Science of Economics

[Cyclenirvana]

I have a friend of mine who has a Ph.D. in economics, and he has told me on a number of occasions that economics is a "science"...that being said, there are principles by which one stimulates or suppresses economic growth. For a while, he worked in politics as an advisor, but finally left because, as he told me, decisions were made based on politics not economics. He advised some state legislators, who wanted to raise revenue, not to raise taxes, but instead to lower them. They did not take his advice. So, the year following the state raised its income tax rate and guess what...revenues actually dropped. Individuals and companies decided to take their business elsewhere, and people who had been happy with the current tax rates sought ways (and deductions) for lowering their taxes. And the decision to raise taxes was based on pure politics...let's go after the rich.

I saw this article on line and confirmed what I think most of us have thought all along:
http://www.rr.com/news/topic/article/rr/9000/9994598/AP_IMPACT_Road_projects_dont_help_unemployment

I don't want to make this political...or a dem vs. rep argument...but simply the science of economics. I am not a economist, but I (along with 9 other physicians) own a lab employing about 45 people. I cannot think of anything that congress has done that has stimulated us to provide more jobs??? Help me if I am wrong here. My sister and brother-in-law own 3 small businesses including a desert cafe. They would say the same. All of us agree that the best thing for the economy is for people, especially those with money, to spend money! Not pay more taxes! Me paying more taxes will not help the income level of the people we employ!
Anyway, I found the above article interesting, because, to no one's surprise, the shovel ready jobs have done nothing to our unemployment rate...and I would wager that they never will!:frown
But I would love to hear from true economists and businessmen/women on this website, as I know my knowledge in this area is very limited...but the above is my impression.

 

[Kingman]

It's about buying votes. Plain and simple. Always has been.

 

[Kayvan]

Its really a dark art....like black magic, alchemy, etc.

It was coined the dismal science for its early predictions of famine, downward spirals, etc.

Its really a framework of rules on what not to do: ie, print money, bank runs, speculation.

Economics cant teach you to run a business, but to fail less than competitors.

 

[Triheart7]

It seems to me that whenever the government steps in to help, they never seem to see the unintended consequences.

One simple example I recently noted was when I was at the gift shop at Folsom Prison last month. (Buying a Johnny Cash poster for a Christmas present). The clerk, a former guard, was talking about the fact the prisons are paying so much extra overtime. The guards have to take "furlough Fridays" off. However they have to hire other guards at OT pay to cover for the guards that are taking the day off to "save money". This happens all over the State.

Very few of the politicians have any real life experience, plus you throw in political bribes. Sometimes it hard to separate the plain stupidity from the corruption. It just drives one nuts thinking about this stuff!!

 

[ChipBeck]

Chiponomics 101

But I would love to hear from true economists and businessmen/women on this website, as I know my knowledge in this area is very limited...but the above is my impression.

Cyclenirvana,

Economics was my primary focus in graduate school and I have been a small business owner for a third of a century.

The laws of economics are as well known and every bit as certain as the laws of aerodynamics. A big difference between those two areas of study is that aerodynamics is as certain in micro as it is in macro, whereas economic behavior in an individual (micro) may deviate substantially from the cumulative behavior of a large group of people (macro). As in all sciences, the best predictor of future behavior is past behavior. Over 2000 years of recorded history have been exhaustively examined and the distillation of these findings are available to anyone. Most of our citizens however, show little interest in this essential study. Their lack of knowledge has made it possible for a majority of the politicians setting our national economic policies, to be ignorant of even the most basic economic history or to purposely ignore it in a sinister play for the votes of the uneducated. Economics is not about numbers, it is the study of human behavior and the measurement of how individuals react to incentives, penalties, tax rates, regulations, etc.

The Congressional Budget Office scores all new legislation statically. In other words, they assumed that a change in tax rates or regulations will have no change upon behavior. That a doubling in the tax rate will result in a doubling of taxes collected. This methodology has been shown to be insanely inaccurate (because the disincentive of higher taxes changes taxpayer behavior), yet the CBO refuses to change its method of scoring. To the wizards of smart in Congress, raising the marginal tax rate from 50% to 100% would result in a doubling of taxes collected. In reality, at a tax rate of 100%, that taxable activity would cease and actual taxes collected would plunge to zero. Nobody would go to work if their tax rate was 100% and their take-home pay was $0.00.

When a small businessman like me takes out a multimillion dollar loan to construct a new facility, we are forced to sign a personal guarantee putting everything we own on the hook if the business fails before the loan is repaid. The bank can attach my home, my retirement accounts, my personal savings, and almost everything else I own. When an entrepreneur takes out a large business loan he is literally betting his life on the outcome of that gamble. In order to have the confidence required to take that leap of faith, a few things are necessary.

1. A stable currency. A reliable medium of exchange and a predictably low rate of inflation.

2. A stable set of rules, regulations, and laws. When government completely changes the rules in the middle of the game, even the best business plan is destroyed.

3. Enforceable contracts. This should be the primary focus of our civil justice system that has degenerated into a haphazard vehicle of income redestribution via the tort jackpot lottery.

4. Stable interest rates and available credit. Interest rate locks on business loans are typically only three to five years. As such, a 20 year loan might have its interest rate reset seven times. In the early 1980s when the prime rate skyrocketed to 21.5%, a lot of entrepreneurs bit the dust when deteriorating business choked off their ability to pay those much higher rates.

5. Stable and affordable energy prices. Cap and trade would skyrocket all energy prices and have a devastating effect on our nation's economy.

I could write an entire book but the five items above are enough for this short dissertation. Almost everything that has been done during the last year to "fix" our economy, has taken those five items in the wrong direction and has made everything worse. Ruinous rates of money creation as we monetize large chunks of our national debt. The rapid erosion of the US dollar, which is still the world's reserve currency, as foreign nations lose faith in our country and the AAA bond rating of America is threatened. Reckless changes in labor law with the threatened imposition of "card check". And the certainty of skyrocketing future interest rates when the Fed finally tries to pull massive amounts of a liquidity out of the banking system after years of high double-digit money creation.

Everything we need to rely on is being destroyed. And entrepreneurs are paralyzed as a result. We have no idea what our currency, rules and regulations, tax rates, health care costs, credit availability, energy prices, environmental policies, or interest rates will look like a few years from now. It shouldn't take a rocket scientist to figure out why new business creation (and the jobs those businesses create) is at an all time low. There is no way I'm going to bet my life on a new business in this era of uncertainty.

And I haven't even touched upon the issue of a national debt that exceeds over $1 million for every family living in this country. So let me sum it all up briefly. Are we, as a nation, currently pursuing policies that will result in greater future prosperity...........NO.

Chip

 

[Spirit]

..........................
When a small businessman like me takes out a multimillion dollar loan to construct a new facility, we are forced to sign a personal guarantee putting everything we own on the hook if the business fails before the loan is repaid. The bank can attach my home, my retirement accounts, my personal savings, and almost everything else I own. When an entrepreneur takes out a large business loan he is literally betting his life on the outcome of that gamble.

..........................
Everything we need to rely on is being destroyed. And entrepreneurs are paralyzed as a result. We have no idea what our currency, rules and regulations, tax rates, health care costs, credit availability, energy prices, environmental policies, or interest rates will look like a few years from now. It shouldn't take a rocket scientist to figure out why new business creation (and the jobs those businesses create) is at an all time low. There is no way I'm going to bet my life on a new business in this era of uncertainty.

...........................
Chip

Professor Chipster,

Your PRESENTATION of Chiponomics 101 is superb.



Proverb:
"It's always darkest before the dawn."

 

[fjpikul]

Wait till economists DBK and Cantwell chime in.

 

[Nardo GT]

Cyclenirvana,

Economics was my primary focus in graduate school and I have been a small business owner for a third of a century.

The laws of economics are as well known and every bit as certain as the laws of aerodynamics. A big difference between those two areas of study is that aerodynamics is as certain in micro as it is in macro, whereas economic behavior in an individual (micro) may deviate substantially from the cumulative behavior of a large group of people (macro). As in all sciences, the best predictor of future behavior is past behavior. Over 2000 years of recorded history have been exhaustively examined and the distillation of these findings are available to anyone. Most of our citizens however, show little interest in this essential study. Their lack of knowledge has made it possible for a majority of the politicians setting our national economic policies, to be ignorant of even the most basic economic history or to purposely ignore it in a sinister play for the votes of the uneducated. Economics is not about numbers, it is the study of human behavior and the measurement of how individuals react to incentives, penalties, tax rates, regulations, etc.

The Congressional Budget Office scores all new legislation statically. In other words, they assumed that a change in tax rates or regulations will have no change upon behavior. That a doubling in the tax rate will result in a doubling of taxes collected. This methodology has been shown to be insanely inaccurate yet the CBO refuses to change its method of scoring. To the wizards of smart in Congress, raising the marginal tax rate from 50% to 100% would result in a doubling of taxes collected. In reality, at a tax rate of 100%, that taxable activity would cease and actual taxes collected would plunge to zero. Nobody would go to work if their tax rate was 100% and their take-home pay was $0.00.

When a small businessman like me takes out a multimillion dollar loan to construct a new facility, we are forced to sign a personal guarantee putting everything we own on the hook if the business fails before the loan is repaid. The bank can attach my home, my retirement accounts, my personal savings, and almost everything else I own. When an entrepreneur takes out a large business loan he is literally betting his life on the outcome of that gamble. In order to have the confidence required to take that leap of faith, a few things are necessary.

1. A stable currency. A reliable medium of exchange and a predictably low rate of inflation.

2. A stable set of rules, regulations, and laws. When government completely changes the rules in the middle of the game, even the best business plan is destroyed.

3. Enforceable contracts. This should be the primary focus of our civil justice system.

4. Stable interest rates and available credit. Interest rate locks on business loans are typically only three to five years. As such, a 20 year loan might have its interest rate reset seven times. In the early 1980s when the prime rate skyrocketed to 21.5%, a lot of entrepreneurs bit the dust when deteriorating business choked off their ability to pay those much higher rates.

5. Stable and affordable energy prices. Cap and trade would skyrocket all energy prices and have a devastating effect on our nation's economy.

I could write an entire book but the five items above are enough for this short dissertation. Almost everything that has been done during the last year to "fix" our economy, has taken those five items in the wrong direction and has made everything worse. Ruinous rates of money creation as we monetize large chunks of our national debt. The rapid erosion of the US dollar, which is still the world's reserve currency, as foreign nations lose faith in our country and the AAA bond rating of America is threatened. Reckless changes in labor law with the threatened imposition of "card check". And the certainty of skyrocketing future interest rates when the Fed finally tries to pull massive amounts of a liquidity out of the banking system after years of high double-digit money creation.

Everything we need to rely on is being destroyed. And entrepreneurs are paralyzed as a result. We have no idea what our currency, rules and regulations, tax rates, health care costs, credit availability, energy prices, environmental policies, or interest rates will look like a few years from now. It shouldn't take a rocket scientist to figure out why new business creation (and the jobs those businesses create) is at an all time low. There is no way I'm going to bet my life on a new business in this era of uncertainty.

And I haven't even touched upon the issue of a national debt that exceeds over $1 million for every family living in this country. So let me sum it all up briefly. Are we, as a nation, currently pursuing policies that will result in greater future prosperity...........NO.

Chip

Excellent Chip. My degree is in Economics/Finance. Never used it. Thought about selling on ebay.

 

[Shadowman]

Well presented Chip and as stated truly very sad and disturbing days continue and will IMO continue to unfold

Thank you

Shadowman

 

[Triheart7]

I like that Spirit...Chiponomics 101. Too bad our "representatives", never took that class.

 

[BlackICE]

I like that Spirit...Chiponomics 101. Too bad our "representatives", never took that class.

Our elected officials all seem to have post-docs in Socialism.

 

[Cyclenirvana]

Interesting reading. I never thought about economics in terms of behavior but this makes more sense than anything I have heard the politicians say. I know that the current administration has only about 10% of appointees who have ever run a business! Wow. Thanks Chip...great reading.
Scott

 

[S592R]

Chip,

register as a write in candidate as an independent. Run for Congress. If I have to buy a foreclosed home in Scottsdale to vote for you I will.
:bored

 

[Triheart7]

Our elected officials all seem to have post-docs in Socialism.

Too true!

 

[ChipBeck]

The 8% solution.

Interesting reading. I never thought about economics in terms of behavior but this makes more sense than anything I have heard the politicians say. I know that the current administration has only about 10% of appointees who have ever run a business! Wow. Thanks Chip...great reading.
Scott

Scott,

You are wildly optimistic. The current administration contains over 450 individuals and only 8% of them have ever "worked" in the private sector. So it's a pretty safe bet that far fewer than 8% of them have ever "run" a business.

Perhaps the Boeing Aircraft Company should try this. They could dismiss 92% of their workforce and replace them with people who had never worked in the aviation business before. They could cook up all kinds of fresh new airliners and passengers would certainly flock to be the first to fly on these brand new aircraft designs. Forget that preexisting body of aerodynamic knowledge. We need "fundamental change" and a large dose of hope. Even if the new designs are strikingly similar to those that have crashed and burned in the past, it's okay. They will certainly work this time.

All aboard, up, up, and away!

Pay no attention to that smoking hole in the open field. We're on the right track!
In 2000 years of recorded history, the imposition of socialism on a society has never once resulted in increased prosperity. It has a track record of 100% failure. It has always failed, will always fail, and can only fail because it attempts to both defy and deny human nature. The notion that a young man will work as enthusiastically to buy a car for his neighbor as he will to buy a car for himself, is foolish. I have already said too much and I must cut myself off, before I have to ban me. :bored

Chip

 

[Indy GT]

Chip-

As always a superbly insightful presentation! Your clarity of presentation and depth of real-time knowledge is a tremendous asset to us all. Thanks for standing up on the soap box (and keeping the moderator at bay on this touchy topic).

For those new Forum participants, you should search for another of Chip's golden nugget posts on automotive gasoline. Another superb diatribe on a topic which effects all of us.

 

[Nardo GT]

Just read my signature line

 

[MG 42]

Chip, have you ever considered running for President? Just think FGT state dinners…

Where do I send campaign contribution?