“Alice In Wonderland” Economics


            When Lewis Carroll set out to write Alice in Wonderland, he created a world void of logic to show the absurdness of imaginary numbers in calculus.  In Alice’s world, the characters use flawed logic and misguided assumptions to argue almost certainly ludicrous claims.  Unfortunately, I find myself down in the Rabbit Hole of Wonderland in the science of economics; where logic, economic laws, and intellectualism have taken a back seat to what can only be described as academic drivel.  Nobel prizes and teaching jobs at top universities have been handed out, like trophies in an 8-year-old soccer league, to economic illiterates and they teach these economic fallacies and warped logic to our youngest and brightest daily.
             This past fall, while making my schedule for the spring semester, I had to meet with my future microeconomics professor because his class was full.  Interested to know his positions, I said, “ I have a question about gold and silver, that’s the only thing that’s real money, so can paper money work?”  Of course, I already knew that paper money has failed literally every time it has been used, but thought the question worth asking anyway.
           
             “Paper money works”, he said, “but asking a microeconomics professor that question is kind of useless”.  Besides the fact that every student of economics should understand the nature of money, it was clear that he is oblivious to the failure of paper money taking place in Europe and the mounting debt it has allowed the United States to incur, which is just a ticking time bomb.
            Once classes started, he was discussing health care markets around the world and drew a line on the board.  On the left side he wrote socialized and free market on the right.  After pointing out, correctly, that the United States spends more on health care than any other country, he put the United States to the far right on his line chart, arguing that the free market has failed to deliver proper, affordable health care in this country and socialized care, in countries like Sweden and the UK, are more desirable.
             But exactly how free market is our health care system?  For starters Medicare covers 47.5 million Americans and Medicaid covers another 47 million, or 94.5 million combined, both of which are socialized medicine that utilize price fixing for over 7300 medical procedures.  Since the Medicare and Medicaid reimbursement remains well below the actual cost to do business, doctors rely on other patients to pick up the slack by charging those without the socialized medicine significantly more.  At best, arguing that the United States provides health care services through the free market is ignorant.  When, in reality, health care costs continue to skyrocket because of this schizophrenic health care policy of socialism for some and free markets for others, with an extra bump from the third party payer and other governmental interventions such as occupational licensure.  However, compared to the rest of economics wonderland, this professor’s offenses against logic and economic fact are mild.
              James Livingston, author of the book “Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment and Your Soul” and history professor at Rutgers University, wrote an op-ed for the New York Times chock- full of economic and historic misinformation.
              He writes, “As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”
             Unfortunately, this is just the first paragraph.  As he does throughout this piece, Mr. Livingston puts the cart before the horse here.  Certainly, private investment in equipment that make production more efficient causes real, sustained economic growth; for example, the private investments made by Henry Ford to produce automobiles more efficiently and qualitatively provided real wealth and economic growth in the United States. By investing in the means to produce a good, the automobile, Ford provided some Americans with a job, an automobile to travel more quickly –remember time is a cost, and an exportable good to the rest of the world that creates demand for our dollar.  This is real economic growth.
             Consumer debt and government spending, on the other hand, simply only creates artificial booms and busts that give the impression of prosperity.  This “economic growth” gives the impression of wealth, but instead inflates a bubble that allocates resources to non-productive uses.  Government spending, in the form of the $2 trillion line of credit that Fannie Mae and Freddie Mac had from the treasury to purchase loans made to lower and middle income families from the banks and housing incentive programs, and consumer debt, taken out by homeowners and readily available because of 1% interest rates set by the Federal Reserve, created malinvestment in housing.  First comes the boom, where initial investments are made and the increased value of the asset, housing in this case, creates the illusion of wealth and prosperity by way of credit created out of thin air; Gross Domestic Product (GDP) increases in nominal terms.  Invariably, a prolific bust follows the boom, when the market attempts to purge itself of the malinvestment made in housing, or even stock market valuations.  This is not real economic growth, but perceived growth because of rapid increases in the paper value of assets held.

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