Thursday, November 19, 2015

Three options to economic life

          The choices for living  (in a world that will become market-based economies only) then have come down to three options. 
          Be unemployed and depend on others to provide for your material means of living (food, shelter, clothing, transportation, etc.). This choice is not helping to grow the economy, this is not demonstrating the self-improvement that has been our focus. (I remember one economics professor starting out a semester of study with the assumption that all people are lazy and helped his class to understanding the world based first on that assumption. The assumption is not true, and what that professor did not help us understand is that the lazy people are the least important to the workings of any economy. Discarding the assumption of that one professor,) The group of unemployed people in society does include the very young, adult students who are investing in skills, training and knowledge, and the elderly, and some adults who are (the very pinnacle measure of our humanity) disabled. ("If we want to discover the full potential in our humanity, we need to celebrate those heartbreaking strengths and those glorious disabilities we all have. It is our humanity and all the potential within it that makes us beautiful." -- Aimee Mullins)
          The other two choices ARE expressions of financial self-improvement and I would even term as seeking "financial livelihood." 
          Second you might be employed and manage to spend, save and invest the income that is earned from an employer or several employers. 
          The third choice is for you to be a business owner, an employer.
          What about employment by the government? How is this different from employment by a business owner and why can't we all just be employed by the government, letting the government be the business owner? The difficulty in depending upon government employment too heavily is that government agencies do not operate on a profit basis as a decision-making mechanism like businesses do. This same reasoning can be applied to non-profit employers. Let's demonstrate with a long example. 
          (Hopefully readers will not become confused if outside of this book pundits use the term Mixed Economy as a substitute for a Regulated Market Economy. The substitution does not work. A mixed economy depends upon the government to produce some sizable proportion of the country's gross domestic product. Well in that case, most every economy is a Mixed Economy since governments produce the education, roads, military training, and so many other portions of the economic whole. The emphasis here is to point out that by "Regulated Market Economy" we are dismissing the misleading phrase of Free-Market Economy since no market organizes freely, free of regulation or free of societal restraints.) 
          In a business, the owner is managing the capital, the loans, the costs of maintaining those two, the labour costs, the input costs and quality of goods and services, and is trying to squeeze profits out of every sale. The mathematics behind each of those costs and any revenue streams are all comparable (in dollars or Euros or Yen or other national currencies) and all directly affect each other by the measure of the currency. 
          How is this different in a government agency? First of all, if government agencies generate surplus revenue (or profit) for one year's budget, then their funding is cut with the expectation that they will be able to perform like that in the next budget year. That is wrong. Government agencies are not organized to generate "profits" or excess revenues. If there are excess revenues, then it's as much of a fluke as any roll of the dice.
          Secondly, the managers of a government agency have not been trained and conditioned to notice how extra revenues are being generated, so they don't specifically know how to repeat those steps that led to any excess revenue. In fact those managers will see any reduction in funding as a demerit, or a disciplinary action. This will be a dis-incentive for them trying to repeat the effort at generating excess revenue. Along this same line, the agency managers do not have any personal financial incentive in generating excess revenue -- they do not personally get bonuses for easing the burden on the tax payers. 
          By those two reasons, we see how a business operates with an advantage by using the currency and the mathematics possible through the currency to gauge costs, revenues, profits, the success of any planning, to look into future months and deal with shortages, to see peaks and valleys in the seasons of their industries and of their communities. Using the flow of currency works dramatically well for the business owner. Government agencies and their managers do not have the same tools or insights. 
          Why can't that principle be applied to government agencies or to non-profit organizations? The first answer is that those agencies and organizations often times have to respond in reverse to the business cycle. So while a business owner may forecast a slow season based on the mathematics behind the money flow (laying off employees, cutting the size of orders, not purchasing replacement equipment, etc.), government agencies may have to increase their expenditures at that very time because of greater unemployment, greater demand for low-cost housing, bread-winners experiencing greater difficulty in feeding their families, or when a natural disaster disrupts the smooth working of the market economy. Then when a community is more self-sustaining based on the general health of the market economy, the government agencies need to remain vigilant and those managers need to fight to keep their budgets at levels high enough to keep the agencies intact even though demand may be low for their services. This type of management is counter-intuitive to the management of a financially based and profit-seeking business. 
          Non-profit organizations can base many of their decisions on cash flows. At the same time they need to base their decisions on the missions and objectives and goals set out for them to accomplish, which justify their operation as non-profit organizations. A church may offer free cooked meals to groups of homeless or disadvantaged people. They are not looking to profit from this, but they do need to manage their costs, predict how much food to prepare, not be too wasteful with left over foods. Funds still need to be collected to pay for all those costs. A church could be collecting excess food from restaurants and grocery stores, and could be collecting cash donations from members and finding other sources of funding. Instead of delivering cash dividends as a business would, such a church needs to be sure they communicate the success of their programs to all those who generously give to the non-profit mission. Still those "returns on investments" or returns on donations are very difficult to measure, unlike the ease of measuring cash flow, costs and revenues, profits and capital values. 
          In spite of these complications and the differences between business employers, government employers, and non-profit employers, a principle of Capillary Action must still be recognized. On the micro-economic level, each employee must be creating value for the employer, value that is greater than the paycheck which the employee receives. The justification becomes more complicated and sometimes more difficult to gauge for the government agency and for the non-profit organization. They cannot judge the value of the employee's contribution solely on monetary values. In fact, businesses should not judge solely on monetary values either. For instance, a business does need to build loyalty and trust with its customers, which is difficult to measure in monetary amounts, but employees do create that loyalty and trust in their relationships with customers. Employees do create some value that is beyond monetary measurement. Business managers and owners can base their decisions more weightily on monetary values since the cash flows are involved in every facet of a business. Government and non-profit employees will be evaluated on more loosely defined values (expressed in mission statements and funding directives) they create beyond any savings of costs or generation of revenues. 

          For an economy to be stable and healthy, we might wonder what proportion of people can be employed by business owners and how many could be business owners. And is it possible to have too many business owners and not enough employees? If everyone decides to own a business and not be dependent on an employer, what would the economy look like, would if function properly? 
          According to experts including master restaurateur Gordon Ramsey and small business advisers Second Wind Consulting, your business should be all right if you are spending approximately one-third of your gross income on payroll. Spending more means you're not making enough profit, or unable to make investments to support the business. Spending less means you might lose your best employees because you're paying them too little. . . .

          Those numbers work well for businesses that manufacture a product. However, you can afford a higher percentage for payroll if you run a service business. Service businesses don't have materials costs, and thus have more room to pay their staff -- who are essentially their product. Even in service businesses, Second Wind Consulting recommends keeping payroll below 50 percent. (Wayne, Jake, of Demand Media,

          Since businesses need employees and their labour to create value, then some people must be convinced to remain as employees and depend on the income earned from employment. Within businesses, employees are necessary.
          Employees do become dependent on their paychecks and dependent on their roles within businesses, under the management of owners. In a market-based economy, financial livelihood is possible from ownership (which not everyone can have) and from employment. Considering Capillary Action, if value is flowing up hill to the owners through the work efforts of the employees, then there is a clear possibility of taking excessive financial advantage over the employees. 
          Changing jobs is not a process that can be taken without a great deal of planning and considerations. As an employee, a person has a certain skill set that is valuable and employable, but often not quickly transferred to another employer nor to another industry. So while there may be pay and other incentives attracting an employee to keep a job, there are also heavy potential costs to leaving a place of employment to seek other opportunities. Employees can not specify one point at which a current job will be abandoned. More reasonably, they have a range of issues to consider before looking for and applying for a job with a different employer. 
          Secondly, an employee is not fully informed about how an employer is taking advantage. A group of coal miners may be very happy as a group when they are kept ignorant of the level of income and life styles outside of their "company town." Meanwhile the coal company executives could be living excessively lavish lifestyles based on the value created by the coal miners. Those company executives will want to keep the employees ignorant of the differences in their lifestyles. A company executive may even believe that one deserves the better pay and lifestyle given ones investment in education and social graces and tough negotiating skills. This is a complication. Once the miners learn of the inequities between the levels of pay and living standards, they as a group could organize and demand better pay, and demand that their lives not depend solely on the coal company. That history offers a great many trying lessons.
          So far in this economic treatise, I have dealt only with employment, labour and management. Much of economics examines the role of capital too and its level of earnings. Investors and silent partners, owners of land and wealthy individuals who lend money to a business but take no role in managing the business practices, are they "owners" or are they "dependents" under this model? Precision in naming the distinctions can be difficult. If a person offers capital until such time as some level of returns has been reached, then the capital is withdrawn, then that person is acting as a dependent. 
          (This does not speak to the role of any lending or investing business such as a bank. Those businesses are acting in far more complicated ways. We are speaking about the actions of individuals, basing our model on the actions of individuals. i.e. The committee did not act, rather individual members within the committee voted and their majority rule placed some processes into action by agents, individuals, who agreed to carry out the directives of the group.) 
          In opposite extreme to these dependent capitalists, if an investor or lender places pressure upon business managers for the business to emphasize some value(s) other than earning profits, then that capitalist may be seen as acting an employer. An involved investor can be seen managing some resources and directing the actions of employees to achieve something other than simple profits, or to achieve profits by a particular expression of personal character or culturally shared values.

Thursday, January 1, 2015

spelling out my bias for Stiglitz’s preface

Stiglitz’s preface does not bode well for his 2012 book “The Price of Equality” to accomplish very much, nor to open up new discussions, nor to impress enough decision makers about the value of his work. In the preface, he points to a downward spiral of inequality corrupting the political and business processes of a country. This corruption leads to less efficiency for the markets and less stability for the markets. With markets being less efficient and less stable then there is growing inequality and then more corruption. I want to see how Stiglitz develops this theory, and what evidence he can offer to convince his readers. But then for the rest of the preface, he seems to be whining, “It’s unfair, it’s unfair, it’s unfair, and it’s unfair,” like a second-grader. And then I saw him slip in the idea of government redistribution of wealth.

Life is unfair, and if he expects to undo that reality, then I am biased against his book and I need to deal with my bias against him before continuing the reading. Holding on to my bias is not going to allow me to read and best understand what he does have to offer. I will write out this essay so that I can work out my bias, and then maybe I will be able to read and better appreciate what his book has to offer.

And get off the idea of government redistribution of wealth!!! Before government can lay their hands on wealth, capital, assets, or possessions, they have to offer due process. Through due process a government can claim imminent domain, or public goods, or “the needs of the many out weigh the needs of the few or the one.” (Star Trek reference there, and I think Gene Roddenberry had a beautiful vision for a future economic system.) Wealth should be out of the reach of the government. Income meanwhile is within reach, through monitoring and through taxation (payroll taxes apply with every paycheck and April 15 is coming). But wait, the government can not know what’s best for the redistribution of the income. We cannot trust a corruptible government to best decide what to do with one person’s income in assigning it to other people!! If we are striving for efficient markets, then what about allowing the markets to decide about the redistribution of income?? (Specifics on how can come in a bit.)

First we much realize that all questions of income and markets and economics are rooted in micro-economic questions. Let’s toss out Stiglitz’s downward spiral and replace it with the micro-economic story. Individuals are the only ones who act within an economic system. Maybe a statistician or scientist can spot a trend based on watching and measuring the actions of many individuals, but you can realize that the individuals act. Within a corporation, individuals act to create the value that is marketed and sold to individual customers. Within the stock market, individuals write the code for the computerized buying programs and then individuals decide the prices that will trigger bids to buy and to sell. Individuals in representative bodies and in executive offices decide to lead on a legislative initiative, or to vote one way or the other. All those individual actions accumulate together to play out the economic system. This is micro-economic actions playing out to cause macro-economic trends and realities.

Individuals will act based upon perceived incentives which should pay off compared to risking some investments of time, labour, skill, strategy, reputation, weighed against other opportunities and other dimensions of a decision to act. If the incentives can be increased for growing numbers of people, then more might risk starting their own businesses, more might risk an embarrassment in front of a supervisor and a work team to offer a revolutionary production method, more might risk investing in a new home, real estate or new vehicles and equipment. If more incentives can be offered to more individuals, then the economy can grow based on what opportunities the individuals seek (not based on the government’s corrupted notions). From this micro-economic view, the growth of the economy is based on individuals perceiving and acting upon greater incentives which drives those prospering individuals to seek out even more opportunities and understanding the incentives that keep compelling them to make economic investments and striving for greater efficiencies and stability and to all the more appreciate predictable markets, those being the markets that do not fail so often and probably that have less volatile business cycles.

Of course when we say incentives, we mean cash. We mean getting more money out in front of more people. We mean offering them more income, that is what is meant by incentives. (Along with prestige, and individual autonomy, and self actualization, but economists don’t do well at measuring those things. We measure money.)

(Are we a bit further on yet? Can we now turn to the specifics of how income can be redistributed if not by government?)

What’s needed then is some extra incentives, but where can they come from?? They will not magically appear.

If inequality is an unwanted outcome, is there a way to lessen the inequality as a method for increasing the incentives for more people? Is there a way to lessen the inequality as a method for increasing the incentives for 99 percent of the people? Income can be taxed. But we don’t want the income to go to the corruptible government as tax revenue. What if instead of a tax, we capped all individuals so that no one in the whole world could earn more than 10 million Euros in a year, or no more than $15 million in a year, or the equivalent per country in a year (remember countries wish to keep their sovereignty)? What could corporations do with those revenues that no longer can be offered to their executives, their superstar employees (a term from Freeland‘s book “Plutocrats”), to their board members, to their consultants, nor to their richest investors? How would corporations and businesses redistribute those revenues?

Now how would a cap work?? Well, yeah, . . . let’s call it a tax. After earning the income up to that annual cap within a year, all further individual income will be taxed at 100 percent. This is a tax that the government does not want to collect -- how awful it would be to allow the government to collect that money!!!! And it is a tax that no millionaire would want to approach or to deal with! After all, not only is the millionaire loosing all of that extra income, but one would still have to deal with the costs of accounting for the money earned over the cap. So the tax rate really would feel like 102 percent or 105 percent when you figure in the accounting costs. Then there would be the embarrassment among ones peers should they find out you tried to earn money over the annual cap (which they are all denied) and then got busted by the feds!! Yes, we’ll call it a tax that is never intended to be collected. This will be a 100 percent tax on all income over the annual cap.

What could corporations do with those revenues that no longer can be offered to their executives, their superstar employees, to their board members, to their consultants, nor to their richest investors? How would corporations and businesses redistribute those revenues? Would corporations and their markets find some efficient means for steering funds toward more research and development? Efficient means for raising the pay of deserving employees who are not near the annual cap? Efficient means for investing in equipment, real estate and manufacturing opportunities? Efficient means for green and sustainable developments? Efficient means for greater training, education, workplace safety? More creative ideas on serving customers, earning greater loyalty and reducing the risks to the lives of customers?

I believe in the markets, and in people’s abilities to recognize economic opportunities and incentives. Things would still be unfair with an income cap in place, would still be unfair regardless of how society evolves (even if guided by Roddenberry himself). But I do want to understand the price of inequality in economic systems, and I hope Stiglitz can help open my eyes.