would describe the Fed Funds Rate as being “loose” or “accommodative”. If, however, market rates were near 3%, then we would describe the same Fed Funds Rate as “tight”.

Since the Fed implemented its Fed Funds Rate of 0% back in 2009, market rates have essentially been cut in half. Thus by keeping the Fed Funds Rate constant in a period of declining rates, the Fed was effectively “tightening” the entire time. I guess it shouldn’t be surprising that the Fed doesn’t understand this. After all, they did lead us straight into one of the worst financial disasters in history.

#EconomistsAreMorons

Those Jobs are Long Gone

In light of the current frenzy to “bring back good jobs to America”, I felt that it would be useful to help people understand why that will never happen. To see why I say that, you just need to recognize that there are no “good jobs” in China or Mexico to “bring back”. If you took the time to visit the workers in these countries you would see that they work long hours, in crappy conditions, with little to no benefits and for very low pay.

Because we do such a horrendous job at educating people on how the economy actually works, there are millions of people in this country who hold onto the ignorant delusion that by transporting these crappy, low paying jobs back to America, those jobs will magically transform into “good paying, middle class jobs”. How is this magical transformation supposed to occur? I have no earthly idea.

Maybe the Easter Bunny, Santa Clause and the Tooth Fairy will combine their powers to turn them into “good jobs” for all the good little boys and girls. Or maybe if we gather enough four leaf clovers and wish real hard, then those jobs will miraculously transform.

Those “good paying, middle class jobs” didn’t leave this country; they vanished. They disappeared from the face of the earth. Now China and Mexico are full of crappy, low paying jobs just like America.

If you want to know why they disappeared, you probably just need to look in the mirror. It is the consumer’s irrational obsession with low prices that is destroying the middle class; not China or Mexico.