I love the subject of economics. Having devoured the subject for the last six years and having studied now nearly thirty books on the subject besides many other sources like blogs and podcasts, I feel at least qualified to impart my own two cents on the matter.
I began my education on the subject in 2010 when I lost half my lawn business and the news was awash with the word economy. Mostly in the context of being a bad economy. “What is an economy?” I asked myself. I found a book at the thrift store called, “Macro Economics.” It was a four-hundred page textbook some poor student probably paid thirty bucks for. I got it for fifty cents and started reading and I’ve been reading ever since. This year alone, I read eight books on economics. It’s an addiction I know.
That one thing to keep in mind
That question that started this knowledge journey for me is one I intend on answering for you in the most simple form possible. There is really only one concept you need to keep in mind in order to have your mind straight when encountering discussions on the topic of economics. If you hold onto this concept and take it with your thoughts and conversations you will not likely stray into seductive economic fallacies. Economics simply put is people getting things out of the ground and trading with other people who get things from the ground. I shared this concept with a friend in a phone conversation once. He countered, “That’s not true. My Xbox doesn’t come from the ground.”
“It’s made from petroleum (plastic) and metal. Both of which come from the ground” I explained.
“Oh… I guess you’re right about that” he concluded. It was a rare moment that I could enjoy feeling like Milton Friedman on the Donahue show. If you haven’t seen it, it’s a must watch. https://www.youtube.com/shared?ci=1SKb9G7nImI
I know some of you more familiar with economics are thinking, “but isn’t it goods AND services?” Sure, but you really can’t provide a service if you haven’t bought some kind of good (or goods) that enables you to provide the service. So it is my opinion that boiled down to it’s most simple element, economics is simply stuff that comes from the ground and is successfully traded.
In political discussions you’ll hear fancy words like quantitative easing, stimulus and “reinvestment” acts. Congress has passed nice sounding bills with words like investment and stability in them, but really, if we want the economy to “get going” we simply have to make it easier to get stuff from the ground and successfully trade that stuff in the market.
Businesses can improve this process by eliminating unnecessary steps and costs associated with their work. If one business fails to do this another likely will. This is why competition is beneficial to the consumer. If the consumer pays less for one product, he’ll have more leftover to buy another product. Efficiency creates more demand in this way.
Supply or Demand?
With that, I’ve just introduced the well known concept of supply and demand. The big debate on economics can be boild down to two groups. One group focuses on supply, the other focuses on demand. Those that focus on supply are the Austrians. Their theme is “supply side economics.” Their motto is supply creates its own demand. The other school of thought is Keynesian. Their focus is on demand.
The Obama administration falls into this camp and has tried its hardest to stimulate demand in the economy. Unfortunately, I don’t see enough evidence that it has worked. Now it is possible to stimulate demand. Just create a product that people want. The Iphone is a great example of that. No one demanded the Iphone until it was introduced. This new supply created new demand. What Keynesians focus on, however, is trying to stimulate demand by creating new money and buying things with it and making money cheap to borrow with low interest rates. Their promises and projections have been way off. The first response was, “It wasn’t enough, we need more stimulous.” So they did a round two, then round three.
Then they said, “Well, it would have been worse.” I don’t think one gets to fail at a prediction on what actually happens then gets to turn around and predict what would have happen in a non-existing timeline of events. Now, they just declare that it worked. How do they know it wouldn’t have taken six years to recover without interventionist policies? We may never know because the unfortunate reality is that politicians don’t get credit for actions they didn’t take. Even if inaction was the best course. Therefore, their impulse is to “take action.” What they really want is to take credit. Credit that will benefit them politically. Politicians from both sides fall prey to this impulse. See “The Parable of the Campfire” post for a fun illustration of this flawed logic.
The sad irony is that by attempting to create demand before an increase of supply is available, the intended outcome is sabotaged. For example, when the Feds forced lenders to make subprime loans, this caused the price of homes to rise. What happens when prices rise? People buy less of the good. When people stopped buying houses, the bubble that was created popped. This well intentioned policy had its goal sabotaged in the long run by short sighted policy. Does anyone think we came out ahead on that deal?
The same thing will happen to the bond market. The Fed has created trillions of new dollars to buy bonds in its exciting sounding “stimulus” program. The side effect from this program is that bond prices went up as fewer bonds were left. Since prices for bonds went higher, investors shifted their purchases over to the stock market. These ballooned assets are no longer assets in my opinion and have become liabilities. They hoped that the economy would take off and dwarf the burst of this artificiality created asset bubble but it never came. It’s been the slowest so called recovery in history. The bill is coming due soon. I cover this in President Trump Year One, where I outline the challenges soon to come.
Supply Supply Supply
Abundance is prosperity. The more we can produce with decreasing effort, the wealthier we all will become. Until we understand that root principal and focus on that end and reject nice sounding, complicated, and elaborate schemes, the sooner we’ll live in prosperity.