Sunday, February 15, 2009

The economy simplified

The definition of economics seems to need clarifying.Too many confusing terms,acronyms and formulas for the common man to wrap their arms around.When you listen to panels and pundits hashing it out,both sides can generally make a decent case for their side so you left as confused as when you started.If you're hard-core left or right,it doesn't matter,you're not changing your mind anyway.

I try to look at it very simply.An economy has two sides,suppliers and consumers,that's it!Suppliers are the manufacturers,distributors,sales,producers,providers,etc.Anyone involved in making a good or providing a service.We know the total value of this side of the economy by the GDP,or gross domestic product,which is the total value of all goods and services.

The consumers are obviously anyone who uses,buys or in some method consumes the suppliers goods or services.Eating,reading,listening,watching,wearing,driving,living in,etc. are all examples of consuming.

You can imagine the two sides in a circle with consumers demands being met by the suppliers.The more you demand,the more that is supplied,and the economy grows.If demand drops,the supply drops and the economy shrinks.

Every aspect of our economy fits into one of these two sides and interacts with the other.It really is that easy.The population of the world is constantly expanding which means demand is always increasing and the economy grows along with it.

The question of the day is obviously how does a stimulus package boost the economy?Well,it can't based on physics.The theory is to spend money to artificially create demand.If we create social programs,then these require employees and materials such as money for welfare or unemployment or maybe food or clothing or housing.This has to be provided by manufacturers,growers,builders,etc.Infrastructure projects are the same requiring workers and materials to complete them.Any of the spending provisions included in the stimulus will fall into these categories as they will require people or money or goods or services to deliver them.

The problem is the demand was created artificially not by the addition of more consumers.Since the Government has no money,it must spend it's only source of income to pay for this,taxpayers money.We are already over the budget this year so there is no taxpayer money available.This means the Government must sell debt instead.Treasury securities are sold on the open market to individuals,corporations,Government agencies,foreign Governments,etc. to generate the money to pay for the stimulus.The taxpayers are the ones responsible to repay this debt.

As a consumer,you can either buy or trade for the goods and services you use.The debt we accrued from the stimulus limits what we have available to use to buy.This is why you hear that we need jobs that create wealth to stimulate the economy.Obamas stimulus plan simply shifts the same money around without generating anything new.The people who received anything under the stimulus are being paid for by other taxpayers reducing what they can buy.It's like taking a bucket of water from one side of the pool and dumping it in the other side.There was no overall gain.

Any raise in the economy by the stimulus is offset by the debt increase.That's what I mean by physics.If you didn't add population to increase demand and you didn't inject goods or services from an outside source such as foreign investment,the overall balance cannot change.Even though you may have used foreign money to buy the debt used to finance the stimulus,it must be paid back which negates it.Actually it more than offsets it,because you must pay interest on it.For this reason you may hear that in the long run a stimulus is actually a negative because of the interest.

The only way to raise the water level in the pool is by adding more water.It doesn't matter if the water is in the form of more consumers creating more demand or more suppliers providing more goods and services,it must be a new,outside source injecting it.The end result of all this is that the Obama stimulus cannot possibly grow the economy due to physics and,in fact,will shrink the economy in the long run due to the debt interest.

The other argument is how to stimulate the economy that has become bogged down without any long term negative effects.This is exactly the problem we have today.We still have the same total amount of goods and services in the system.We still have the same amount of consumer demand.However,the supply and demand wheel has slowed down otherwise known as a recession.The cost of goods and services rose which decreased the money people had available to make their house payment.When they foreclosed,the derivative markets collapsed and the credit crunch took hold.Obviously,there are many complicated details to this,but that's it in a nutshell.

When your available spending decreases because the cost of goods and services increased faster,your demand drops which leads to suppliers output decreasing.It's the pool effect again.To stimulate the economy,you must either reduce the cost of goods and services or increase the available spending we have.Either one affects the other which makes the supply and demand wheel spin again.It's the speed of the wheel that determines whether or not the economy,or GDP,is decreasing (receding),increasing (growing),or in neutral (no growth or recession).

It doesn't matter what confusing terms and economic factors you hear discussed,they all boil down to simple supply and demand by suppliers and consumers.Every aspect of economics fits somewhere into this simple two part economy.

Obama wants to spend more to stimulate.This increases your debt limiting what you have available to spend.This lowers demand which lowers supply requirements and slows growth overall.Easy.

If you cut taxes,you increase the money you have available to spend.Your demand goes up which increases supply requirements which increases growth overall.Easy.

The loser in this scenario is Government and that's what this is all about.Government is the middleman in the supply and demand scenario.To provide all of the programs they must take from some taxpayers and give to others.Wealth redistribution.Socialism.Robin Hood.All that good stuff applies as it's the only way they can operate since they have no money.The cost of operating Government can be looked at as a drag on the supply and demand economic growth wheel.The more you expand Government the greater the braking effect on the wheel.

Proponents of bigger Government know that controlling the brake gives them power to control the wheel.We must have a Government,of course.We need an infrastructure and certain,basic programs for it to function such as a National Defense.However,it's limits are strictly defined in the Constitution for good reason,to limit the power and thus the braking effect as well.That's why the simple concept of smaller,limited Government is better.

All of the costs due to Government regulation in all of it's many forms put a drag on the economy.Anything that costs business money or time reduces it's efficiency and thus it's ability to productively provide goods and services.Productivity is the main goal of business.Not job creation.That is a good effect of an efficient,productive business.To simply create jobs to put people to work without increasing productivity decreases the overall business output.The pool effect again.

Obama wants to create jobs by increasing the debt thru the stimulus.These jobs won't increase the overall productivity output,so thru the pool effect,you didn't increase the economy.There just simply is no free lunch.If you take from here,than over there pays for it.

Choose the Republican plan to cut taxes and just get the wheel unstuck and spinning again without the debt offsetting it.Even though this doesn't grow the economy either,it gets the supply and demand wheel spinning without the long term debt and growth of Government dragging it down.It becomes very clear why the Obama stimulus is bad news when you simplify things!

When you hear Obama state the point of a stimulus is spending,you can see that this is wrong.The point of a stimulus is get the wheel spinning without costs,that's all.You can do this in many ways but growing Government thru the Obama stimulus package is only designed for a Socialist agenda to be enacted.It's physics!More to come...

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