Democrats Do Not Understand Economics

Obama has just slapped a 35% tariff on incoming tires from China. This is a perfect example of why protectionist legislation does not work.

For starters, the tariff will simply drive tire production to other countries. The US is simply not competitive in this market segment. So, the obvious beneficiaries are countries such as Brazil and India. Since the US does not have the tooling to make the cheap sorts of tires sold by the Chinese, as that market hasn't really been contested by American tire makers in a long time, we don't expect any production to be driven to the US. So, unless Obama plans a blanket tariff at some point, there is no real hope of increasing production in the US.

Of course, the immediate problem is that China most likely will retaliate in some way. What this means is reduced exports for the US, most likely chickens. So, one of the problems with protectionism is immediately evident, and that is that other sectors will lose employment. So, to recap, tire manufacturers will not be helped, but, say, chicken farmers, will be hurt.

Here at the bureau, we try to dig deeper. As we have said before, various protectionist legislation over time has had unintended consequences. This is no different. If Obama has not slapped a similar tariff on Chinese car imports, it is likely that this tariff will provide the Chinese with an excuse to enter the US car market, because their tires may not have a tariff if put on a US-bound car.

Certainly, other trading partners, such as Japan, will start using more Chinese tires, as China now has to sell their production elsewhere. So, US-bound Japanese cars may see Chinese tires. If the tariff actually applies to assembled product, expect the Japanese to use Chinese tires for domestic product and ship their tires to the US. Brazil et. al. will do the same. The market will shift some, new players will get a boost, but the American tire maker won't get any help.

However, domestic car production should take a nice hit. The tire price isn't that great, but margins are already razor-thin, and this is maybe a hundred or so off the bill of materials for a foreign car. So, the US manufacturer has to drop their prices a bit to stay in line, or the foreign car maker makes a few bucks more per car. Either way, the US car manufacturer is at a disadvantage. This is only unexpected to those who do not comprehend economics. It is, hopefully, unintended by the current administration.

And, let's not forget the poor consumer. One effect, in the short term, at least, will be driving up the prices of tires. This will hit families short on income the most, as they try to keep their cars operating. This will mean they will put off tire purchases, with the common result of increased accidents. So, an unintended (hopefully) side effect of this protectionist act will be to reduce the safety for everyone due to people putting off tire purchases.

So, to recap: protectionist tariffs will 1) not help anyone in the US, 2) cost US jobs in other sectors that export to china, 3) drive production to other countries, 4) hurt the US automobile industry and 5) reduce safety on the highway. You may pooh-pooh the bureau's conclusions, but the fact remains that activity is at the margins; a change of 35% in the price of the cheapest tires is actually enough to do all these things simply by pushing the cost of something past a tipping point. For instance, if a set of four tires cost $100, and a family can afford $100, they would replace all four tires. However, with a 35% tariff, the tires now cost, presumably, $135, and the family can only afford two, at $67.50. Imagine that writ large all over the economy, lots of situations where the decision maker suddenly finds himself on the other side of a decision from where he expected to be. Quixotically, this may actually lower tire sales in the US and thus hurt domestic tire manufacturing.

More Monetary Lunacy

So, I just saw the advertisement for Michael Moore's 'Capitalism'. Of course, one does not expect a lot of Moore, he being incapable of correctly diagnosing any sort of problem. However, he seems to manage to grasp the obvious fact that there is some sort of a problem.

I could go through his faults over and over, starting with his failed analysis of Columbine, through his misunderstanding of climatology, including his incapability to understand the politics of health care, up to now, his new missive missing the point on economics. To be perfectly fair, I have not seen any of his movies and won't start with this one; all my analysis is hearsay, but that really doesn't matter, because plenty of people hold the idea I wish to deal with now.

Moore stands in front of Wall Street and yells, "We want our money back!"

I think, more than anything, this piece of transparent grandstanding shows the central misunderstanding: that the money ever existed and that it ever was 'ours'. For the first part, the truth is that much of the 'money' used in this boom never existed, and the bailout money is all fake anyway.

Let me explain. First of all, lots of the collateralized debt, debt turned into an asset and loaned against, created money that didn't exist prior to the collateralization. In other words, the bank owns mortgages, for instance, which it terms assets, against which it must maintain a certain minimum reserve. However, if the bank packages these debts into a collateralized debt obligations, acronym CDO, then they can be sold as bonds, which the buyer can consider an asset. If the buyer is a bank, they can loan against that asset. If the buyer is someone else, a real estate developer, for instance, they can borrow against that asset. The great genius was the creation of a new way to do fractional reserve banking. They, of course, went on to create a massive derivatives market as well, but that's another story. Suffice to say, most of the money lost so far never really existed in the way we think of money normally, which is to say consideration for services rendered, or, in the vernacular, 'pay'.

The money was created out of thin air, in other words, and back to thin air it went. This, to put it simply, would be fraud in another age. In our age, the best and brightest went to Wall Street and created this mess, being called miracle workers and the drivers of the new prosperity. These same people are being asked to fix the problem now, and their prescription is exactly more of the same, as it is the only thing they know how to do.

This brings us to the second part. The money used for the bailout is also imaginary and never was ours. Basically, if you look at the US dollar, it says 'Federal Reserve Note'. The money is emitted by the Federal Reserve Bank of the United States of America, or FRBOTUSA using the classic American acronym tradition. This money does not come from the United States government. It comes from an independent organization that is theoretically controlled by the government only in that the president appoints the chairman. Treasury notes used to be common but are all but unknown now. The treasury does countersign all FRN, but it's not the same thing as emitting them.

Why does this matter? Well, when the government runs a 50% deficit, as it appears it will this year, all that money has to come from somewhere. The mechanism, near as I can tell, is that the treasury issues notes, which are bills or bonds, which go to the reserve bank, where they are partially auctioned to foreign investors and partially bought by the reserve bank itself. The reserve bank, using its plenary powers, simply prints, er, creates electronically, enough money to cover the purchase. This is important, because the fed now thinks it has 'assets', which are those bonds and bills.

Most of the 'open market operations' the fed engages in involve those bonds and bills. It swaps them with other banks 1:1 face value. In this way, banks get to unload questionable loans onto the fed, and get US Bonds and TBills in return. This does two things. Obviously, it removes toxic debt from the banks' sheets, which improves its bottom line as these debts will be repaid. Less obviously, it changes a large amount of debt from sub prime to triple-a. This means the bank's reserve ratio gets lower and they can loan more money, in theory.

The 'bailout' that was financed by congress, however, is slightly different. The money to make those payments, of course, did not come in from tax revenue; the money came from debt, which, as stated above, is at least partially produced by the fed. Here's the fun part: that money never needs to be repaid because it is 'owned' by the fed. At least, the part the fed owns does not need to be repaid. When it is swapped to a bank, the fed, first of all, will have to print up money to cover the bad debt it swapped for, and second, the banks will expect repayment, which I'm sure the fed will be happy to provide.

In other words, the US government will have to 'repay' the bonds and other debt instruments, but it will do so by borrowing more money. The genius of the scheme is that the banks get paid 'real money' in return for their bonds that they swapped bad debt for, and now they can swap more bad debt for bonds that were issued to repay the banks. It's all not really 'fraud' because it is legal.

The Federal Reserve Bank of the United States and the United States Treasury Department would like to remind you that they are pretty certain they are working in your best interest, or at least that's what all their banker friends are telling them.

Rules of Exploitation

Truth be told, people don't mind being exploited. Most people don't have a big plan in mind, so don't mind going along with someone else's big plan, and the group instinct tends to kick in and they work really hard together to accomplish something, feeling good about it. However, there are some rules to not never ever ever break when in a position to exploit the works of others. Here are a few.

1) Do not ever take too much money. This is probably the most important rule. No matter what you do, your cut can't be too high or you will begin to eat into your own sales, if nothing else. The cut taken by the RIAA, for instance, is so high that it has reduced sales of music significantly by setting the price on the upper end of what people will pay. The iTunes Music Store demonstrates this rather conclusively, as the prices there are much lower than the prices for physical CDs and the iTMS has seen its share of the market skyrocket.

2) Help people better themselves. This means giving them opportunities to advance, with more responsibility and the opportunity to make better pay. Believe it or not, bonuses are powerful incentives. A slightly lower base pay coupled with average bonuses that more than make up for it provide you with the opportunity to look a worker in the eye and say 'you are so important to us we are going to give you some extra money'. You can actually reduce payroll significantly through the judicious use of bonuses and you will certainly be able to retain your more effective employees more easily.

3) Parties, social events, so on. Show up. Shake hands. Don't expect to be fawned upon or even spoken to much, but, hey, these are your minions and you need to be seen around. Further, they need to relax in the company of their cohorts so that they develop better interpersonal relations.

4) Try to understand their needs and meet those needs. Once again, this can lead to lower payroll costs, as people get money to meet their needs. A happy worker is a cheaper worker.

5) Do your level best to match aptitude, attitude and job. Even if you have a worker who is very good at what they do, if they don't want to keep doing it, you may lose a good worker. Better to give them an opportunity to do what they want then to see them walk away entirely.

6) Provide a history of looking out for your workers. This means not firing them when things get rough. This means being ever so careful to clearly communicate to your workers that every effort was made before a given worker was let go. This means sometimes using company funds to help workers over personal hurdles such as unexpected costs. Once again, this will lead to lower payroll costs in the long run.

7) Don't ever, ever, ever mess with the pension. Doing so will cause people to simply not consider the pension part of the pay package, even if you put it back. Pensions are instruments of trust, and if you mess with them, your payroll costs for good employees will skyrocket.

8) If you're big enough, provide services such as lawyers, doctors and accountants to your employees. You'll find that you won't need to pay them as much when an accountant is helping them manage their finances, your lawyer is saving them pain and legal fees and your doctor is taking care of most of their complaints.

9) Keep them 'on the job' by providing someone to run errands, free food if they stay at work and social areas where they can 'get away' without getting away. Remember, a lunch with other workers can run to an hour and a half due to driving, waiting, so on, whereas a catered-in lunch can be as short as forty-five minutes, and the workers won't mind being shooed back to work so much if they are full of free lunch. Seriously, free lunch is one of the most effective motivators, right after free hooch.

10) Be careful to not overload them. This is particularly important with knowledge workers such as programmers, authors and so on. When they get burned out, their productivity plummets. Far better to let them have time off to recharge than to have them sitting in a cubicle hopelessly staring at the same block of text for hours. This may mean forcing them to go home, and certainly means that, whenever possible, they use a desktop that cannot leave work so they cannot take work home. Their spouses will thank you and that means less stress at home and thus less burnout.

I guess the point of this essay is there is a disturbing trend that has been going on for some time to treat humans as disposable, interchangeable entities, to lay them off at a whim and to shuffle them around like cattle. I have been through this experience as an employee a few times. Only one time have I ever worked for a company who got most of this right and I deeply regret quitting.

So Let's Talk About Health Care

A few things keep popping up everywhere, such as the current US argument about whether to create a more socialized medical system or not, which is largely a debate along partisan lines, and of little interest to this bureau because either it will pass and thus doom healthcare in the US or it won't and thus keep us locked in the slow, painful death of our current system.

The bureau is simply against a single-payer healthcare system because, like all socialist systems, it will pretty much end any innovation in health care. Of course, our current system has channeled 'innovation' into ways not particularly helpful to the rest of us, leading to ever more expensive tailored prescription drugs with ever odder side effects that may or may not be effective at treating the actual problem. Seriously, let's not get started on how broken medicine is.

Above, I did, indeed, mean to say 'more socialized'. The system we have now is already pretty much socialized. Hospitals are subsidized out of public funds. Much of our current research is funded by public funds. Bureaucrats control what remedies can and cannot be used.

One problem, so they say, is that poor people cannot afford expensive procedures, and a single-payer system would ensure this was fixed. Poor people can afford catastrophic insurance. What most of the poor can't afford is the current PPO/HMO plans. Catastrophic insurance is pretty much what it says on the tin; if you break your arm, they will cover it. If you get laid up with cancer, they will cover it. If you want to go to the doctor for the sniffles, they won't cover it.

Believe it or not, catastrophic insurance is actually lots cheaper than a PPO because these things don't happen that often. Regular doctor's visits and simple procedures are to be covered out of pocket, but since catastrophic insurance is so cheap, it is easy to save quite a bit of money to cover the high deductible the plans tend to have.

Now, were the health care system deregulated, further savings could be seen. For instance, most instances of a doctor's visit are for some form of a communicable disease that can be dealt with on an outpatient basis. Believe it or not, your local pharmacist is a very good resource for these sorts of problems because he knows the drugs and what they do better than the average doctor.

As an anecdote, I used to go to doctors to get medicine to deal with my allergies. Invariably, they'd prescribe something like Zyrtec, at that time prescription only, and not properly covered by my insurance. The cost of a month's supply of Zyrtec was $66. My copay was $60. Hardly worth the paperwork, methinks. I got 'downsized' and ended up working for far less money, and no longer had the cash to cover $100 for a doctor's visit followed by $66 for Zyrtec, so I went into a local drug store. The pharmacist asked if he could help and I said I needed a cheap, powerful antihistamine. He directed me to chlorpheniramine, which is so cheap it can be had online for $5 for 1000 pills.

I took chlorpheniramine four times a day until Zyrtec went over the counter. It saved me great wads of cash. However, I probably would have bought the Zyrtec if I could have avoided the 'doctor tax' of $100 per visit.

One other problem with health care is that the average doctor simply cannot be acquainted with every possible syndrome. It is very easy to miss the markers for an underlying condition, leading to vastly more expensive treatment at a later date. This problem has been solved in the engineering field with something called an expert system.

An expert system is a large collection of rules in a computer, although it can be done by hand as well. When a problem crops up, the technician opens the expert system, enters the initial parameters, then conducts the tests the system directs. As each parameter is entered, the system processes the rules to eliminate the ones that do not apply. It then displays the necessary diagnostics to proceed based on the rules that still apply. If the system is well-designed, it can narrow the problem down in a hurry and will provide the same diagnostic solution for every instance of the same disease. Believe it or not, this repeatability does not happen now.

Also, a proper expert system will spot cross-discipline blind spots. It is an old adage that if you tell your doctor what you think you have, you will be diagnosed with that, but there is a corollary that says that if you go to a specialist, you will be diagnosed within his speciality. An expert system would easily spot this sort of problem, as any specialist can run the whole system and the system will, through diagnostic rules, lead the specialist to conclude the disease is in another speciality.

The resulting medical system would be in tiers, with technicians doing most of the actual day-to-day work, with researchers and doctorates responsible for tracking down diseases the system failed to identify and fashioning rules for them. I expect early on there will be a lot of rules that say 'see a specialist in '. The specialist would be expected to craft acceptable rules based on his diagnosis, and would be expected to take a significant amount of time making sure he got it right.

The resistance to this idea the bureau has found falls into a few different categories. I will deal with them each, one at a time:

What if it is wrong?

This is an interesting question. As the system is being developed, it will be wrong rather often, so will require the oversight of an experienced doctor. However, after a period of time, even though the system will still make mistakes, it will begin to be more accurate than the average doctor, whose accuracy is lots lower than any of them like to admit. Further, as time progresses and the system is elaborated upon, it will begin to spot rare and exotic disease earlier than humanly possible. In other words, this sort of thing will eventually be right far more often than a human could ever be.

I don't like being treated by a machine.

The machine won't treat you; medical technicians will do that. They will just do it with far less wasted time in school and with far greater accuracy than any human ever could. Actually, for some people, this sort of thing could be a boon because the average person can self-diagnose most common problems and self-treat using an expert system, which would save even more money and give these people a degree of freedom unheard of before.

I trust my doctor; he's a very intelligent and confident man who seems to know everything.

Doctors do, indeed, have a god complex, which is why they absolutely must not be allowed any real political power. So certain are they of their beliefs, they are prone to having massive blind spots and to being completely unaffected by rhetoric, facts or glaring fallacies. As far as many of them are concerned, if it is in a book or a drug pamphlet, it is correct. They are confidence men, as nobody would let a mere human anywhere near their bodies if they did not act with supreme confidence. However, the dirty little secret none of them want out is that more people are killed by mistakes made by doctors than are killed by handguns in this country. Look it up. Seriously.

Your system would allow people access to valium/painkillers/narcotics/etc.

Sure it would. There's no reason for them to not have access to those things at this time. As a simple aside, almost anyone can get any of those drugs with relative ease despite well over forty years of drug prohibition. Just like alcohol prohibition, drug prohibition has created a criminal element with a strong control of much of the country. This is really fodder for another essay, but banning something is a sure way to make it extremely profitable to criminals.

That being said, once knowledge is out there, it would be easy for the average person to understand what they're doing, and if they have a concern about it, they can check themselves into a clinic.

However, by far the most pernicious facet of the control the doctors exert on medicine is the cost. Drugs are expensive enough, but the average person has no way of determining if the drug they were given was appropriate, or whether or not it was the cheapest option. With the availability of an expert system, such information could be obtained, meaning that, with free availability of medicine, the average person can make an informed decision, either to follow the advice of their medical professional or to go with some other solution.

I won't go deeply into it, but cannabis is clearly in this category. Very expensive drugs exist to deal with the lack of appetite for those under chemotherapy or suffering from AIDS, but few are as cheap and effective as cannabis. Despite that these people are essentially going to die, they are not granted what little comfort cannabis can provide and instead are given drugs whose side effects can often be horrific and whose price is rather stratospheric.

What about all the doctors?

Lots of medical doctors would find themselves being nothing more than medical technicians, as that is what they are now. Initially, lots of trained doctors would be needed to refine the system, but, in the end, most of the doctors are going to have to find something else to do or accept that they will merely be technicians. On a positive note, they ought to be able to handle patients at a higher capacity due to the ease and speed with which an expert system can diagnose problems.

Also, the good diagnosticians will be 'kicked upstairs' to work on the rules. There will be lots of work streamlining the system. If the thing is left to market forces, there will be as many as three competing systems, providing an impetus to develop improvements and refinements to both increase efficiency and accuracy.

So, the monopoly exerted by the doctors' cabal is seriously inflating the price of medicine as a legal monopoly almost always does. Couple that with the economic issues facing insurance and the general decline in real income in this country, and you have the problem in a nutshell, well, a large basket, anyway.

Two Trillion Dollars

That's Two Trillion Dollars, with a 'T'. USD 2,000,000,000,000. Were that much handed to every man, woman and child in this country, it'd be roughly $6500. Handed to every one of the 14.5 million people currently listed as unemployed, it's roughly $138,000. Each. That's how much money the Federal Reserve Bank of the United States has 'lent' to bankers so far since this whole disaster started. Seriously. Well, that's how much, approximately, they think, might have been lent, as one of their functionaries has told us that her office does not even know how much has been lent and to whom.

So, who cares, right? They're fixing the economy. At least they're doing something, right? Wrong. Aw, heck, if you've been reading this blog, you knew that was coming.

If they'd given each jobless person, say, $100,000 to do whatever he liked with, they'd go a lot farther towards 'fixing the economy'. Giving it to bankers has done essentially nothing. The banks haven't been lending that money; it merely kept them from ruin. That's the truth of it.

The average person does not have unlimited ability to draw on a line of credit like the US government does. It can't simply print money to cover losses like the fed does. The average person is now looking at cinching up their belt and hoping one of the two wage earners does not lose their job, and, if they do, then they simply have to cut services. There is no other way.

But not the fed. Not the US government. The US government is running something like a 50% real deficit. This isn't the imaginary 'budget' deficit, which is a pretty number based on the approximations if nothing happens and all is rosy. The real deficit includes stopgap spending for the war effort, the various bailout packages and so on. It does not include the above two trillion dollars. Add that in and the actual deficit goes north of the budget. Yes, folks, we stand to spend over twice what we make this year, if true accounting were taken.

But, it's all saving the economy, right? I mean, if it helps, even a little, it's worth it, right? Wrong. Even if this whole spending money on credit were ever, and I mean ever effective at creating real growth, we'd still be stuck paying for it. The loans being taken out this year ought to push us over ten trillion in debt easily. Were the fed properly accounted for, we'd have passed that level years ago, as operations of the fed depend on faith in the dollar, which is, in turn, underwritten by faith in the US government. This means that either by greater production to sop up all that extra money or by increased payments directly to service debt, we will have to pay for this.

In other words, if they fix the economy, we will have to pay for the fix, and our children, and our children's children, unto the third and fourth generation.

Of course, if the dollar goes bust, then we won't have to pay, will we? We'll pay with a ruined economy in the short term, but won't have to worry about all those IOUs afloat on the world market. Now, I think we can see why bankers fear deflation so much. They want the middle road, the slow and steady inflation that makes their loans worth less but their assets worth more. Any deflation reverses that trend and they start to lose money.

So, when bankers run the country, inflation will be the rule of the day, even if it means pumping two trillion dollars into the economy in less than a year. I do believe Thomas Jefferson warned us about bankers, banking and letting the government be run by same. It is to our ruin we have not heeded his warning.