Economics 101 for the rest of us

Warren Buffet and Carl Icahn are famous investors but fewer people may know Ray Dalio.  Mr. Dalio founded an investment firm 40 years ago called Bridgewater Associates.  With $160 billion under management, Bridgewater runs one of the largest hedge funds in the world.

Bridgewater founder Ray Dalio, Bridgewater website

I recently discovered (among 3 million other people) a thirty minute YouTube video that Mr. Dalio produced to explain fundamentals of what he calls the economic machine. 

This video, which he narrates has been translated into several languages and viewed over 3,200,000 times.  The content begins slowly with basic concepts but progresses to explain the primary levers that policy-makers use to manage and stimulate the economy.  You can find it here.  

There are numerous lessons cleverly and clearly explained here.  Example: I hadn't appreciated why economists seem obsessed with Wage Growth until I watched this simple animated video.  The importance of wage growth has less to do with the oft-used and politically-charged phrase, "income inequality" and more to do with our collective ability to consume and deflate credit bubbles.

Also explained, is the concept of Credit, which Mr. Dalio asserts, "...is the most important part of the economy and probably the least understood". Other explanatory notes...

• "A beautiful deleveraging" of our massive debt and deficits is the catalyst for a soft landing we all pray for in order to avert "social disorder" and societal collapse.  
• Spending cuts are generally what people think of when they hear about "austerity" measures exercised by government, individuals and businesses to lower spending on goods and services.  
• Wealth redistribution occurs primarily through higher taxation on upper income Americans.  
• Money-printing refers to Federal Reserve purchases of government bonds and other financial assets ($2T since the Great Recession alone).

So what's the correct mix and emphasis of lever-pulling required for a soft landing?  Perhaps Mr. Dalio will address that question -- and what exactly is meant by a soft landing -- on this same platform at http://www.economicprinciples.org.

Spring has sprung!

While it's still too cool in southern Wisconsin to get excited about the weather, the morning sunlight streaming across my lawn is enough.  A week of travel on a sour stomach and poor weather in north Texas, makes me appreciate the moment all the more.  

Image by freepik

On a heavier note; I recently discovered a quote by John Stossel.  I don't know much about Stossel, other than he's a Libertarian.  I've only seen a few of his topical reports on television but his pithy take on the nature of taxation is amusing.  Mr. Stossel says....

"Politicians, bureaucrats and the people they 'rescue' get money through force — taxation.  Don't think taxation is force? Try not paying, and see what happens."

Blessed again!

Wikipedia image

Another Progressive I've known as long as Mortimer (since childhood) read my last post - I'll call him "Cameron" - and he takes issue with my claim, "Wealth re-distribution is the Excalibur sword of most Progressives."  Cameron feels it is only reconciliation for "30 to 40 years" of growing disparity between the wealthy and the less fortunate.  Cameron's beef is summed up thus: "So John, I have a question for everyone out there that talks about this so called wealth redistribution. Based upon the facts I have cited, why was it okay for that wealth redistribution to go on during the 80's, 90's and into the 2000's, but now it's not when it goes the other way around?"

"Cameron,

Thanks for taking the time to read my last post and share your views.  I appreciate it.

Regarding CEO pay at the S&P 500; I don't feel it's a useful benchmark for a public policy discussion, because by definition, you are citing 500 companies to represent a national employment landscape that comprises over six million private employer companies.  That's hardly a reasonable sample, but let's talk about it anyway. 

(On a side note, I hear large public company CEO criticism often and find it interesting that few care about celebrity compensation like that paid to Oprah Winfrey or Alex Rodriguez - even though their pay dwarfs the average CEO paycheck and they don't create many jobs). 

Vastly undeserved executive compensation occurs to be sure, but it's really a matter for shareholders to deal with, isn't it?  After all, they own the company.  They can sell their shares, vote out the board, start a proxy fight, file lawsuits and do any number of things - and many do. 

Similar to any employee that just can't stand his/her Boss; vote with your feet, sue the bastard, etc. but again, let's not make policy for 300 million people based upon a handful of public company executives, lax boards, or apathetic stockholders.

I want to comment on two other items related to prosperity: housing and taxes.

More of our discretionary dollar goes to housing than anywhere else.  We were hardly raised in wealthy homesteads, Cam.  Our parents worked hard, but lived modestly by today's standards.  Perhaps a 1500 square foot bungalow on a postage stamp-sized lot, with two bedrooms, maybe three.  Can we agree on this description?  How do we live today?  More importantly, what has happened to American home sizes over this period you are pointing to? 

Researcher Moya Mason notes in a recent paper that while family sizes have decreased almost 25% over the last 30 years, the size of new houses actually increased over 50%.  This is consistent with my view of Americans in general.  Few of us are able to consume too little and the living standard has improved among all groups, since our childhood.

America has grown primarily through free markets, hard work and innovation - not government intervention.  I recognize this is traditional conservative orthodoxy and some don't like it, but it goes to the core of our disagreement.  You sound as though lower and middle third America have actually been exploited by the "top third."  How so, Cameron?  Think about income taxes (we can talk about taxes on property and consumption another day).

A column in the Wall Street Journal (April 14, 2010, `Spreading The Wealth Isn't Fair') by Arthur C. Brooks of the American Enterprise Institute alerts readers that last year, 38% of all Americans were expected to have zero tax liability.  They paid nothing in federal income taxes.  Under Mr. Obama's budget and other expected tax changes, this group of Americans that pay zip to federal coffers, is expected to grow to 46% in 2011 while the federal government continues to expand. 

Dr. Brooks also notes that according to the nonpartisan Tax Foundation, a full 60% of all Americans "consume more in government services than they pay in taxes."  And what about that top 5% of Americans earning more than the other 95%? These are the folks everyone loves to hate.  Well, they pay over half of all federal income taxes paid.  Yes, 5% of the tax paying public, pays over 50% of all federal income tax collected.

I understand the worry over a concentration of assets, but whether we advocate for the top third, bottom third, or middle third of America - we cannot tax our way to prosperity, or make transfer payments to reverse perceived inequities, unless we want to unwind the very system that facilitated America's rise. 

I'm going to close with part of that Arthur Brooks column:

"...our system is the envy of the world and should be a source of pride.  Generation after generation, it has rewarded hard work and good values, education and street smarts.  It has offered the world's most disadvantaged not government redistribution but a chance to earn their success."   (Words in bold my emphasis, not Brooks'). 

I can't improve on that statement, so I'll leave it there. 

Cam, I know we haven't resolved our debate, but I am excited about your visit this summer after not having seen you for so many years.  Please let me know your expected day(s) in town, so we can block the time and I can make the sauce.

Best,

John"