Economics for One

Another great analysis by USA Today popped up last week: the fraction of individual income earned from private business (as opposed to government wages and programs) sank to the lowest level in the history of the United States.  According to their analysis, just 41.9% of US personal income was derived from private wages and salaries in Q1–down from 44.6% in December 2007 and 47.6% in Q1, 2000.

At the same time, government wages and benefits have dramatically increased.

Why is this significant?  Because all government payments come from taxes, which are ultimately derived from productivity in the private sector.  So as the private sector shrinks relative to the public sector, the burden on the private sector increases, and the overall stability and sustainability of the system decreases.

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The US House of Representatives has just approved another $2 Billion for the “Cash for Clunkers” program.

Under this program, people will receive $3,500 to $4,500 when they trade in a car and buy a new car that gets better gas mileage than their trade-in did. That covers approximately 500,000 new cars.

If you are thinking of purchasing a new car, this may be a nice additional incentive.

Of course, the skeptic in me notes the irony that the Federal Government is working to boost demand of an industry in which it now has a major financial stake. (Where are the $500 rebates for trading in an older computer, or television, for a newer model that uses less power?)

There seems to be no end to the efforts to rescue dead business models and dying industries.

This month the US Federal deficit passed $1.09 Trillion. That’s the amount of money the US has borrowed so far this year. It does not include debt from past years. The previous record was about $500 Billion.

It’s a pretty ignominious accomplishment. And since the year is not yet over, and the US continues to spend, the debt is continuing to pile up. Based on current spending projections, this year’s debt is expected to hit nearly $2 Trillion by October.

How much is $2 Trillion? It’s about $6,500 per person in the US. For a family of four, that’s about $26,000 in debt accumulated this year.  That’s on top of all previous debt, as well as any consumer or household debts.

But does it really matter? It isn’t like the taxpayers will ever have to pay this debt, right?

Wrong.

The US government’s credit rating is so good it is considered “risk free” by most of the world. The people who loaned the US this money absolutely expect to be paid back. If they are not, it will rock the worldwide financial markets so strongly it will make the recent financial crisis look tame by comparison.

The only ways the US government can pay back that debt are 1) by raising taxes and / or lowering spending, or 2) by devaluing the US dollar through inflation. Higher taxes means less money to hire employees, and less money for those employees to take home and spend.  Inflation makes the dollar worth less relative to other commodities, goods, or services. But while it makes the US debt effectively smaller, it also lowers the value of everyone’s existing savings, investments, and retirement funds.

Given the politics of Washington, DC, which do you think is the more likely scenario?

One of the challenges the insurance industry faces is “Moral Hazard.”

Moral hazard is a the observed phenomenon whereby, because something is insured, it becomes more likely to occur.  If a bad event (e.g. breakage or theft) will cost a certain amount, then if that event is insured, it will cost a bit less.  This makes the bad event less bad–which is the point of insurance.  Unfortunately, it also means that the insured person will not work quite as hard to prevent the bad event from happening, or, in extreme cases, may even cause the bad event to occur.

A silly illustration: if a grocery store could somehow insure every dozen eggs for $1000 against breakage, “Moral Hazard” is the insurance industry’s way of recognizing that there would somehow be a lot of broken eggs.

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Conventional wisdom says that in a recession, the government should lower interest rates to help stimulate the economy.  Unfortunately, this is like saying the cure for a bad hangover is a bottle of whiskey. Read more…

From 2006 – 2008, Peter Schiff appeared on numerous shows predicting the economic collapse.  This compilation of some of those clips shows him clearly articulating not only what would happen in the US and world economy, but also the mechanism and timing of the collapse.

Despite his solid reasoning and clear articulation, many of the other panelists and hosts openly mocked and ridiculed him.

This clip demonstrates two things: 1) the predictive power of the Austrian school of economics, and 2) the profound ability of otherwise intelligence people to ignore excellent arguments and instead believe what they want to believe.

Most people don’t really understand inflation.  They know it has to do with prices rising – prices for food, housing, utilities, clothes, entertainment, and everything else, really.  But beyond that, they’re often at a loss for how to define inflation.

Inflation is one of the least-understood concepts in economics.  And with good reason: in the US, we haven’t seen terrible inflation for the last couple of decades, so it hasn’t been all that important.

But we’re starting to see it now. Read more…