Hughesair (Inflection Point)

Retired physician and air taxi operator, science writer and part time assistant professor, these editorials cover a wide range of topics. Mostly non political, mostly true, I write more from experience than from research and more from science than convention. Subjects cover medicine, Alaska aviation, economics, technology and an occasional book review. The Floatplane book is out there. I am currently working on Hippocrates a Fanciful History of Medicine and Death of the Middleclass. Enjoy!


Sunday, May 29, 2016

Economics 101

The Fed goes to extraordinary lengths to stimulate the economy with very little result, thus raising questions, what is the economy and how does one stimulate it? Our economic growth barely exceeds population growth and obviously all but the very wealthy are suffering from a declining standard of living. An old tattered economics 101 text book may shed some light on the questions.
The man or woman on the street has no problem feeling the depression. Why is it that economists do not? What is the economy anyway? What is the energy that man on the street feels walking down a thriving business district in a thriving city, I'm thinking of Dublin, versus the depression felt in a manufacturing town where the plants are shut down, moved to Mexico or outsourced to China?

A text book might say, "economics is the  allocation of scarce means to alternative means," that says nothing of good economics or bad economics because the economy is the very quality of life, the standard of living. The gross domestic product, GDP, offers one yard stick for measuring the economy but falls short reflecting the quality of life, the productivity that drives the economy and the palpable feeling of energy on the street. The word product is the key. The GDP is the product of the money supply multiplied by the  yearly turnover rate, the number of times that money is spent, the turnover rate or velocity. The velocity is under appreciated and the numbers are hard to find. Divide the GDP by the M1 and you get a sense of velocity, the turn over rate, the number of times we spend and pass the same dollars from one place to another over a year's time. In good times the velocity is up around 11, in bad times, like now, it is down to like 5.

In physics E = M c squared. In economics Energy equals the GDP divided by the M1, money supply in circulation. Janet Yellen and the Federal Reserve have tried to stimulate the economy with quantitative easing pumping nearly 4 trillion dollars into the economy over seven years by way of the banking system with minimal results. The strategy does nothing for the velocity or energy side of the equation in fact velocity, i.e. energy may be lower.
           GDP       M1         E        trillions $
2016    16.49    3.2446    5.08   
2015    16.47    3.0873    5.33      
2014    16.15    2.9212    5.53      
2013    15.76    2.6414    5.97
2012    15.38    2.4586    6.26      
2011    15.19    2.1618    7.03      
2010    14.94    1.8600    8.03      
1009    14.54    1.6965    8.57      
2008    14.58    1.6034    9.09
2007    14.99    1.3711    10.93
2006    14.72    1.3849    10.63
2005    14.37    1.3869    10.36
2004    13.95    1.3025    10.04
2003    13.53    1.3025    10.39
2002    12.96    1.2187    10.63
2001    12.71    1.1824    10.75
2000    12.69    1.0896    11.65
Note that a dramatic increase in money supply drives little increase in GDP
One can hardly find any reference in government accounting for the turnover
but a dramatic decrease in the energy level of the economy, less than half since 2007
In 1998 the government stopped publishing L the factor for overall liquidity,
later they stopped publishing M3. Both would reflect the trillions sequestered in the
shadow banking, hedge funds and offshore banking; I wonder why.

Productivity drives the turnover rate, the velocity and thus the energy and the standard of living. What drives productivity? The working man can tell you, the tradesman can tell you and the farmer. 
That bring us back to chapter two. From the text book John Ise, professor of economics at the University of Kansas, a grass roots economist, Sod and Stubble, productivity comes from the land, labor, capital and entrepreneurial ability. In Kansas, land was the cheap, abundant, an exploitable resource, the abundance of virgin prairie land, sod and stubble, the resource that made our mid west the wealth producing bread basket of the world. It's more complicated now you say and indeed transportation, coal, iron, then technology and now the Internet and information serves as does land for the rich productive wheat lands.

For land substitute, a cheap exploitable sustainable abundant resource, today we think foreign labor and cheap manufacturing at the expense of US jobs and an obscene trade deficit now exceeding a half a trillion a year while ignoring our own infrastructure, energy, transportation and information grid to the benefit of legislatively sanctioned monopoly. It's like colonialism all over again. OK forget the trade deficit, focus on abundant cheap sustainable exploitable infrastructure, substance and photons, 

With the second key factor - we are doing just as bad - labor, think human resource, shelter, security, nutrition and education. There are 3.4 million homeless, incarceration and a breakdown in our legal and policing systems, near poorest nutrition of developed nations and an education system at the expense of our not yet enfranchised children, legal dropouts at 16. No business succeeds long term with a total disregard for employee welfare. A nation is no different. Stop exploiting humans and free up legitimate resources for exploitation.

Building the infrastructure, freeing up monopoly based resources and providing affordable higher education and health takes care of our two most distorted and neglected factors of production, unlocking these two basic factors will release a tsunami of productivity because we have lots of venture capital and entrepreneurial ability to supply the rest, the other two.


Blogger John's Electrons said...

This is good stuff!

1:41 PM  

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