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Idle Assets and other Economic Thoughts

HKO_A

I wonder if there is such a thing as idle assets.  If one wishes to sit on his money for years because the costs and risks of deploying it are too high is that any different from a land owner who wishes to speculate on a piece of property rather than plant it or a factory owner who wishes to idle a factory machine until the demand for its output rises.  These are all the same economic decisions.  Even wealth withheld from what one may consider ‘productive’ use creates value in the form of security, potential,  and stability.  Everything that can be measured is not worth measuring;  everything that is worth measuring cannot be measured. Central authorities miss this when they think they know better how our wealth and assets should be deployed.

The so called trickle down effect of rich people spending money on frivolous luxuries is illusory.  It is a relatively small portion of aggregate demand.  The greater demand is from the growth in spending from the lower economic strata.  Economic history is a story of luxuries becoming necessities.  This is stimulated by high innovation and investments that drastically reduce the costs of common items- from steel to computers to cellular phones.  These innovations spawn entirely new industries.  Respect for these innovators like Jobs and Musk is as much cultural as economic.  Populist rhetoric that these giants and innovators owe their success to political magicians subverts that respect that they are due.

Keynes understood that wages were “sticky”. Because of unions (and todays minimum wage laws),  wages are less subject to market adjustments that kept unemployment low.  His answer was monetary stimulus, leaving the gold standard, tariffs, and government spending even though he considered tax cuts to be a faster stimulus.  Keynes was a very bright man who believed  that in the dire times post WWI that Laissez faire would  not bring the solutions in time.

While he believed the monetary systems must be managed he was most often very critical of the those who were doing the managing.  If only they were as brilliant as he.  They never are- thus the “fatal conceit”.

Keynes and FDR (who Keynes sharply criticized for pushing major reform during a weak economy- sound familiar?) would have been chagrined to see that the effort to increase employment even with government programs would have degenerated into a massive welfare state with low worker participation and a high and growing  long term dependency rate.  This state of affairs is destructive in many ways more than economic.  The longer it persists the more difficult and painful it will be to correct.

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An Aura of Earned Success

Unlike the grandees of Wall Street or the energy industry, the tech Oligarchs have so far experienced relatively little of the criticism commonly directed at Wall Street or energy executives for their huge compensation levels. They, it appears, are different even than the other rich. Whereas the wealthy on Wall Street and elsewhere are viewed as illegitimate and greedy, the tech moguls have managed to retain an aura of earned success and enjoy almost universal admiration.

“We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” Google’s Schmidt boasted in 2011 to Bloomberg Businessweek . “And what a world it is. Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in a daily discussion, because their issues are not our daily reality.”

from The New Class Conflict by Joel Kotkin

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A Different Kind of Bridge

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A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works—of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had.”

“A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.”

Excerpt From: Hazlitt, Henry. “Economics in One Lesson.” Three Rivers Press, 2010-08-11. iBooks.
This material may be protected by copyright.

Check out this book on the iBooks Store: https://itun.es/us/-Mw_y.l

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Turning Luxuries into Common Goods

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from The Washington Post George Will writes How income inequality benefits everybody

excerpts:

The ranks of billionaires are constantly churned. Most of the people on the original Forbes 400 list of richest Americans in 1982 were off the list in 2013. Mark Zuckerberg, Facebook’s chief executive, was not born until 1984. America needs more billionaires like him, Michael Dell, Bill Gates, Jeff Bezos and Steve Jobs. With the iPod, iPhone and iPad, unique products when introduced, Jobs’s Apple created monopolies. But instead of raising their prices, Apple has cut them because “profits attract imitators and innovators.” Which is one reason why monopolies come and go. When John D. Rockefeller began selling kerosene in 1870, he had approximately 4 percent of the market. By 1890, he had 85 percent. Did he use this market dominance to gouge consumers? Kerosene prices fell from 30 cents a gallon in 1869 to 6 cents in 1897. And in the process of being branded a menacing monopoly, Rockefeller’s Standard Oil made gasoline so cheap that Ford found a mass market for Model T’s.

Monopoly profits are social blessings when they “signal to the ambitious the wealth they can earn by entering previously unknown markets.” So “when the wealth gap widens, the lifestyle gap shrinks .” Hence, “income inequality in a capitalist system is truly beautiful” because “it provides the incentive for creative people to gamble on new ideas, and it turns luxuries into common goods.” Since 2000, the price of a 50-inch plasma TV has fallen from $20,000 to $550.

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Shutting Down Startups

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Perhaps nothing reflects the descent of the Yeomanry better than the fading role of the ten million small businesses with under 20 employees, which currently employ upwards of forty million Americans. Long a key source of new jobs, small business startups have declined as a portion of all business growth from 50 percent in the early 1980s to 35 percent in 2010. Indeed, a 2014 Brookings report revealed that small business “dynamism,” measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter century.

This decline in entrepreneurial activity marks a historic turnaround. In 1977, Small Business Administration figures show, Americans started 563,325 businesses with employees. In 2009, they launched barely 400,000 business startups, long a key source of new jobs, which have declined as a portion of all businesses from 50 percent in the early 1980s to 35 percent in 2010.

There are many explanations for this decline, including the impact of offshoring, globalization, and technology. But in part it reflects the impact of the ever more powerful Clerical regime, whose expansive regulatory power undermines small firms. Indeed, according to a 2010 report by the Small Business Administration, federal regulations cost firms with less than 20 employees over $10,000 each year per employee, while bigger firms paid roughly $7,500 per employee. The biggest hit to small business comes in the form of environmental regulations, which cost 364 percent more per employee for small firms than for large ones. Small companies spend $4,101 per employee, compared to $1,294 at medium- sized companies (20 to 499 employees) and $883 at the largest companies, to meet these requirements. 20 The nature of federal policy in regard to finance further worsened the situation for the small- scale entrepreneur. The large “too big to fail” banks received huge bailouts, yet they have remained reluctant to loan to small business. The rapid decline of community banks, for example, down by half since 1990, particularly hurts small businesspeople who have depended historically on loans from these institutions.

From The New Class Conflict by Joel Kotkin