Monday, August 22, 2011

Why Do Americans Hate Economics?

I read this a couple of days ago and then watched the video of the writer speaking on this topic.  So I asked myself that very question given the experience of close to 8,000 students I have been honored to teach in the last seven years and their comprehension on the subject.  One of the foundational principles of learning, I believe and teach, is that learning comes at the confluence of history, geography and economics.  To grasp the dimensional depth of an issue in a global economy, one must have a working understanding of all three pathways to that understanding.

Harry Truman once rightly stated to bring him a one armed economist for he was sick and tired of the economists around him answering his questions but then retorting, "but on the other hand .."  meaning what he got was fluff and fluff is not fodder for decision makers. 

I have taught Economics, have a minor in my undergraduate degree in Economics but believe Economics, as a science, to be common sense and relatively simple to grasp.  If people want something, that means they are willing to redirect their purchasing power away from a planned expense toward something else.  That is called Demand.  The factors of production determine what velocity and capability to provide the good or service; that is Supply.  Where the Demand and the Supply curves cross is the Equilibrium point or what we call Price.  Demand more than the Supply capability and Price goes up.  Fix Supply and Demand increases, Price goes up.  Fix Supply and Demand and Price do not change. There you have Micro Economics 100A. So generally speaking, DEMAND drives Price.

Given that caveat in the last paragraph, it is most interesting to me to hear pundits, politicians and economist tell us of late that the problem we face is not too much debt (a joke) but a lack of demand. If people had the resources / money or disposable income, they would buy more thus forces the investment in more goods / services production capability. Thus the flawed logic of government stimulation meaning pour more borrowed money and print more paper monety into the system and people wil beging to buy, create aggregate Demand.  Then we hear that the supplier network, corporations, are hoarding money, money is sitting on the sidelines, etc.  Given the poisonous political environment and disdain for government in general, can you blame these companies for being reluctant to spend their cash especially in the US?

Another interesting corollary is that the capital business is investing is not in more people but in technology thus increasing aggregate supply to meet the diminishing Demand via machine productivity and less with more brick and mortar plants and bodies.  Really, what is wrong with that for we are a Service Economy not and not a smokestack economy, right?  By the way, American workers are now the most productive workers in the world.  It is matching the productivity output to a buying public.  Therein lies the issue. 

There are many gray heads that long for a return to the Smokestack days when manufacturing ruled when it comprised a 70% portion of the GDP. That WILL NOT HAPPEN for when economies mature, they mature through three phases: first is Agriculture, second is Manufacturing and third is Service.  We have exited the Manufacturing / Industrial Age in America and have entered fully into the Service / Information age but finding we are not competing due to technology and intelligent, lower cost labor in a global economy.  So what we are witnessing are countries like Brazil, Russia, India, China, South Africa, South Korea blowing into their own Industrial Revolution and doing it well; we are not faring well in our adventure into the Service Age.

So why do Americans hate economics? People only fear that which they do not know or understand therefore Americans do not hate economics as much as they fear the not knowing of economic forces.  They are actually, the forces, are actually quite predictable if you watch the trends and indicators.  Do not fear Economics but embrace the principles, watch the trends and it actually becomes an enjoyable viewing. 

I hope this helps this morning!


AUGUST 19, 2011

Why Americans Hate Economics

In university classrooms—and especially the Obama White House—fancy theories of macroeconomics defy basic common sense.


Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics." She doesn't believe that, but it's true. I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven't boosted the profession's reputation.
Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."
Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring."
In today's Opinion Journal video: Editorial writer Steve Moore explains why Keynesian economics doesn't make sense; and OpinionJournal.com assistant editor Allysia Finley on Mitt Romney's tax flip-flops.
That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.
I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.
Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.
A few months ago Mr. Obama blamed high unemployment on businesses becoming "more efficient with a lot fewer workers," and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?
Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.
Associated Press
White House Spokesman Jay Carney
How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.
As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.
The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.
So here we are, three years of mostly impotent stimulus experiments and the economy still hobbled. Keynesians would be expected to be second-guessing the wisdom of their theories. Instead, Prof. Romer recently complained that the political system will not allow Mr. Obama to "go back and ask for more" stimulus.
And that is why Americans hate economics.

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