Justplainbill's Weblog

September 7, 2012

Basic Economics for the Taxpayer – Consumer

Filed under: Political Commentary — Tags: , , , , , , , , , , — justplainbill @ 6:38 pm

Wealth = Productivity – Waste

Productivity = Available Labor X Available Resources

Waste = (100% < Effort) + (100% < Resource Use)

7 September 2012

Definitions:

            wealth, Black’s Law Dictionary 9th Ed. 1730: 1. A large quantity of something, 2. The state of having abundant financial resources, affluence. Dictionary of Banking and Finance 3rd Ed. 377: (wealth tax), (a tax on) money, property or investments owned by a person.

            productivity, Black’s no definition labor, Black’s 952, 1. Work of any type, including mental exertion * the term usually refers to work for wages as opposed to profits. 2. Workers considered as an economic unit or a political element, 3. A Spanish land measure equal to 177 1/7 acres. DB+F 273, the rate of output per employee or per machine in a factory.

            waste, Black’s 1727 + 1728: Permanent harm to real property committed by a tenant to the prejudice of the heir, the reversioner, or the remainderman. (List of acts follows.) (List of specific types of waste follows.) DB+F 376: material left over from a production process which is of no value and is thrown away. To use more than is needed

Justplainbill’s definitions:

            wealth: that which enhances the human condition beyond the necessary

            productivity: human effort

            waste: crime, inefficiency, negligence, incompetence; in the above equation, waste is actually the difference between 100% effort and that actually put forth; and it’s the same type of difference when figuring resource use

            effort: total human involvement in the production process

Additional references: The works of James Q. Wilson, Ph. D.; The works of Thomas C. Sowell (pronounced soul) Ph. D.;  The Albany Plan Re-Visited, www.bn.com/ebooks, & Ng’s coursera. (Jared Diamond’s book, Collapse is ok, too.) For the sake of brevity and carpal tunnel syndrome, the abbreviation T-C is being used to denote the long suffering Taxpayer-Consumer.

The current political climate has caused so much confusion regarding fair share, rich vs. poor, income gap, welfare & disability, and the social obligation of the wealthy, that some basic discussion has become necessary. The definitions that I’ve put up show the disparity between groups on what’s what, but almost all of the arguments made ignore the key ingredient in the creation of wealth: productive people.

Rather than repeat myself, at this point you should read the first section of the earlier posting on entrepreneurship and education where the basic point is made that man’s labor, both intellectual and physical, is necessary for raw material to be converted to a product or service that has value. The headlined equations are socio-legal, not mathematics or economics. These are the equations that taxpayers and consumers (T-C) should use when evaluating all situations requiring those decisions affecting our political community.

Fair Share, simply put, means that you receive in proportion to what you contributed. All else is coerced charity, and as such, is NOT a government function, but is, instead, theft. A good example of this is a few years ago in Missouri, there was a large enough surplus such that the legislature voted to return the excess to the taxpayer, if memory serves, like the Missouri Balanced Budget, because the Missouri Constitution requires it. Various civil rights groups, (isn’t it amazing how civil rights groups often conjures up thievery?) filed suit in federal court saying that the return of collected taxes to the taxpayers was unconstitutional because it meant that the colored would not be receiving their fair share of the money. Unlike subsequent federal rulings in Missouri, in this case the court ruled that you only got back if you put in, meaning, each taxpayer received his fair share of the excess collected taxes. Fair Share IS proportional, NOT absolute.

Income Gap has existed since before time, now, and will continue until the end of time, however, the concept that this is anything more than a minor statistic in certain economic theories, is a political trap to force guilt on the taxpayer in order to coerce charity through forced taxation. The concept of this gap being both eternal and universal is historically obvious. It shows up in The Bible, in Chinese literature from The Warring States period, in Pre-Columbian (before Columbus reached North America) Civilizations, in fact, in ALL cultures and societies. The points to be made here are that before The Industrial Revolution, the gap in terms of wealth was immensely greater than now. Some examples:

During the Diaspora in Egypt, a huge segment of Hebrews was held in slavery. 100% of their labor and their person was owned by Pharaoh. In Latinium, 100% of the labor of the slaves, plus their person, was owned by Roman Citizens. In the antebellum U.S., slaves were allowed in most states, to own property, and in fact, to work to a very limited degree, for themselves (with occasionally making enough to buy their freedom. Freehling’s Secession has some excellent in-context historical commentary on this). Prior to The Industrial Revolution, even though the income gap was huge, what you could buy was limited to food, clothing, shelter, and savings. There was nothing else to own! The purposes of Wealth Accumulation were limited to creating an inheritance, good health, and easing your work situation! Historically, just consider the condition of the French Peasant in 1790, and the Russian Serf in 1917, or for that matter, the East German Citizen in 1985 and the Chinese rice farmer in 2012, or heck, just about anybody in sub-Sahara Africa! So, how huge is the gap between Roman Slave and Roman Caesar, and how do you compare that with today’s arbitrarily proclaimed income gap?

All were subject to the same diseases, climate trauma, famines, old age, wars, &c.! Post-Industrial Revolution, the variety of goods and services available for purchase & use, is huge, and let us not forget that such services such as health care, are now among the benefits brought to us by that Industrial Revolution. So, what is now being speciously argued by this income gap is that the less productive are somehow entitled to goods and services that they cannot afford without charitable subsidy by the more productive. The fallacy with income gap is simply that there is so much to buy, and so much of it has been made “necessary”, that only the very rich can afford it all, yet, those at the poverty level, at least in the industrial countries, are well-to-do by all other standards.

[And, not to hurt your feelings in here, but as a matter of cold, hard fact, the disabled, the very young, and the elderly are not productive, that is, their activities, generally, are not contributing to the creation of Wealth – and, yes, the elderly buy goods & services, but they are using either savings or charity to pay for them. BTW, I give a greater share of my wealth to charity than, Obama, Biden, Kerry, &c., so please don’t send me emails about how these people should be taken care of. As a matter of economic fact, not emotion or socio-religious morality, the disabled, the young, and the elderly, are not productive members of society. Actually, if you wish to argue this, let’s start with how health-care is rationed in Europe, Asia, India, Africa, and South & Central America. The aforementioned three groups are excluded through rationing, of the tax supported health-care systems!]

Consider how many “poor” people have cell phones, cable, year-round housing, 100% access to health-care (and this pre-PPACA [Obama-Care], Patient Protection Affordable Care Act – and as an aside, prior to PPACA there was 100% access to health-care for every person, legal or not, walking within the U.S.A., including both free birth-control and pre & neo-natal care! Rather than enter into an argument here, just remember that during the 2008 Presidential Primary Cycle, Hon. Senator (NY) Hillary R. Clinton, Esq. (AR), made a big deal about it, pointing out that the, then current, situation was that although everyone had access, it was the hidden surcharge of $800 that each health insurance policy holder paid to cover those who did not have insurance, and she included those on Medicaid and Medicare in her computations!), school breakfasts and luncheons, paid education from K – 12, and even beyond with Pell Grants, accessibility to sub-prime student loans, scholarships, and even unqualified direct support from both public and private sources. So, how is that ‘poor’ to the point of justifying taking over 50% of my gross in taxation?

The availability of necessary products and services to those at the low end of the income gap is the same as that for those at the high end. The difference is in those goods beyond the minimum needed for good health and a basic education. Community basketball courts, “summer programs” for the poor, special +/or remedial courses, set-asides, &c., are in fact, waste, unless those accessing such charity perform some communal productive function, and even then, without 100% return on wealth, there’ll still be waste, but, it will be a socially acceptable waste, if the T-C has set the standard, one not arbitrarily set by politicians for the purpose of vote buying.

Bill Gates can buy a Ferretti Yacht; I cannot. The income gap between Bill Gates and me is huge and is based on his productive contribution to the global economy compared to mine. He’s earned his yacht, I have not. The gap factor between us is over 10,000X. Now, the gap factor between a person legally designated as poor by The Federal Government and me, is less than 4X, based on the federal standard of $27,000/yr. And, if the reporting on www.snopes.com is accurate, the complaint of the woman with the $10,000+ wall TV, receiving welfare & AFDC in New Orleans stating that after Katrina she wasn’t getting enough aid, is a showing of the uselessness of income gap as a factor in any reasonable decision making. The income gap between the middle class and the poor is less than a factor of 4.

Let’s cover the nomenclature of these groupings, too, while we’re here. When using income gap as a measure, Keynesians refer to the different groupings of poor, working poor, blue collar, lower middle class, white collar, upper middle class, lower upper class (aka nouveau riche) and upper class (old money). While “the name remains the same”, membership in these various classes, until recently, has been in constant flux with the two poor classes, and the blue collar class, shrinking, and all of the others increasing, as a percentage of the population. Lots of factors for this, but free market post industrialism, coupled to minimal reasonable government intervention, have made this so. Reaganomics and the silicone chip have made wealth creation less expensive, Clinton’s abuse of the Community Recovery Act (CRA), and his combine with Goldman Sachs and CitiGroup (Corzine, Weill & Co getting Glass-Steagall repealed, Clinton single handedly creating the sub-prime mortgage bubble – along with the corrupt political appointees at Fannie Mae & Freddie Mac; and before you say that it ain’t so, the historians are already reporting it as such, just read William D. Cohan’s House of Cards, as one of many already out there reporting this, Charlie Gasperino’s last two books give more insight to what went on, too. BTW, if you get FBN, Lou Dobb’s chalk talk on 6 September 2012, gives an almost adequate summary of this.), coupled to the Swiss, who, for the second time in 100 years, refusing to take US brokerage-house collateral for cash, (last time was 1929 – oh, you didn’t know that it was Swiss refusal to accept collateral that caused the 1929 Stock Market Crash and the ensuing depression? Well, now you do;) which caused the global financial collapse of 2008, since exacerbated by Bernanke & Co.’s release of paper into the system without the concomitant creation of the wealth necessary to give that paper value.

Price is different from Value, and in fact, not related to each other. Both are quantifiable and qualitative. Professor von Mises’ work Currency and Money explains this from the economist’s perspective, yet from the viewpoint of the consumer, two simpler examples show clearly the differences, and, yes, there are many differences but we usually only see one or two. Basically, price is an arbitrary number of a specific meaningless paper currency which a buyer and seller agree to trade for a desired product or service. This transaction need not, in fact rarely does, take place in a free and open market place. Empirically, I have yet to find an actual or reference to an actual, free and open market place. TANST (There Ain’t No Such Thing!)

It’s impossible for the T-C to know enough about any transaction or occurrence such that he can make the best/ most informed decision. This is primarily because T-C must work for a living, which means that T-C simply hasn’t got the time to get the necessarily extensive education nor the time necessary to gather enough data, to be able to make the best possible decision. However, T-C can acquire the necessary basics of things to make good guesses. Refer back to the Education & Entrepreneur posting for one acceptable and adequate methodology. Another would be to require test-able standards of all government positions, especially judicial and elected positions. The Albany Plan Re-Visited (www.bn.com/ebooks) has two approaches to this problem, neither perfect, but both are better than what we currently have.

Gold ore has zero value. Once processed into bullion or coin, it has both price and value. You can find the price of gold by googling it, getting The Wall Street Journal, or just by following most adequate News sources. Today, it’s about $1,700 a Troy Ounce, ten years ago it was about $800 tr/oz. Whether in 2002 or 2012, it’s still just one troy ounce of gold! Only the price has changed. Price has NO relationship to Value!

The value of gold, or any other product or service, is more than its purchasing power. Ok, where to go to learn about purchasing power? Best discussion that I’ve ever found is in Mark Twain’s A Connecticut Yankee in King Arthur’s Court. Go enjoy the good read. For those who want the quick reference, answer this question, who is richer: the man with $5, who must pay $5 for a loaf of bread, or the man with $3 who must pay $1 for a loaf of bread?

Value includes the satisfaction value, the aesthetic value, and the resultant, of the product or service. That Canadian Maple Leaf has more than 1 tr/oz. of gold in its value. It has the art work of the dye maker, the sweat of those who manufactured the gold, the distribution expense, the pleasure of the warmth of its glow and feel (only metal that I think actually feels warm; yes, I know that’s subjective, but I really do like gold), and the secure feeling that one gets knowing that this little coin has a future use directly related to my health & welfare! Think about it: how many people with their savings are purchasing gold and silver in the expectation that at some time in the future, they will be able to purchase food, water, shelter, clothing, and medical care? Remember the Weimar Republic and where that led the world! Will the pretty paper be able to do that?

So, what actually happens when Bernanke & Co. use quantitative easing? You’ve already got the necessary basics, price and value.

Yup, more paper, the same amount of gold, no increase in wealth.

Unless more gold is dug, processed, and manufactured, in which case, and you should refer back to the equations at the top of the page because that means: more wealth!

But there’s more. Because of Clinton’s repeal of Glass-Steagall, brokerage houses are now allowed to access the “cash window” at the Federal Reserve. Goldman-Sachs is not a bank in the traditional sense of holding consumers’ deposits and then loaning that money out. It is an investment bank, meaning that it deals in instruments of debt and equity. von Mises and Hazlett are good for all of the details, but the key for T-C is this, businesses use brokerage houses, consumers use banks; brokerage houses deal in stocks, bonds, letters of credit, DBO’s, CBO’s, Mutual Funds, &c., consumers deal with home mortgages, credit cards, auto, and appliance loans, i.e., personal financing including savings accounts, and checking accounts. (Yes, there are many individuals who deal directly with brokerages, but they are acting as businesses, not consumers, think about it, but you should be looking some of this stuff up in The Dictionary of Banking and Finance, or Black’s, and you really should own a current copy of each and update them every three years.) Because of the Crash of 1929, they were made separate and as such, not one of them became “too big to fail”, primarily because T-C’s money was kept separate from speculator’s money. Now consider what happened to the $1,600,000,000.00 of T-C’s money missing from MF Global, oh, BTW, that’s Corzine of Goldman-Sachs fame, that just got off Scott-free of all liability +/or responsibility for the T-C loss.

Accessing the cash window means that they can get tax dollar cash to finance leveraged purchasing of financial instruments. Think like this, it means that they don’t have to put up their own capital to buy/speculate in the markets; think the aforementioned MF Global. They get to use our money instead. It’s part of why the stock market keeps going up, think price increase, while the economy is so bad, think no change in value. Think why large companies are keeping cash on hand, trade in currencies because the price of other currencies is tied to the dollar, and small companies are losing ground, think steady value with no wealth increase. Think about the relationship between the currency number on your IRA or 401(k) and its actual value. You may have a large dollar amount, but to what value does that dollar amount relate? Think $5 vs. $3, which is what the big companies are thinking.

So, where are we? Y’all should now have enough knowledge to make rational decisions when people start talking to you about price and value. Y’all now have enough to know whether or not you’re better off now, four years ago, and you should be able to rationally speculate on how well you will be four years from now!

And better yet, you will be able to use this little bit anytime, anywhere, and anyplace that people try to talk to you about economics. Just keep in mind that there’s no correlation between price and value, and be able to answer the question of who’s richer, the man with $5 cash and $5 cost for a loaf of bread, or the man with $3 cash and $1 cost for a loaf of bread.

–          86 –

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4 Comments »

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    • ?? Whatever you’re talking about still doesn’t affect anything that Iwrote about, and certainly doesn’t come close to explaining the Value vs. Price problem.

      Comment by justplainbill — June 4, 2013 @ 2:17 pm

    • If any of y’all are truly interested, then you should go to http://www.bn.com/ebooks and buy, read, and promote “The Albany Plan Re-Visited”.

      Comment by justplainbill — June 4, 2013 @ 2:20 pm


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