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Sunday, October 23, 2016

Why I Think The Economy Is Broken

There is not a single factor, but myriad factors which holds down wages and stunts the progress of the entire economy. And in order for us to fix it, we need to fully grasp this. Because until we do all we will continue to get is nowhere.

Let me just say that mostly on both sides there are misunderstandings of what needs to be done. For the liberals and democrats, of course, their solution is to simply mandate wage increases—such as to the minimum wage—and to raise taxes on the corporations and the rich. For the conservatives and republicans they're still believing that global trade is the answer. If we can sell stuff to the rest of the world that will create jobs and increase wages.

We know, however, that neither of these solutions really work.

First of all, you cannot artificially raise wages without there being rippling consequences within the economy. As I have said many times before, corporations and small businesses are not ATM machines. And certainly they are not the Fed that simply prints more money when it needs to. So, in comes the union machine. Folks, take a look at Detroit as one of the best examples of artificially increasing wages—and even benefits for that matter. But of course this was not the government who did this, although factions of the government certainly did and do encourage it. Not only did unions demand higher wages for employees, and not only did they fight for more health benefits, pensions, and other monetary things which cost a ton, but they also contributed to bylaws which turned otherwise efficient operations into unmanageable, and ultimately unprofitable ones.

In any business there is a rule of thought that you charge a customer what he or she is willing to bear.

But it is not just a matter of what the customer is willing to pay. It is a matter of what a customer can pay in realistic and reasonable terms. In other words, a business knows that there is a fine line
between trying to get more than what they are entitled to for their product or service and outright pricing themselves right out of business.

You can apply this simple idea to the unions. The difference between the business machine and the union machine is that a business knows what a customer is willing to bear, and it also knows how much a customer can afford to pay. In the case of unions, many of the monetary demands were made without anyone on the union side, and especially the employees, knowing what was even on the balance sheet.

The unions, in my opinion, should have had two jobs. One of those jobs was to make a stand for the interests of employees of course. Their job was to create an environment whereby employees could be reasonably compensated for the work they did, and that they would enjoy some of the benefits of a thriving corporation through wages and benefits. Something I think is important, by the way, despite my misgivings about unions in general. But their other job was to also be the spokesperson for reason and rational thought. Their job was, essentially, to educate the workforce they were representing on the reality of the situation.

There is a danger, I think, when we become so convinced that the rich and the corporations they own are simply greedy. Somehow we have come to a place where when we think of the rich and the corporations we think of the giant in the Jack and the Beanstalk story sitting in his castle above the clouds hoarding and counting his golden coins with no regard for anything but the fact that he has the golden coins.

The rich do not sit on their money. It is part of the reason not only do they become rich. But it is a part of the reason they become richer.

In other words, the rich invest their money. And even when it comes to common shareholders they have one simple demand of the corporations for which they hold a stake in.

Make more profits.

But in order to do that that really doesn't mean lower worker's wages, fire workers, send jobs overseas, reduce benefits, and gouge the customers who buy their products or services. Granted, there may be some who believe that way, but I would call them the minority. What any common shareholder—or major shareholder—wants is a growing and thriving business to continue to deliver dividends and profits. For a lot of us that means growing the business and expanding the markets we operate in.

If you talk to many employees the one common theme always seems to be that they are just a number, that the fat cats really don't need them, that they are a burden and that for that reason corporations will go to any length to shut them down and send them packing.

For me that's a false reality, and a silly way to think. Because anyone who understands business also understands that yes, employees do fall onto the liability side of the ledger. But, they are as necessary as any other cost of doing business. The reality is that a business indeed wants to focus on growth and expanding their markets—but when employees walk out the door and when employees have to be replaced, there are two things that come out of this.

Distraction and cost.

For one, when you have to spend time in the day strategizing over how to bring in replacement
workers, and when you have to spend time in the day seeking out new workers and being engaged in the hiring process, you are going to have less time in the day to focus on strategizing keeping the machines running and expanding the business. It's a distraction. And then there's the cost. Even in unskilled labor, you have to train the workers. And during that process there is going to be some level of transition and downtime whereby the operation will not be at its optimum efficiency.

For those who say unskilled labor is a job even a monkey can do let me just say this.

I have worked in many "unskilled labor" jobs during my tenure in the workforce. I have seen workers come in who worked in similar settings prior to their working alongside me who were still not able to simply walk onto the production line and run the operation flawlessly. You still had to have other employees showdow them, and you still had wrong buttons pushed, and problems within the process which ultimately slowed things down—and cost the company money.

It is better to have a strong and reliable and fully trained workforce committed to the process and committed to the company than to have a revolving door. Smart businessmen know this, and so therefore it is misnomer that employers simply do not care about the people who work for them.

It's a very small example, but say you own several rental properties. What's more efficient and cost effective for your business? Keeping tenants over the long haul, or constantly having to find new ones to rent to?

Of course there is a need to always evaluate the workers you already have and determine whether or not they are serving the best interests of the business. For those that are not, of course you have to make decisions about whether they stay or go. The same would apply to my tenant example. If the renter is consistent in paying but breaks windows, knocks holes in the walls, or otherwise jeopardizes the business—they are no longer an asset. It is common sense really.

Unions essentially created bad tenants. So many, in fact, that at some point in time it makes more sense to simply shutter the doors than to coninue to seek out new tenants—or be burdened by the cost of keeping the bad tenants you already have.

And then you have the matter of taxes.

It has always amazed me how many people think that by simply raising taxes, you, and I do mean you will somehow benefit better by it. The reality is that taxes, just like employees, are a cost. And when you are spending money in one place, you obviously cannot spend it in another place. And again, the rich and the corporations are not the giant in the Jack and the Beanstalk story. Their money will be worthless if all they do is hoard it. In order to get richer the rich and the corporations must find ways to make their money grow. And that means investing those dollars into more factories, more retail outlets, more products or services in their lines, and it means it will take more people—workers—to get it done.

And by the way, those additional workers will pay more taxes. The more product or service moving through the economy the more sales tax revenue. The more workers with money to spend will also contribute more to the tax rolls as a whole. Lowering taxes does one primary thing. It encourages the flow of real dollars into the real marketplace and when you do that, even if taxes are lower, more tax revenues will be reaped simply because there are more dollars moving around in the real economy to tax.

Why does the Fed lower interest rates when the economy is in a slow down? To encourage more money to enter into the real economy. Lower taxes does the same thing. It speeds up the process of free money flow in the economy.

When interest rates are lower more people will buy cars, more people will use credit cards, more people will buy houses, and thus the markets move upward in a fluid fashion. Raising the interest rates slows the economy down in much the same way that the example I provided about a business pricing itself out of the marketplace ultimately shuts it all down.

Raise taxes and you slow it all down. Lower taxes and it all speeds up. It's not rocket science. It is very basic economics, folks.

The more money you have to spend to fuel your car, and to keep the lights on in your house, the less money you will spend on newer cars, adding square footage to your house, or simply going out for a dinner night with the family.

Everything slows down when certain dollars are siphoned into one pool for which all other pools suffer as a result.

And then there are regulations.

Regulations can be put into two categories. Those that are created through government policy, and
those that are created out of those bylaws I was talking about as it applies to unions. You can make rules that allow businesses to freely and openly compete, and expand, or you can create rules that make it harder, or impossible, to do that.

If you look at the macro here what you begin to see are those myriad issues I was referring to at the start of this. Higher taxes, unruly unions with bylaws that scrape away at efficiency, higher costs of wages and benefits for less work, and rules and regulations put forth by the government and the unions—and laws created in the interest of global trade have all worked to hurt the American worker, and to dissolve what were otherwise good paying jobs, only to be left with an economic disaster. Workers make less, and therefore can not spend as much, and because corporations can no longer reasonably compete, since the door was open to go elsewhere for their labor, they have done so.

I have long held that the idea of global trade was a good one when it became the "law of the land." But somewhere along the line it got away from us. Before it was a convenience and a novelty to be able to expand our personal dollars by having the opportunity to buy that cheaper item made in Japan or some other place. And it was a "feel-good" moment to think that by putting out dollars into those other countries would also lift their economies, thereby making it more possible for them to buy what we made. What we saw in all of this was a win-win.

Going back to my tenant example, what better opportunity to raise your rent than when your tenant gets a pay raise. If one person is making more money, then everyone ultimately makes more money. If global trade would have worked, we'd all have been making more money. Us and the Japanese and the Chinese, and whoever else you want to throw into the equation.

Why did Detroit fall? Why is our entire economy falling? Again, there are myriad factors to consider in all of this. High taxes, over regulation, and stifling of efficiency—it has essentially shut the whole thing down. And what we're left with is a horrible situation where half of the workforce is on government assistance, and the other half is working for pennies on the dollar. Those who are making it, by the way, are having to support the half that aren't.

And also by the way, we used to do it that way before this all happened. We did. The difference was that we did it by our earned wages being used to support the earned wages of another. Paul worked on the production line making beds and mattresses and used that money to buy cars from John who worked on the production line making cars. And John went out and bought a new TV with the money he earned making cars that supported Joe who made TVs. And all three of them supported Tom who drove the trucks to get the products moved, and Sally to stock the shelves, and Roderick who made the sale.

These days who is their to support? Paul doesn't make beds and mattresses anymore. John doesn't make cars anymore. Joe doesn't make TVs anymore. The jobs left don't pay as much, and when any one of these guys buys a bed or mattress, or a car, or a new TV, it takes a much greater chunk out what they can spend on other things—like even a hamburger at Burger King.

And now for something completely different:

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