I'm an Economist!

What is interesting (or scary) is that I predicted this months ago. You can ask my office mates.

This means one of two things. Either I'm an economic genius, or our top economists have no clue, either.

Which do you think it is?

Thoughts on RINOs

One of things that seems to avoid mention in talking about Republicans banding together to prevent the passing of bills, especially when it comes to the dissident RINOs, is: what if a Republican's conscience tells him that the bill should be passed? One of the things we should truly consider is whether party unity is more important than doing what one believes is right. Sure, I believe that any who voted for the stimulus package is wrong, but I think it is wrong to demand a person vote against his conscience for sake of party loyalty, as well.

Moreover, it wasn't the three Republican Senators that broke rank that passed the bill--it was the unanimous Democratic support for the bill. If anything, those Democrats deserve the censure of those who believe the bill is the absolutely wrong thing to do. Frankly, my concern about the politicking of placing party before conscience is just as stern for the Democrats. How many Senators decided to cave and not break rank, either because of internal or external expedience?

Granted, I think those three RINOs need to go. But it isn't because they broke rank; it is because they voted for something that shouldn't have passed. So in a similar vein, I'd like to see all those current Democrats out of office, as well.

The public deserves better.

RINOs strike again

The stimulus bill passed the Senate. Now our only hope of its defeat is that the differences between the House and Senate versions prove so irreconcilable that the bill goes down in flames. (Primarily, I'm hoping Pelosi will fight so hard for her odds and ends that even the RINOs in the Senate, or maybe a few dissident Democrats, will block the bill from passing.)

How Does Wealth Disappear?

One of the basic principles in economics is that currency is based, more or less (in our case, less), on the connection with some material good that backs the currency. Now, our dollar is no longer tied to our gold reserves, but it still represents the worth of our goods.

To understand how wealth disappears, we have to understand how wealth is created in the first place. First and foremost, wealth is created through effort. At the very least, the effort is from picking fruit from a tree, or berries from a bush, or hunting an animal, or so on. The worth of the item is based upon need and availability. A cup of water during a flood season isn't worth very much because water abounds everywhere. A cup water to a man dying of thirst in the desert is practically worth his life. But this is simply stating the principles of supply and demand. No one can really question that supply and demand play a role in matters; what is arguable is how much government should tamper with market forces.

Now, wealth is essentially created through effort, as I just said. I can take some raw material, each component fairly cheap because of availability and low demand for just raw components, and turn those pieces into, say, a house. Because of the effort I placed into the house, the worth of the house is more than the worth of the materials individually; worked into the price is the time and talent I've expended. Supposedly, anyone could invest their time and talent to build a house, but in reality, housebuilding is best suited to one who knows how to build houses, especially given the quality of amateurish buildings. That's why my effort adds to the cost of the house.

Now we examine how supply and demand work on the houses I build. Suppose I build one house, and three people want to buy. That means the house increases in value because of the competition. How? I can simply raise the price until two of the three people are no longer willing to buy the house, and then sell it to the one left standing. The thing to note is that this increase in price is somewhat artificial, because it does not necessarily accurately reflect the cost of the materials and the value of my labor. Those two factors are a baseline of worth; the inflated cost is variable and due to other conditions. For example, if two of the three decide they're better off in tents before I inflate my price, then I can no longer inflate the price. With no competition, my one remaining customer can demand that I sell at the base price, or he won't buy at all. Alternatively, I could build two other houses so that all three can buy, and then only be capable of offering a base price. Or I could build more houses than are demanded, which could potentially artificially deflate the actual value of the first house (depending on the cost of the other houses), because the threat is there to go with a cheaper model, and leave the most expensive house unoccupied.

The government can step in and tamper with prices, too. It can mandate that every house be sold for at least some amount. This causes some reverberations in the market, but eventually it settles down. The reverberations come because some houses aren't worth that amount, and won't sell. But soon the new houses built will be built with the minimum price tag in mind, which has two effects. One is that, since cheaper housing is no longer available, there are fewer people looking for houses, and thus fewer new buildings are constructed. With fewer buildings made, the supply goes down. If the demand remains constant, then the value of the cheaper buildings rises, perhaps finally equating with that bare minimum, and the balance is restored. The second is that the base worth of a house is artificially inflated. As I said before, the cheaper houses might eventually rise value as the supply and demand evens out, but other houses will see an increase in value, as well. If this cheap house and this average house sell for the same price, there will be a higher demand for the average house due to quality concerns. Thus its price will rise.

Now suppose that the government changes its mind and removes its regulation that houses must be sold for some amount. Suddenly the price of houses collapses. People can offer cheaper houses for much cheaper than before, and the higher priced houses lose value as people steer towards the cheaper housing. In an instant, thousands of dollars per home just vanish. All manner of wealth just disappears.

This is the sort of thing that happened with the housing market crash. The government effectively mandated a minimum housing cost by making sure a much wider spread of the marketplace could afford housing (via the subprime loans). So if everybody and their cat can receive, say, a $100,000 loan, all houses are now worth at least $100,000, and all the more expensive houses rise in value. This continues in an upward surge for a time, especially as people build more houses to accommodate the influx of people looking for homes. The bubble builds for a while, but eventually--and most people seemed to forget this point--the market balances out again, and the bubble stops increasing. Due to other factors, the economy slowed, people defaulted on loans, and ultimately many banks closed and credit froze. This had the effect of suddenly reversing the $100,000 minimum mandate, and the price of houses dropped. All the wealth that had been there before evaporated.

That's the thing we need to remember in this world of ours. Wealth can not only be created, it can be destroyed. I can pump thousands of dollars into a business that ultimately fails, and that money for the most part may as well have never existed. Now, some may argue that the money I invested at least went to paying the bills, paying employees, and so on, and that even though the business failed, the money still circulated. But that money also went to purchase products that are never sold, or equipment that then lies unused and is sold off at bargain prices. The wealth effectively disappeared.

So how exactly does wealth disappear? It isn't necessarily correct to say that it disappears because it never existed, that it was an artificial wealth that ultimately would be shown to be the phantom it really is. In some cases this is correct. But for the majority of wealth that has disappeared, it disappears because natural drop in demand leads to a drop in worth of items considered.

The Stimulus Bill

Currently, as of about 4:30 pm Easter Time, it seems unlikely that the Senate is going to succeed today in passing the stimulus bill, which makes me happy. The longer we hold off on passing this monstrosity, the more chances we have at making it a better bill.

Now, I'm not one to sacrifice good on the altar of perfection, but this bill doesn't attain good. It doesn't even attain mildly distasteful. As opposed to an economic stimulus package, I would have called it a Government Goody Bill, in which all the branches of the government, including a few new branches, get heaps and heaps of money. In a 600+ page document, I saw maybe 30 pages that even came close to addressing the financial sector, the dilemma of private businesses, and the needs of anything non-governmental. The rest of the bill endlessly detailed handouts to various government agencies.

Somehow, I don't see how that will help stimulate our economy. But then, I suppose that the slow, creeping spread of the government over all economic aspects eventually will mean that government and economy are one and the same.

I personally hope that the Senate will pare the spending back by a few hundred billion dollars, and contemplate how wise it is to spend in all the places they are spending. I can kind of see how many of the items will make or preserve jobs, but only if we're considering government jobs. That, I think, is telling.

Who I Believe Brings Change

On a quick note, I just have to say that I don't believe Obama will bring change as president of the United States. Part of the problem I have simply comes from listening to the candidates talk and what solutions they propose. Obama, better than McCain, scores political points, has talking points a mile long, and is, in his own right, decent at identifying problems.

It is his solutions that terrify me. Part of my reaction is sub-rational: when I look at what McCain proposes, as modest as those proposals are, I have a gut-feeling that he won't do much to hurt things, though I might remain skeptical as to where he will fix things. When I read Obama's proposals, or listen to him speak, I have a gut-feeling that he is going to tank the economy, and in general make matters worse.

I have some basic knowledge of economics. That can be boiled down to three points:

1) Supply and demand. You get full points on a Econ 101 exam by simply drawing an X on a chart and labeling one as supply and the other as demand. The reason is simple: the concept itself is simple to understand, but it is vital.

2) A man can increase capital through his own blood, sweat, and tears. In agriculture, assuming decent weather conditions, a farmer could increase capital by growing more crops. Simple as that.

3) When the costs are hidden, or something is free, people will take as much as they can, regardless of need. (This excludes those rare cases of something being so bad you couldn't give it away.)

What does Obama want to do with his economic policies? He wants to ignore supply and demand; he wants to cripple capital-making processes; and he wants to hide costs.

I might be completely out on a limb on economic policies, but this seems like a recipe for disaster. In my opinion, only someone who doesn't have the slightest clue of where money actually comes from could possibly think Obama's economic strategies are sound.

It seems like if you ask a liberal where money comes from, his answer will be (with a deer-in-headlights type expression): "The rich?"

Hidden Costs

The problem with trying to determine the moral path through economic policies is rooted in unforeseen consequences. In almost any plan, there are hidden costs that somehow make inexpensive plans require much more funding than originally anticipated.

In college, I see this all over the place. I came to the University of Wyoming in 1999 on the Trustee's Superior Student Scholarship, which paid for tuition, fees, room, and board, so I didn't necessarily have to worry so much about costs (and therein lies a problem), but I could see how numerous costs were inflated due to good intentions, but poor policies.

In the dorms, where I lived for four out of my five undergraduate years, I had the opportunity to witness just how hidden costs keep hurting us. Now, the dorms at UW were operated fairly simply. There was a fixed cost of living in a dorm room, and that covered phone, electricity, water, heating, and internet services. There was a fixed cost of any particular meal plan for dining in the Washakie Dining Hall.

The idea behind fixed costs is that some use more and some use less, and it is more effective to charge the average. Thus you tend to lose out with some customers, but on others you gain back the difference. And fixed costs are attractive to people. I know nowadays when I page through the classifieds looking for a new place to live, the places where utilities are a fixed part of the rent seem more appealing, and for a good reason. If I don't have to worry about the electricity bill, I can use all the electricity I want without worry. If I don't have to worry about water or natural gas, then I can take all the long, hot showers I want.

Perhaps where I would like to focus my attention the most, though, is on the Washakie Dining Hall, because that is where I've seen the most waste. And it is telling. While any particular meal plan carries a fairly high cost per meal, once you're inside the hall, you can take as much as you want and keep going back for more, if you so desire.

What you tend to see, then, is people who grab the main course, or possible two, heap up their trays with all kinds of side dishes, pick at their food, and then send most of it back to the kitchens to be thrown away.

What was really interesting was that people actually justified their waste. "If Washakie is going to charge so much more a meal plan, then I need to make sure I'm getting my money's worth." Friends of mine would load up their trays with stuff they didn't want and let it all be thrown away in an infantile desire to "stick it to the man."

For some odd reason, the cost of meal plans kept increasing every year.

I know a number of universities will offer meal plans, but then have a price attached to each course a person could select, which provides incentive to only take what one could afford. In addition, those plans carried with them much less waste, as people realized if they didn't finish what they took, then they had wasted their money. There's obviously a hidden cost factor at play here. At UW, that hidden cost factor drives the cost of food up every year, but though the students grumble, they continue to waste, because a fixed cost is a fixed cost.

The question then becomes, is it immoral then to offer fixed cost plans when it is obvious that people abuse the system? Not necessarily. A fixed plan can be very beneficial to many people, both those who offer the plan and those who accept the plan. The immorality comes from those who would abuse the system. But this comes back to matters of restraint, which we Americans don't seem to have. The moral course of action is to not waste, even when we have the opportunity to waste as much as we want without repurcussion.

Why Obama Will Win

Susan Estrich, a Fox News contributor, has new article posted on the Fox News website regarding a friend of hers who will not be voting for McCain. I find Estrich's columns to be some of the most thoughtful, well-articulated, to-the-point left-wing writing I've ever said. After all the vitriol we tend to her in the left-wing news and blogsphere, coupled with a large dose of finger-pointing and idiocy from the right, it is refreshing to read her posts.

That being said, I think there's a subtle clue in this particular column as to why I think Obama will win. It isn't because he's the new face of change, or that McCain is a warmongerer, or anything like that.

I believe it is because Obama promises goodies. End of story.

Right now, we're in a bit of a financial crisis, and there's concerns of whether this crisis will continue to develop until we're in a widescale depression. On the minds of the people of the United States is not: "how am I going to work through this?" Instead, it is "how is the government going to save me?"

I understand very well that the government exists to protect us. It gives us our laws, it maintains a military against outside forces, it provides a legislative system to adjust laws to be fair, it offers an executive system to enforce those laws for our protection, and in even hands us a judicial system to ensure that disputes are settled, be they civil or criminal. This is all very moving, very touching, very assuring.

So the government protects us from outsiders (or at least it is supposed to), and the government protects us from our neighbors. But the big crisis in our nation, and why I think Obama now will win, is that many of us want the government to protect us from ourselves.

Now, Estrich raises legitimate concerns.

[Rosie] does not believe [McCain] will help people like her: People who are "lucky" to be covered by an HMO where the lines are endless and the care is too often haphazard. It was not her first choice, it was the only insurance she could get. Blue Cross twice rejected her, the first time because she took medication for gastritis. Gastritis? She was lucky to get coverage by the HMO. If she tried now, with arthritis and high blood pressure, not to mention a fussy stomach, even they would turn her down.

The problem of getting health care to those most in need is one of the hot topics in this presidential debate. Who should have insurance and how much that insurance should cover are vital questions. The answers people want is "everyone and everything." Obama wants to promise that; McCain doesn't. And for this, Obama is heralded as a savior, and McCain out of touch with the common person.

I don't necessarily understand the problem Rosie is going through. I have insurance and don't have any health factors that will greatly impede getting insurance. But my mother-in-law suffers from Rosie's problem. For a time she had some strange abdominal pains that no one could explain, and because of this health risk, insurance agencies won't cover her. She's lucky to be on her husband's plan, though it carries a huge deductable, but on her own, she's out of luck. That hardly seems fair, especially considering that in a crisis she could find herself facing backruptcy. No one with any amount of compassion would ever wish that on someone.

Politicians, especially those on the left, want to make sure everyone has insurance, as though health insurance is this magical entity that mystically reduces the cost of health care. But health insurance isn't a panacea by any means, and the idea of making sure everyone is covered ignores the very principles that makes insurance work.

Insurance isn't a basic right owed anyone. If any thing is a basic right owed, it might be the health care itself, which is a subtle distinction, and even then there are arguments to make about it.

Insurance is really just a business. People who started insurance noted that personal disasters can be devastating and practically impossible to recover from. But such disasters are relatively rare. Now, in normal course of events, back in the days when we actually cared about our neighbor and didn't have the government looking over our shoulders to ensure we played nice and fair, lest there be a lawsuit, if one of our neighbors fell into hard times, everyone (or at least a large number of people) pitched in to help. They provided food, water, and shelter, and contacted a friend who had a brother who knew a person who could employ the downtrodden unfortunate.

In some ways, though, this neighborliness can be inefficient and no effective enough. In a small community, no one is going to be able to provide the $6 million needed for the lifesaving operation to rescue the victim of a terrible accident from the brink of death. Thus it isn't necessarily effective. Furthermore, even if at some point in time the community could have afford the $6 million, there was no guarantee that $6 million would be at hand when needed. Thus it isn't necessarily efficient.

The insurance people then offered a service. They would regularly collect small donations that would be put into a fund. When disaster hit, disaster beyond the economic capability of the members, money would be drawn from that fund to aid the victim. It was more efficient because regular payments meant a continual, calculable, and immediately accessible source of money, and if it could attract enough customers, from many communities, then it would be more effective, as well. Of course, since the insurers are offering a service, a portion of those payments would go to salaries.

Now, insurance agencies cannot cover everyone. In order to survive, in order to be capable of helping its customers, it has to have a relatively large body of low-risk customers. It has to rely on the probability that most of the people who pay insurance in fact will never need the insurance. And this immediately creates tension. People at high risk of cancer--like my grandfather, who smoked like chimney and drank like a fish--are those who will most likely face expensive medical procedures beyond their economic capabilities. But these are the people insurance agencies want to cover the least, because they will in turn need large withdrawals from the funds. It is almost self-contradictory. Insurance exists to help people who have to pay enormous amounts of money, and yet if insurance covers those people, it risks going out of business due to have all its funds drained dry.

There are a lot of calculations that need to be made in order to determine, then, who to cover and who not to cover. The agency has to take on some amount of risk, for otherwise it cannot cover anyone. But how much risk is a difficult balancing act. If an agency discovers that 75% of smokers require expensive surgeries, respirators, or other medical services, that agency might decide that covering smokers is too risky. The payouts will be more than the pay-ins, and the company cannot keep afloat. But if the agency instead discovers that only 30% of smokers require expensive treatment, then it might be willing to gamble by covering smokers.

Obama wants to offer health insurance to every American, regardless of medical history. It sounds nice. Those like Rosie and my mother-in-law would finally be able to have insurance. It would certainly be a relief and a boon, especially as the financial crisis tightens budgets, increases unemployment, ruins retirement plans, and cast a cloud of doubt on the future. But the question becomes: if offering health insurance to everyone can be done, why hasn't it been done?

There are two potential answers. One is that the insurance companies are greedy and would rather rake in the money and never pay it back out. The other is that the insurance companies are already stretched as far as they can go, and taking on additional risk would endanger them. If too many risky customers demanded payments all at once, the company could go under.

You know, now that I mention it, that sounds remarkably like something else I've heard about just recently. What was it? Oh yeah! It had something to do with the Democratic government demanding that mortgages be offered to people that couldn't quite make the credit checks, down payments, and other factors required for qualification. When all those people couldn't meet their payments when the housing bubble burst and the economy slowed down, what happened to all those banks? That's right, they collapsed, forcing us to attempt a $700 billion bailout plan.

Of course, the analogy only works if the second case holds, the case where insurance companies are already taking on as much risk as they think they can afford. Who knows? Maybe Obama is right in thinking the insurance providers can take on unlimited amounts of risk and not suffer for it. It's a nice delusion.

The problem isn't that McCain is out of touch with the ordinary person. The problem is more that McCain doesn't have a satisfactory answer for the ordinary person. What is he supposed to say? If he toes the line Obama is, wouldn't he be saying "Well, I'll make sure you get insurance at the risk of the whole system collapsing in ten or fifteen years, just like the mortgage agencies"? Or maybe, "I'll make sure you get insurance, but at the cost of thousands of people losing their jobs as high taxation slows the economy down and forces companies to lay off their workers?" If he follows his principles, could he possibly hope to win by saying, "Sorry, but I can't make thousands of people suffer just for your benefit, so you'll have to regretably fall through the cracks" or "the reality is the government simply can't guarantee you insurance, so you'll have to rely on providence and your neighbors"? Of course he can't say anything like that. But that doesn't mean he's out of touch.

But Obama offers the goodies, which must mean he's in touch with the ordinary person. And that, of course, is why he'll make the presidency.

Bailout Failure

So the bailout was voted down, and surprisingly not so much along party lines. The vote count was 205-228. Those voting "yeah" numbered 140 (of 235) Democrats, and 65 (of 199) Republicans, so a sizable portion of each party broke from party lines in regards to this bill.

I must say that I'm not particularly pleased that my own representative, Barbara Cubin, voted "aye", but then, I suppose I'm against the bailout plan.

The larger question is the impact on our nation at the failure to pass this piece of legislation. The headlines scream about plummeting prices on the stock market (Dow Jones down 600+!), and there is rampant concern about savings, job safety, and paying the bills. On the one hand, I think that this is the natural consequence of the bubble bursting, and in a short period of time (a matter of months, perhaps), the economy will stabilize and we'll start our merry way upwards once again. People find out that no too many jobs were lost, and that the "fundamentals" of the economy, i.e. that portion that is still connected to the real world, are indeed still strong.

In this sense, I'm more of a do-nothing economist. The markets will right themselves. And while I feel fairly justified on this position (keep in mind I'm a computer scientist, not an economist), there is still the worry that this does portend even more dire events to come. Certainly our government thinks that a failure to do anything will open the door to doomsday scenarios, but that could simply be that our politicians believe they at least have to make a show of doing something, have some piece of legislation to point back at and say, "See? We did something about this."

I think lancing this sore is good for us, and we can't just cover up the wound with bailout packages. But then, is the infection so widespread that the healing process of bloodletting will bleed us dry before the infection is purged?

I don't have any strong answer on that. I do know that tomorrow morning, I'll wake up at 6:00 AM, have breakfast, read a little from my Bible, come to work around 7:00, and proceed with my normal daily routines. Life will move onward. If the economy tanks, well, I'll handle that somehow. I'll take whatever employment I can get to pay the bills, maybe even work two jobs for insurance.

I do know this. God will provide. It may not be what we want, but it will certainly be what we need. If I can't get my dream $75,000 a year job, well, maybe I should learn to be content with at $15,000 a year job, and live much more simply. Finances will be tight, but I can manage. And if we're willing to quit sniveling and act responsibly, the rest of us should be able to manage, as well, one way or another.