moneyFYI
Financial Freedom Is Merely Organized Common Sense
Tiny Thoughts on Economics and Governance
Economics is the study of how people allocate scarce resources.
There is no resource in such supply that people can ignore the allocation question. Even things once thought near infinite, like the air and the oceans, are now becoming subject to scrutiny. Questions arise, like “Can you use the ocean as a garbage dump?” Economics studies how people sort those questions out and develops alternatives.
There are two general branches of economics Microeconomics and Macroeconomics
Microeconomics
This branch deals with individuals and businesses. What decisions do people make when addressing resource allocation? You are familiar with many of them. They work as you would expect when external factors like government action, or societal shaming, are absent.
Most of us know that demand shrinks as prices rise.
We also know that as prices rise, there tend to be an increase in the supply of that particular good or service. That constrains the price rise and sometimes even forces it to fall. The fall can adversely affect the entrants who were relying on that price remaining. You could see that 20 years ago when fiber optics was overbuilt. The price fell by more than 90%. Much of it remained dark.
Time is an issue. Spend today or spend tomorrow? Money has the advantage of being durable. (well most of the time) The idea recognizes that money is always spent in the present (consumption) while it is not always earned in the present. You will not work forever, so to have money to spend you must transfer some of what you earn to the future. The tools are plentiful. Government mandated programs, employer pension plans, personal pension plans like RRSPs, Other savings programs where invest.
Investing is the process of transferring money to the future. The idea is to allow someone else to use your money in the time you don’t need it and have them pay for that use. It could be a loan, like a bond or term deposit at a bank, or it could be a small piece of a business, or real estate project. The ide ais to invest so the return you can predict in your accumulation time phase helps you acquire the right amount of money to live after you stop working.
Investment yield (rate of return) depends on many factors. If the investee might not pay you back you will want more. (Risk premium) If you might want your money back soon, the investee will pay less (Liquidity) If the investee can deduct what they pay on their tax return, they can pay more. (Tax factor) You might not be able to get the investment you want because the minimum unit is too big (Availability) When you think about it in terms of what investors can provide and what investees want, you will find there are about 40 factors that affect yield. If you have a factor you contribute be sure you get paid for it. Many people can contribute liquidity but get paid for short deposits only. In normal times, five consecutive one-year investment s would pay les than a single 5-year investment.
Debt is a way to allocate money in time. Spend now, earn later. Your debt is someone else’s investment so you pay for the ability to have money before you can earn it. Debt is a drag on how you will be able to allocate money in the future.
All the decisions we make are tradeoffs. If I choose liquidity I will earn less. If I spend my money on a fine car, I may not have enough for my preferred apartment. Maybe not enough for saving. If I save too much, I might miss out on things I could do with young children. The fundamental is that once you earn a dollar, you can only use it once. Advertising, credit cards, and payment plans tend to make it easy to miss that fact.
Learn to think in tradeoffs and priorities.
Macroeconomics
Macroeconomics is the study of what happens, will happen, or should happen if you add all the individuals together. Macroeconomics is the basis for government policy. Or should be.
The field breaks into two areas. Monetary policy and fiscal policy. How you look at it matters too but that isn’t part of economics in the theoretical sense. More later.
Monetary policy involves managing the money supply of a country. That affects how easily growth can happen. A shortage of money is restrictive. Too much money leads to inflation. The Either of a shortage or a surplus will affect interest rates. The price people pay to use money someone else has saved.
Monetary policy does not affect everyone the same way. Large borrowers like inflation and low interest rates. Savers prefer no inflation and high interest rates. Business that are heavy investors in physical assets, like mines, farms, resorts, apartment buildings, and manufacturing, are affected differently than ones with fast turnover and not much investment. Like a grocery store, or a law firm.
Monetary policy today is an illusion. You must participate because it is part of your context, but you should base your spending, borrowing, and investment on what is reasonable. Today will not be the norm forever. (Probably)
Fiscal policy is how the government gets money and how it spends it.
The first thing to notice is the government has no money of its own. Everything they spend comes from the people. They get it by taxation mostly and a little more by user fees. They match their spending and revenue by borrowing. You will notice they tend to always borrow for some fo their spending. That is easier to explain to voters than is a tax increase. Voters must notice that a government borrowing is just a tax that hasn’t happened yet.
Sound fiscal policy has two parts:
How to tax the people so there is little affect on their economic activity. It has been said that it is like plucking goose feathers. You want the most feathers for the least hissing. Hissing is the least of the problem any more. If you overtax people they find ways to avoid the problem. Think about The Laffer curve.
The Laffer Curve postulates that there are always two rate of tax that will raise the same amount of revenue. That is because money raised by tax is a two-variable problem. The rate and the base it applies to. If you rate is zero, there will be a very large base but no revenue. If your rate is 100% there will be no base to apply it to and so no revenue. There are intervening pairs of rates that will raise a given amount of money. Maybe 10% raise the same as 80%. What comes of this is there is an optimal rate of government taking.
The government has hundreds of “revenue tools” from income tax, to sales taxes, to import duties, to gas taxes. Some are elastic. That means the consumption varies with the price. If the tax doubles the consumption halves. Some are inelastic. As the price changes, consumption changes little. Like the tax on cigarettes and, liquor. Gasoline is inelastic but only to a point. Eventually people will change the cars they drive, or drive less. If every vehicle became electric tomorrow, I wonder what the government would do about the lost gas tax revenue.
Government spending is a huge conundrum. There is no program they provide that is wanted the same way by all people. I doubt there are many of the areas they spend within that 70% of the people agree there is a need and they are spending the right amount of money. Quite possibly not 7%. Again it is about tradeoffs. Just like you.
With the advent of cheap money and people being unaware of the tradeoffs, government fiscal policy has tended away from the idea of scarcity. They invoke “can’t afford” only when the program requested doesn’t match their ideological direction.
When you have the data in terms of monetary and fiscal ideas, you need to notice how you look at it. The viewing point.
Where ideology fits
Everyone rationalizes. Ideology is a rationalization that pre-exists action. It tends to cluster within two distinct ways of thinking about people and society.
Way #1 is what Thomas Sowell calls “the constrained view” The essence of that is people are the way they are and most change very little. People are selfish, present-oriented, and adapt to the incentives and disincentives they find in their lives. People we call conservatives or classic liberals tend to think this way. They want the government to be less intrusive. Essentially keep order and improve predictability.
Governments can best serve by intruding only a little. Let people make their own way as best it suits them. There would be some overarching societal norms and institutions that have proved their worth over time. Things like objective laws and law enforcement. Banking, educational institutions, churches and such.
Way #2 is unconstrained. This approach assumes that society can change and the people will become less selfish, and less present oriented as the result. While it is theoretically possible, there is no example of where it has worked. The idea is altruism and patience can be legislated. Progressives and “L” liberals tend to think this way.
How the approach affects politics
The unconstrained approach requires very strong governments. I can’t imagine how you refit society with a laissez-faire approach. Power creates a problem. Frank Herbert has postulated, “Absolute power does not corrupt absolutely, absolute power attracts the corruptible.”
While governments have power they control, they will tend to attract people who want to use the power. Most of those are people who have high intelligence but have not made tradeoffs in life. What Sowell calls “Consequential Decisions.” They tend to see society and government like a college seminar. Here’s the problem. Discuss. Here’s the answer. Now let’s go get a latte.
Worse yet, governments tend to not use feedback loops. People who make weak decisions are seldom corrected. Compare to businesses. Businesses blow up with weak decisions. Have you ever seen the government eliminate a department because they did something dumb. Have incompetent politicians been re-elected?
Why think about classic liberalism
We each should match our personal morals and ethics against the need for a society wide authority. If we like the idea of people managing and being responsible for their own lives, then we will tend towards the constrained view of government. If we think society is responsible for how people behave, the unconstrained view.
The advantage of the constrained view is that it does not need big government. You should ask if that is a problem. In my view, reducing the likelihood of continuing mistaken programs, and attracting people who are interested in power and not their contribution to the people, means it is.
We have found over the years that given two ways to approach a problem or opportunity, one simple, on complicated, the simple one tends to work more often.
Big government tends to be too expensive and too error prone.
The takeaway
It isn’t about who is good and who is not. It is about two different worldviews. Your thing to think about and to understand how to cope, is how to change minds. Even your own. The first thing to notice is, logic and reason have never changed anyone’s world view. That is a huge problem for many. The reason lies in a thought form Stephen J. Gould.
“Nothing is more dangerous than a dogmatic worldview—nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”
Begin by thinking about yourself and your worldview. How would you support it? How would you challenge someone else? How would you defend yourself from their arguments?
Do not get caught in an echo chamber where all you see or hear agrees with what you believe.
Avoid behaving as if you have graduated from the Dogbert Communication Course. It’s thesis:
“You should not listen to anyone else. They will be either agreeing with you or saying stupid stuff.”
I help people have more income and larger, more liquid estates.
Call or email don@moneyfyi.com in Canada 705-927-4770
moneyFYI 
very much enjoy your postings, thank you.
Thank you for reading