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.

The Real Selling Point of Universal Healthcare

If the proponents of universal healthcare truly want to convince people that it should be adopted here in the US, they should be focused more on the effect it would have on our economy if we removed the burden of healthcare from the back of American business.

I am sure all our business leaders cry themselves to sleep at night over the prospect of not having to pay for healthcare costs. “Oh, please don’t remove that burden from us! We love having to pay higher employment costs thus making our products less competitive in a global economy! We love having to cut workers’ wages and reduce their hours in order to offset constantly rising healthcare costs! We love having to spend hours and hours of our time focused on healthcare issues that have absolutely nothing to do with our actual business!”

Rebuttal to: The World Needs More US Government Debt

In order to understand what is wrong with the conclusions reached by Mr. Kocherlakota in his article “The World Needs More US Government Debt”, we need to examine the nature of the assumptions that were used in the framework that underlies the economic models being used by economists like Mr. Kocherlakota.

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).

Instead, we need to understand that the real world is a Relativistic one, in which there are no absolutes. Because of this, it is critical for us to focus on relationships if we hope to understand the forces at work in our economy.

Mr. Kocherlakota tells us that the US can issue more “extremely safe bonds” in order to stimulate demand. Believing that investors are willing to pay so much for US bonds because they are “extremely safe” is just one example of the myopic thinking that is a natural part of using a Newtonian Framework to try and understand a Relativistic world.

The reality is that interest rates are relative. In order to see what this means for our economy, let us assume there are 20 people on an island and a hurricane is coming right at them. There are only two places on the island to ride out the storm, and each shelter can only hold 10 people. So they hold a quick auction to buy an admission ticket into each shelter.

The first option is a 100 year old farmhouse. The second option is a rickety old mobile home. Naturally people bid up the price of a ticket to the farmhouse in the auction. Not because it was “safe”, but because it was safer than the alternative.

In our world, people have bid up the price of US bonds, not because they are “extremely safe”, but because they are safer than all of the other crappy alternatives available to investors. How do we know these other investments are crappy? If they weren’t, people wouldn’t pay so much for US bonds. They wouldn’t be willing to buy negative real returns if the world wasn’t full of even crappier alternatives.

And why is the world full of crappy alternatives? Because economists keep preaching the ignorant mantra that saving is an absolute good, when the reality is that it is the relationship between saving and spending that determines the health of our economy.

Imagine you have all the money from our economy piled up at your feet. In front of you are also two buckets: one labeled “Spend” and one labeled “Save”. Your job is to take the money and throw it into one of the buckets; in doing so you will determine the nature of our economy.

If you throw all of the money into the “Spend” bucket, you will have created an economy with tons of demand, but with no capital available for investment. Thus the economy will not grow because it will be impossible for us to invest in the productive assets we need in order to raise our productivity.

If you throw all of the money into the “Save” bucket, you will have created an economy that has tons of capital available, but no reason to invest that capital into productive assets because there is no demand to satisfy. Thus the economy will not grow.

Therefore the key to growing our economy is to maintain the proper relationship between saving and spending. Looking at our economy (with its continually falling interest rates, mountains of debt, inflated nonproductive asset prices, dearth of demand) it should be clear to everyone that we currently have too much saving going on. In order to get people to invest more in productive assets, we need savers to turn more of their saving into demand.

Of course the irony (or the perversity) here is that Mr. Kocherlakota is essentially proposing the same thing, but from a fundamentally different perspective. He proposes issuing massive amounts of new government debt, which would make the government’s savings rate even more negative than it already is. Thus making our overall economic saving rate negative; which is exactly what needs to happen.

The obvious problem is that bankrupting the government is an irrational and illogical approach to solve our saving dilemma. You would essentially allow current savers to keep their savings by taxing the heck out of everyone in the future; including the non-savers who were not even the cause of the problem.

Again, the reason that mainstream economic models generate such perverse conclusions is that they are based on a fundamentally flawed concept of reality. It is time for economists to wake up and move beyond the outdated Newtonian Framework that has dominated economics for far too long.

 #EconomistsAreMorons

Unemployment, the NFL and the invisible hand

Much of the current debate about what steps need to be taken in order to improve the global economy is being complicated by the archaic, “mechanistic” ideology that currently dominates economic thought. Despite the enormous advancements made by science, most economists continue to try and understand the economy using a Newtonian view of the world. One in which the economy is like a giant game of billiards, where all of the elements of the economy are separate and move independently from one another.

Where, for every action, there are knowable and discrete reactions (i.e. if I strike the cue ball along a certain line with a certain force, then a certain outcome will always ensue). Thus, economists mistakenly tend to believe that for every economic action we take (ex: cutting interest rates, increasing savings, getting an education, etc.), there will be a specific and knowable outcome.

Of course, this mechanistic view of the world is a natural byproduct of our everyday experience with the world. Since we cannot directly see, feel or measure how our individual economic actions affect others, many people have naturally assumed that our individual actions do not, in fact, directly affect others. Because of this belief, most people naively assume that everyone in the economy has the same opportunities available to them.

This belief in turn leads to a very “self” centered view of the economy; one that is based on the short-sighted belief that each person in the economy should simply act in their own best interest. The line of thinking goes like this, if everyone in the economy simply takes the steps needed in order to achieve economic success, then everyone will succeed. Because we are all independent actors, the economic failure of any given individual must be due to either a lack of knowledge or a lack of effort on their part.

We can easily find examples of how this short-sighted line of thinking inevitably leads to the Fallacy of Composition. As just one example, let us assume we have an unemployed man named Joe who wants a job. According to the mechanistic view of our economy, if Joe gets an education (for discussion purposes let us assume he learns to write code) and works hard at his job search, he can find a job (which is more than likely true).

Because they mistakenly believe that all economic participants are unrestricted and independent of one another, people who follow a mechanistic ideology are naturally mislead into believing that an education and hard work will always lead to a job. In other words, if it is true for Joe, then it must be true for all other individuals in the economy, because they have the same opportunities available to them that Joe had.

Thus if everyone who is currently unemployed would all follow the same route as Joe, they will all find jobs and our unemployment rate will be 0%. Obviously this makes no sense whatsoever, because our unemployment rate could never get to 0% (for a variety of reasons). We might call this situation the Paradox of Employment, in that, what leads to employment for one person does not lead to employment for all.

Another, much more famous, example of how a mechanistic view of the economy naturally leads to a paradox can be found in what is commonly referred to as the Paradox of Thrift. This paradox is a natural consequence of the misguided belief that saving (i.e. the opposite of spending) is good for the economy.

Adherents to this belief tend to think along the following lines: let us assume that Joe saves 10% of his income; clearly this would be make Joe “better off” from an economic perspective. Thus, if everyone did what Joe did, they would all be “better off” from an economic standpoint. Therefore the economy as a whole would be “better off” if everyone saved more.

However, according to this logic, if everyone saved 100% of their income, they would all be even richer! But clearly this type of thinking is ridiculous because if there was no spending (i.e. there was 100% saving), then there would be no income and the economy would implode.

The reason why a mechanistic view of the economy always ends in a paradox/fallacy is that such a view fails to address the fact that the actions of each economic participant affects the opportunities available to all other economic participants. To avoid these paradoxical outcomes, we need to develop a more sophisticated view of our actions and the effect they have on the economy as a whole.

The reality is that the economy can be better understood by using an ideology that is based upon more of a Relativistic view of the world. One that utilizes the advancements made in science to help us understand how our actions directly impact everyone else in our economy, and vice versa.

By using such an ideology, one can begin to understand that the economy is somewhat like a game of billiards, but one in which there are billions of different sized balls on the table; and if we move any one of the balls in the slightest, all the other balls on the table will move at the same time. So, instead of just naively assuming each economic participant acts in isolation, we can begin to understand that every economic action changes the initial conditions for all other economic participants. Thus, the opportunities available to each of us are directly affected by the actions of all the other participants in our economy.

In order to develop a crude understanding of what this means, let us consider the National Football League (NFL) as an example of a highly simplified economic system. In the NFL, there are 32 teams that play 16 regular season games. At the end of the regular season, 12 teams qualify to play in the playoffs and the winner of the playoffs gets the Super Bowl trophy.

Let us assume that before the start of the next season every player in the league decides that they are just going to have fun the whole season. They decide that they will not go to any practices and they are going to go out drinking with their friends every night. What do you think would happen? Well, the play would be pretty sloppy, but at the end of the regular season 12 teams would still make it into the playoffs and one of those teams would still wind up winning the Super Bowl.

Now let us assume that the next year, all the players on one team (let us say that it is the Miami Dolphins) decide that they are going to try much harder. They make it to every practice and do not go out drinking every night. What do you think would happen? Since the Dolphins were so much better prepared to play football, they would naturally wind up winning the Super Bowl. From this, someone who follows a mechanistic view of the world would naturally come to the conclusion that it was their hard work that led to the Dolphin’s success.

To see why this is not the case, let us assume that the next year every player in the league decides that they are going to try much harder. They all make it to every practice and they do not go out drinking every night. Would they all win the Super Bowl? Of course not. At the end of the year, 12 teams would make it into the playoffs and only 1 team would win the Super Bowl.

The key point to recognize here is that the success of the Dolphins in year 2 was not just due to their own actions, but due to the relationship of their actions with the actions of all the other teams. By goofing around the entire year, the other teams changed the conditions of the system. Then, when they quit goofing around in year 3, they completely changed the conditions of the system again; they basically changed the “universe” of the NFL. In doing so, they changed the opportunity that had been available to the Dolphins in the previous “universe”.

The same holds for our economy. The actions of all of the other economic participants are going to have a profound effect on the opportunities available to you. In addition, their actions will go a long way in determining the success (or failure) of your efforts.

To develop a crude understanding of how this plays out in our economy, let us revisit the earlier example where Joe was unemployed. Given the current state of our economy, can Joe learn to write code and get a job? Instead of just naively saying that “Yes he can”, it is more accurate for us to assign a probability that his actions will lead to a specific outcome. So for purposes of our discussion, let us assign a probability of Joe getting a job as 99% (note: the actual percentage is not that important).

Since there is such a high probability of success, let us assume that Joe learns to code and gets a “good job” as a code writer. The key point to recognize here is that Joe’s actions lead to the development of an entirely different economic universe. Therefore, what appeared to be “true” in the “Joe is unemployed” universe, may or may not appear to be “true” in the “Joe learned to code and got a job” universe.

So, if we look at the next unemployed person (let us call her Kathy), and we ask, can Kathy learn to code and get a job? In order to answer that question, we first need to recognize that the initial conditions for Kathy are different than they were for Joe. Thus it is only reasonable to assume that the probability of Kathy finding a job has changed as well.

Since the number of available job openings dipped slightly when Joe got a job, it is only natural to assume that the probability of Kathy getting a job will also dip slightly. Let us say that it falls to 98%. Since there is still a very high probability of success, let us assume that Kathy goes ahead and follows that path as well. Once again, the economic universe has been fundamentally changed by Kathy’s actions.

So, if we look at the next unemployed person (let us call him Steve), and we ask, can Steve learn to code and get a job? In order to answer that question, we first need to recognize that the initial conditions for Steve are going to be different than they were for either Joe or Kathy. Thus, if we look at the probability of Steve learning to code and getting a job, we would find that the probability of doing so may slide down to 97% since Kathy took another one of the job openings; and on and on it goes.

Obviously this is an overly simplistic example, but it is only used to make a point. The point being that the probability of you getting a job is not only affected by your own actions, but is also directly affected by the actions of all the other economic participants. Not everyone can follow the same path to success. Each person’s actions essentially lead us to an entirely different economic universe; one in which the opportunities available for all other participants will be fundamentally different.

The simple fact of the matter is that every single action by every single economic participant fundamentally changes our economy. However, since each participant is so small and the economy is so large, the effects of each individual participant are not discernible to human beings. We simply lack the cognitive ability to be aware of the tiny (yet significant) changes that our decisions create.

Thus, from our perspective, the economy appears to be guided by something other than our individual actions; the economy appears to be guided by an “invisible hand”. But the only reason that it appears this way is because the effect of our actions is simply too small to be noticeable; there is no “invisible hand” that is actually guiding our economy.

It is also worth mentioning that as more and more people attempt to learn how to write code, the cost of obtaining that knowledge will more than likely rise (at least in the short term). More importantly, as more and more people acquire the code writing skill (i.e. the supply of code writers increases), the economic value of that skill will naturally decline. Therefore, if too many people pursue the code writing skill, the cost of acquiring the skill set will eventually outweigh the benefit derived from obtaining the skill.

In looking at today’s job environment, it is quite likely that we have already reached this crossover point for some skill sets. It is quite likely that there are some people who are already paying more for a college degree than it is actually worth.

Many people in this country either have a college educated kid living at home, or at least know of a family that has a college educated kid living at home. One of the main reasons for this is that the cost of a college degree has risen so much that many students leave college with a debt load that prohibits them from being able to afford to start a life out on their own. With more and more people attending college each year, this situation is going to worsen in the years ahead.

Of course, much of this flies counter to what many economists are preaching about our economy. Many economists ignorantly claim that education is the key to reducing poverty when we may already be at the point where the pursuit of more education may actually be leading to more poverty. By blindly listening to economists who preach about an outdated view of reality, more and more people are being misled into paying more for a college education than it is actually worth.

It may sound strange, but if everyone in this country worked really hard and was able to graduate with straight A’s from Harvard, we would still have millions of unemployed people and millions of people living in poverty. If this makes no sense to you, consider what would happen if you went for a job interview in such a world. The interviewer asks “So, why should I hire you?” You proudly stick out your chest and say “I graduated from Harvard with straight A’s!” The interviewer sighs, slowly looks up at you and says “You see all those people sitting out in the waiting room? They all got straight A’s at Harvard too. So why should I hire you instead of one of them?”

Can any one person lift themselves out of poverty? Yes. Because our economy is so large and the actions of one person are so small, there is no limit to what one person can achieve. Does this mean that every individual in our economy has unlimited economic potential? No. The more people that try to accomplish a certain goal, the more of an impact they have on the economy.

The point of all this being that, if we ever hope to truly improve our economy, the first thing that has to go is the outdated mechanistic view of the economy adhered to by many economists. As long as this outdated view of the economy continues to exist, we will be dogged by poor economic decision making.

Productive versus Non-Productive Assets

In today’s world, there are far too many people who do not seem to understand the fundamental difference between productive assets and non-productive assets.

In general, non-productive assets are those that do not require any additional labor input in order to maximize their value. So things like stocks, bonds, gold, fine art, etc., these are considered non-productive because you just buy them and hold on to them; hoping that their value will rise over time.

On the other hand, productive assets require the implementation of labor in order to increase their value. For example, let us assume that you buy a saw and just set it on your shelf and never use it. In this case we would say that you have invested in a non-productive asset because you are not using it to produce anything of value.

Obviously that saw will retain some value over time, but treating it as a non-productive asset is definitely not its best use because it is much more likely that the saw’s value will decline as opposed to increase.

Instead, you will create more value by actually employing labor to the saw in the creation of some good or service. Obviously this involves additional cost (either the opportunity cost of your own labor or the cost of hiring someone else’s labor), and there is the obvious risk that there may not be sufficient demand in the economy to recover the cost of your investment plus the cost of the labor involved in using the saw.

So in a demand starved economy (one in which there is too much saving and thus too much capital chasing too little demand), a disproportionate amount of our saving (capital) will naturally be directed towards non-productive assets because they do not require the additional costs or demand requirements that productive assets do.

Thus we will inevitably see “bubbles” in the prices of non-productive assets and a lack of economic growth due to an under-investment in productive assets.

#EconomistsAreMorons

the Lack of Sound Leadership in America

Given the gridlock we are dealing with in America, it is worthwhile to take a moment and look at our situation from a “big picture” perspective. This will hope us better understand the nature of the gridlock and why it is not likely to improve anytime soon.

In general, most people tend to be attracted to leaders that display confidence and conviction in their message. Because our world is so large and complicated, the people who feel the most confidence and conviction in their ideas tend to be those that look at the world in very “black and white”, “true or false”, “good or bad”, “right or wrong” terms.

They tend to boil things down to short-sighted, overly simplistic explanations and remedies, from the naïve anti-Wall Street rantings of Bernie Sanders to the irrational divisiveness of Ted Cruz to the schizophrenic, insanity of Donald Trump (a moderate pretending to be a far right-wing populist).

Conversely, those that recognize the overwhelming complexity of our world struggle to develop a tangible vision of where we need to go. They struggle to develop a vision that people can rally behind. Instead, they sit and scratch their heads trying to make some sense of it all. From the incoherence and inconsistency of John Kasich to the waffling and hedging of Hillary Clinton.

In general, voters are inevitably drawn towards leaders who arise from the lunatic fringes of society. Leaders from both the far left and the far right inevitably make their way to Washington because they are the ones who display the most confidence and conviction in their message.

This creates two problems. First of all, with Washington full of leaders that are so ideologically different, it is extremely hard for them to get anything done. There can be no compromise between each side because of the size of the enormous gulf between them.

Secondly, each side’s message tends to be so overly simplistic that it is impossible for them to improve our situation. For example, the economic policies proposed from the right and left are both so fundamentally flawed that even if one side actually managed to get their policies implemented, those policies are too intellectually flawed to actually do any good. So our economy will never improve no matter who wins the election or the debates in Washington.

What is desperately needed is a visionary moderate that can recognize the insanity being preached by the right and left and somehow develop a concrete vision of a “middle way”. Given where we are in this election cycle, it certainly isn’t going to happen this year. But hopefully we can get enough moderate voices together over the coming years in order to deliver the unifying message that America needs in future elections.