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Economics 101

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  • Independent
    Columbia, SC
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    In recent months, we have heard much talk from the Republicans about protecting the “job creators”. Let’s suppose you have a business that made five hundred million dollars in profits last year. You have many options for investing your money. You can buy stocks or bonds or gold. You can put it in a mutual fund or send it to your bank account in the Caymans. Or you can invest it in your business. Your decision will be based on which investment will yield the biggest return.

    The only reason you would invest your profits back into your business would be to increase the profitability of that business. There are many ways you could do this. You could invest in new equipment to produce your product or service more efficiently. You could buy advertising to attract more customers. If your business is publicly traded, you could buy back some of your stock to increase the dividend per share. Or you could hire more people to take care of an expected increase in the number of customers. Of course, if you do not expect an increase in the number of customers, there is no need to hire more people.

    If your business is to attract more customers, you must be selling a product or service that people believe they want and need. They must also have confidence in your company and your product or service. And they must have the money to purchase your product or service or a way to borrow it. If any of these factors are absent, the customer will not buy. Businesses across the country provide products and services that people want and need. Many have spent years building the reputation of their company and its goods so that customers can buy with confidence. That means the only reason people are not buying is because they do not have any money or any way to acquire it.

    So if our politicians are so interested in helping the “job creators”, they need to tell us how they are going to put more money in the pockets of consumers so they will have the means to buy the goods and services they want and need from companies they trust. Until they can do this, all their talk about helping “job creators” is just so much smoke and mirrors to conceal their support of those who pour money into their campaign coffers.

    So the next time you hear a politician talk about “job creators”, ask them how they will create more consumers so the “job creators” will want and need to hire more people. If they can’t answer that question, they don’t deserve your vote.

    There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.
    Sam Walton, founder of Walmart
  • Liberal Democrat
    Colorado Springs, CO
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    Ron Barnes --

    A very good post and good question. Welcome to the Democratic Hub.

    As you are aware, there are several factors contributing to sluggish growth coming out of the Great Recession. One of them is reduced government spending on projects that would ordinarily stimulate the economy and put money into consumers pockets. President Obama's Jobs Act would have provided part of that stimulus by increased federal government spending on infrastructure, research, education and renewable energy, all of which require good paying American jobs. But getting anything like that approved by this Congress is hopeless.

    Another reason that the economy is dragging is that consumers are fewer in number and have less money to spend. This gets back to the inequality in income between those at the top of the corporations and their employees. We've discussed this many times in this website, so I'll just hit a few key points. According to a recent Bloomberg study:

    Huffington Post, May 1, 2013: CEO-To-Worker Pay Ratio Ballooned 1,000 Percent Since 1950: Report

    "The ratio of CEO-to-worker pay has increased 1,000 percent since 1950, according to data from Bloomberg. Today Fortune 500 CEOs make 204 times regular workers on average, Bloomberg found. The ratio is up from 120-to-1 in 2000, 42-to-1 in 1980 and 20-to-1 in 1950.

    “When CEOs switched from asking the question of ‘how much is enough’ to ‘how much can I get,’ investor capital and executive talent started scrapping like hyenas for every morsel,” Roger Martin, dean of the University of Toronto’s Rotman School of Management, told Bloomberg.

    "The findings come just one day after the S&P 500 soared to a new record, indicating that perhaps the only ones not reaping the benefits from the companies’ historic profitability are workers. Other reports have come to similar conclusions. An analysis from the AFL-CIO, the umbrella organization for many of America’s unions, found earlier this month that CEO pay was 354 times that of the average employee."

    So not only is unemployment remaining a problem because of lack of jobs...or maybe I should say good paying jobs, but workers are also not sharing in the increased corporate profits, much of it coming from higher US worker productivity...or shifting jobs overseas to low wage countries like China and Vietnam. And what disposable income they do have is going to pay for basic necessities and rising health care costs.

    You closed with a quote from Sam Walton: "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else."

    Sam Walton was indeed a good businessman that appreciated the American worker. From Wikipedia: "He launched a determined effort to market American-made products. Included in the effort was a willingness to find American manufacturers who could supply merchandise for the entire Wal-Mart chain at a price low enough to meet the foreign competition."

    But Sam Walton's Walmart (he died in 1992) is not the Walmart of today. The business model of today's Walmart is one that heavily relies of government subsidies and foreign made goods for profitability.

    When Walmart decides to come to your community, they will first arrange with local politicians for tax holidays and subsidies on the land and store they plan to build with the promise of jobs. So immediately they are able to undercut the Mom and Pop stores in the community, which are then forced to close. Furthermore, their ability to buy in large quantities provides an additional advantage over the local small stores.

    However, perhaps the most egregious part of their business model is to pay minimum wages to part time workers. Of course these workers could never afford health insurance at these wages, but they do qualify for medicaid as a low income family living below the poverty line. In addition, Walmart has a policy of hiring many part time seniors on Medicare to avoid paying health insurance. And it got worse with the passage of the Affordable Care Act:

    Huffington Post, December 1, 2012: Walmart's New Health Care Policy Shifts Burden To Medicaid, Obamacare

    "Walmart, the nation’s largest private employer, plans to begin denying health insurance to newly hired employees who work fewer than 30 hours a week, according to a copy of the company’s policy obtained by The Huffington Post.

    "Under the policy, slated to take effect in January, Walmart also reserves the right to eliminate health care coverage for certain workers if their average workweek dips below 30 hours -- something that happens with regularity and at the direction of company managers.

    "Labor and health care experts portrayed Walmart’s decision to exclude workers from its medical plans as an attempt to limit costs while taking advantage of the national health care reform known as Obamacare. Among the key features of Obamacare is an expansion of Medicaid, the taxpayer-financed health insurance program for poor people. Many of the Walmart workers who might be dropped from the company’s health care plans earn so little that they would qualify for the expanded Medicaid program, these experts said."

    So how well has this business policy worked out for Walmart? Not so well according to various business analysts. From Forbes:

    "Wal-Mart’s business is going south due to the company’s penchant for putting politics and the squeeze on Wal-Mart employees ahead of the kind of customer satisfaction that produces prosperity over the long-term.

    "In fact, Wal-Mart’s unwillingness to pay most of their workers a livable wage, while avoiding enough full-time employees to properly run a retail outlet, has led to the company placing dead last among department and discount stores in the most recent American Customer Satisfaction Index—a position that should now be all too familiar to the nation’s largest retailer given that Wal-Mart has either held or shared the bottom spot on the index for six years running."

    Walmart, feeling the public pressure, has since announced that 35,000 part-time employees whose hours were cut will be moved to full-time status, entitling them to the full healthcare benefits that were previously to be denied them in their attempt to avoid paying ObamaCare. It may take them longer to recover from being dead last in Customer Satisfaction Surveys, but having happy employees is an essential first step to having happy customers.
  • Are you sure you want to delete this post?
    1- For the sake of consistency with national accounting, we do not talk about investment as a financial matter. Investment is about increasing your capital for the purpose of production (buying machines, buying tools, doing research, etc.). If you use your money for placements, that's called saving and the different services you can choose from are basically ways to LEND your savings, though you do use financial institutions as intermediates to ease the process. If you start messing up the concepts, you'll have a hard time figuring out which number goes where if you look at data or when you interpret accounting identities such as "savings must always equal investment."

    2- You are right about the relationship between total spending and income (it's another accounting identity which is corollary to the one I listed above), but you need a clear model of how the whole thing plays out to make the argument you made -- and you didn't show that. To complete your argument, you'd need something like the IS-LM model (the one Krugman loves so much). Supposing a sufficiently large output gap so that monetary policy becomes ineffective, a fiscal push can be combined to this same expansionary monetary policy to shift the macroeconomic equilibrium output closer to its potential WITHOUT suffering from high inflation or higher interest rates -- that's part of the insights you get from the model. If you want the simpler explanation, know the identity you used without knowing (total spending = total income = total production) must prevail. In principle, all other things equal, if any group of agent increase their spending, output will increase -- and, to complete your point, as investments (just like savings) are functions (namely) of output, business investment should rise (and not fall) as a consequence of a greater deficit from any given agent in the economy.

    3- Expansionary fiscal policy is an obvious yeah, even at this stage of the situation. But the problem never was economic or even scientific; it's political. Some people have a hard time with the concept of the government doing something helpful.
  • Are you sure you want to delete this post?
    "So not only is unemployment remaining a problem because of lack of jobs...or maybe I should say good paying jobs, but workers are also not sharing in the increased corporate profits, much of it coming from higher US worker productivity."

    What is interesting about wages here is that there are many reasons why inequalities rose, many of which have little to do with the right-wing shift of politics during the last 30 years.

    High skill workers actually saw their real wages increase rapidly while low skill workers saw them stagnate or even dip since the 70's. It's not only CEO's, but also pretty much anyone with a college degree.
    1- The demand for high-skill labor rose while that for low-skill labor decreased;
    2- International competition in the labor market is extensive in the market for low-skill labor;
    3- The relative frequency of "one adult" households rose;
    4- The relative frequency of the more unequal job sector grew (finance-related jobs, self-employed people, etc.).

    All of the above explain the growing inequalities you observe and the first two explains very well why those who were poor got hit the hardest. Unfortunately, people's ability to invest in human capital (that is, their ability to educate themselves) is bounded by their income and it's precisely those with low income that would need it the most to change their situation. Ergo, if you want to change this scheme, begin with education and try to see how you can make high skill workers a greater part of your workforce.
  • Liberal
    Durham, NH
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    Or, we could just raise the minimum wage to $15 and stop sending jobs out of the country.
  • Strongly Liberal Democrat
    Dallas, TX
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    The problem with raising the minimum wage is you got to create the demand to sustain hiring at that wage level.

    Also, the minimum wage in the economy is easier to set with market forces than with the regulatory state. A Federal Job Guarantee at the new minimum wage would do the trick. Business couldn't complain about being subjected to the minimum wage or interference with the "freedom to contract." And the market demand for JG jobs would allow the market to optimize total gov't spending and the gov't deficit.
  • Democrat
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    Billions spent on the War on Drugs and it doesn't end. Tax it, and stop the killing.
  • Are you sure you want to delete this post?
    That wouldn't work out the way you think it would.

    First, the unemployment rate and output vary around their long run tendency in an opposite direction in the short run. Secondly, when output grows faster than its long run tendency (just like when unemployment shrinks faster than its long run tendency), you have a situation where you face accelerating inflation. The reverse is also true, by the way -- when you do worst than your long run tendencies, disinflation is the result (that is, decelerating inflation) -- and it did happen in the US back in the earlier stages of the crisis.

    If the government decides to higher any person who is unemployed, there is a point beyond which it will yield accelerating inflation -- and inflation comes with costs too. I wouldn't use a job guarantee as a policy and you find any economist making a case for that... besides creating silly incentives, it also encourages important problems. You might argue that the above might be a short term solution to a short term problem -- yes, it is. Go for a fiscal push now, if possible. But don't make that a permanent structure.

    As for the minimum wage, its impact on the UNEMPLOYMENT RATE is hard to access for many reasons. A good and simple way to visualize the effect of the minimum wage is to change the variable we use to access the quantities (demanded and supplied): instead of using employees as labor units, use hours. Any price above the equilibrium should, all other things equal, yield higher supplied quantities and lower demands quantities -- that is, unemployment. However, by using hours, you notice that the HOURS people are willing to work at that wage exceed the HOURS businesses are willing to buy at that wage. This unemployment might be expressed in the form of smaller working schedules and more part-time working. This is unemployment in the eyes of an economist: someone is willing to supply his labor, yet can't find someone who will buy them. However, unemployment is measured by a survey who seeks to identify those who are active (that is, demonstrating through their actions their willingness to work) that couldn't find a job... It's one of the many reasons why a minimum wage bellow 45% of the average wage generally does not yield any statistically significant change in the unemployment rate. It does create an excess, but it's not literally in the form of people who are willing to work, but not able to work at all.
  • Are you sure you want to delete this post?
    We do not define demand functions for the fun of using maths.

    Demand describes a relationship between prices and quantities (for one or many agents), given certain things (revenues, preferences, the price of other goods, etc.). It tells you about people's readiness, people's disposition, to pay in exchange for a product, be it a good or a service. If we call that a behavioral equation, it's not out of fun either because the whole point of it is to describe human behavior in the face of scarcity. Similarly, the same can be said of supply, though it describes people's willingness to concede something (which reflects costs).

    If you raise the minimum wage to 15$, more labor will be supplied than there currently is. However, setting a minimum price doesn't affect at all the agents' readiness to pay -- i.e. you do not change their dispositions toward the product by changing its price. Want an even better thing? Your minimum wage is intended to help low-skill workers and it happens that Chinese, Indians, Africans and other developing regions offer substitutes for these workers, specifically. When the price of our low-skill workers is risen, the demand for their low-wage workers increases... and, given free trade rules around the globe, it's not looking good for low-skill American workers if you raise that minimum price too high.

    There are fundamental gains to freely consented trade. If you can produce bananas by sacrificing fewer apples than the other person around, it's straightforward that this person can produce apples by sacrificing fewer bananas than you. Taking people as x and y and use B and A for the fruits you can see that if Ax/Bx > Ay/By, then you have that Bx/Ax < By/Ay. In plain English, one is bound to be the inverse of the other... As a matter of fact, you gain at trading your labor for a wage instead of trying to produce every good or service you might need, just a country as a whole gains from enabling goods and services to flow more freely in and out of its borders.

    Of course, looking at the details of it some people will loose their jobs. However, it doesn't mean that you loose jobs... it means that people will do something else. If you can provide these workers with a good formation, that transfer of job might as well play to their advantage by bringing them into a more productive activity. If you don't have that sort of education system, added international competition will yield a higher structural unemployment rate simply because there risks to be a mismatch between the skills that markets demand those our workers supply (if they supply a skill that is now used abroad, they're in trouble until you can give them a new function).

    A big part of your problems can be solved by designing a system of education that is consequent to the new working world.
  • Liberal
    Other Party
    Llos Angeles, CA
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    There are some really smart people in this forum. I'm not one of them. I run the port of Long beach every day as a commercial driver. Every week....thousands of containers arrive from China. Hundreds of our containers head back.

    The consumer is the job creator. You keep buying foreign products....our products don't move. Its that simple. Economics wont solve these problems. Workers will. When workers decide they've had enough and are willing to sacrifice (fight)............ and put it all on the line like the generation of my grandfather .....things may change.
    True Story: Scott Sullivan, CFO , MCI-World Com.... was my neighbor in Federal Prison. Prior to meeting him I was at the understanding that he and Bernie Ebbers had stolen 10 billion dollars from their investors. This wasn't the case. He explained that World Com had invested billions of dollars in the dot-com boom. CFO was in a position of public trust. World Com was dying. They cooked the books trying to buy time.When Bernie Ebbers sold millions of dollars of his own stock, investors got a hold of that that and created " a run on the bank".

    A man with an estimated wealth of 500 million dollars was just a man. I remember showing him the USA TODAY paper the morning after the feds auctioned his home in Boca Raton for 15 million dollars. I said, "hey scott, is that a heliport on your roof????
    I only mention this because I was expecting a person larger then life......there was only ordinary. It amazed me how other inmates and staff attempted to pick his brain as if he he had all the answers.

    Scott admitted to me that he graduated from a small college in Ithica , New York, He had no working knowledge of leverage buyouts and used the same "creative book keeping" that SPRINT used prior to buying them out. Scott said to me one morning, 99% of the population will never take any chances in regards to their futures based on fear.

    Scott allowed me to see that all of us are the same. There was absolutely nothing about him that impressed me. He was at the right place at the right time when his "run" began.....wealth had convinced him that he was smarter then everyone else. he gambled and won initially. Society calls him a success based on his net worth.....not his worth......if these are the people that society hold in high regard based on their earnings,,,,,I'd gladly accept a life of total poverty. At least I'd sleep at night. 7 investors committed suicide after what they did,,,,,,,,some of you still believe that drug dealers are deserving of these draconian sentences while we praise the success of ROBBER BARONS.

    Scott never got it. The violation of Public Trust was the sole reason of his situation. That was the crime. people trusted him with their life savings.
  • Democrat
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    California increased minimum wage and are among the top ten states for the most job growth in the private industry. good paying jobs.

    Texas is among the top for job growth, but over 30% of all jobs are minimum wage , Mississippi over 30% of all jobs are minimum wage jobs. Make it pretty tough in red states that have large % of minimum wage jobs to find a decent paying job many people qualified for better jobs are working minimum wage jobs.

    I am not an expert, but I am a small business owner and the truth is I can spread out the cost of a minimum wage increase covering it by just raising prices a few cents on one product. wages are 100% deductible so I just deduct more when I give raises helps offset some of the cost , I pay more wages but less taxes on same profit because I have higher deduction for labor.

    Biz raise prices a few cents depending on sales volume, high volume as little as half a cent would cover cost. now this does eat up some of the minimum wage increase, but not all of it by any means, Employees do come out with more spending money and they buy more from me and other biz increasing our profits.

    Republicans have a disconnect with reality because high income corporations are not the main employers, lower and moderate individual owned business are the main employers employing about 75% of all workers in this country.

    Also the vast majority of small individual biz spend their profits here in America putting money back into OUR economy while ever since globalization began escalating a very large percent of high income biz and individuals in this country earn their money here and are spending it developing biz in OTHER countries , vacationing, buying houses. etc in other countries offshore tax shelters, etc and that is our major debt creator earning here and spending in other countries.

    Poor people, working people and most individual small biz owners are not our debt creators whatever they get is put right back into our economy not like the top income where so many spend so much in OTHER countries.

    At least this is what I believe, but I am not an expert in economics.
  • Democrat
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    BTW, I luv the ACA, I am getting better insurance even covers dental for same deductible and a LITTLE LESS COST thru exchange and that is without subsidy. plus out of pocket max is smaller.

    Not everyone will fair as well but a great many will. And millions will get ins. for 30 to 100 bucks a month that are eligible for subsidy.