Click Here for My Full Website

Wednesday, March 18, 2009

Our Politician's Economic Message vs. Reality

Our politician's message proposes that credit, spending and jobs (simply for the sake of jobs) is the key to economic prosperity. We are increasingly being told that we must allow our money to be used to "bailout" failing firms and protect existing jobs, due to systemic risks.

But a few questions are never asked, for example: if these bailouts are so important to our prosperity, then why do they have to forcibly tax us to pay for the bailouts? Why dont they take charitable donations for this purpose? The answer is that nobody would willingly give their money to bailout failing businesses.

The fact is that history, experience and common sense guide us in a different direction. The politician’s argument go further to say that the government should intervene to keep credit flowing, keep people spending (rather than saving), and create government jobs to keep the economy afloat. These are the great falsehoods of our time.

In a free economy, the basic incentive to efficiently accumulate wealth through value creation. This essay will show how these incentives create a cycle which guides people to their most efficient role in society.

This cycle is the real life-blood of the economy. People who engage in value creation activity, build up assets - those assets are then siphoned off (through taxes and inflation) to pay for those whose activity is a liability, such as prisoners, welfare recipients (corporate, international and individual), most government employees, and others.

What is Value Creation?

Creating value is simple: one creates value, essentially, by exchanging goods and services for other goods and services of more value. For example, I might trade a dollar for a candy bar, if the candy bar is more valuable to me than the dollar. Or if I work a job, I have to produce more money than the employer pays me. To the employer, the time is more valuable than the costs. To me, the pay is more valuable than my time/labor. Presumably, the product or service is worth more to the customer than the price to receive it. All three parties create value this way. When a whole society does this, it is an efficient economy that begins to benefit everybody.

As people exchange goods and services for other goods and services of greater value, competition to create value drives prices down, quality up. Newer, better goods and services result over time. People also begin to store or invest part of the value they create. This is the process of wealth accumulation. By accumulating wealth, one can continually benefit from the investments in value creation over time. The constant incentive to create value and accumulate wealth drives the society into a state of affluence.
The Importance of the Job Cycle
Of course, the fun part is enjoying added value – the hard part is dealing with removing inefficiencies from the economy which obstruct or burden the process.
Many people complain about job losses as if there is no redeeming quality to the phenomenon. In fact, sometimes more than a job is lost – sometimes an entire sector of the economy is lost, with major businesses that have thousands of employees. Job losses are certainly painful for real people, and we, as a civilized people, should be sympathetic toward that plight. However, allowing job losses is, unfortunately, an absolutely necessary part of a well functioning economy.

Job losses occur when the employee or business is no longer creating value. Employees and businesses that create value stay, those that cost value are moved to more efficient roles. This is not always the business or employee’s fault, for example, a new technology could simply make the job obsolete, a contractual obligation could hamper value creation, competitors might find better ways to create value and take market share, or the company might not be using the employee efficiently. But the principle remains the same - existence in the market is dependant on merit - and merit is based on value creation.
How This Usually Works:
When a person is laid off or a business goes under, they then search for a new way to make money. To do this, they must figure out how they can create value for others through some exchange. When they find their new job, they move from a value destroying role, to a value creating role - they transition to a more efficient job.
The anecdotal stories are hard to hear, as the new role may pay less or the people may have to endure hardship. But enduring this hardship and allowing the job cycle is what makes the U.S. the strongest economy on Earth. Also, the risk of job losses drives people to take responsible measures such as saving money and increasing their job-market value by accumulating skills and education.

Often, governments will try to intervene to stop the job loss process. By doing so, inefficient jobs remain – meaning that employees stay in the market who are costing more value than they are creating. Nancy Pelosi has said we should bail out a failing newspaper (ironically one which has long supported her career). Clearly this newspaper is not creating value for consumers and advertisers or it would not be in financial trouble. Consumers clearly feel their money is more valuable than the newspaper. Protecting inefficient producers can destroy the value creation process which makes an economy function well.

In fairness to the liberal point of view, sometimes by giving a life-line of money, a business can change their model and become efficient. Harley Davidson is a good example of this in the 1980's. However, there are several reasons why widespread use of this practice is dangerous. Besides the lack of fairness and political corruption, a culture grows up around the protected jobs – essentially, the people involved begin to ask what the taxpayers/government can do for them, rather than what they can do to add value for someone else.

Credit vs. Savings
Credit is a way of spending future earnings. By brokering the transaction today, the creditor can make money by charging interest. Certainly, there is a value creation element to credit – the money today is more valuable than it is when the payments come due. Well invested borrowed money can earn returns for the debtor and pay back interest for the creditor.

However, credit that goes toward spending or malinvestment puts a liability on future value creation. A piece or maybe all of future earnings must go to pay for money already spent. This process reduces accumulation. This principle remains true whether we are discussing a person, business, municipality or country (including the U.S.).

The Problem With Our Direction
The U.S. government is so indebted that it cannot help but heavily burden future value creation. Adding more debt and more spending can do nothing but hamper future value creation and wealth accumulation. However, the U.S. government has a tool that no other institution has in the U.S., which is inflation.
History shows that governments, when faced with massive debts and overburdened taxpayers, simply print money. By printing money, it reduces the value of current money holdings. It is a way of robbing value from money-holders. Awareness of this problem is paramount.

Opposition to the government’s current direction is needed, in large mass. We must encourage policies which encourage value creation and protect wealth accumulation.

No comments: