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~ USA Headed for a 5th Revolution! Why?

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Category Archives: Definitions

#39 How Manufacturing Can Create Societal Wealth

05 Saturday Apr 2014

Posted by Jordan Abel in Definitions, Economics, Innovative Thinking: Ideas and Products, Societal Issues

≈ Leave a comment

Note: Entry #41 begins a series of blogs about General Motors.  How did an apparent culture change over time likely lead to bankruptcy and an apparent disregard for addressing safety issues.  Such actions by corporations affect societal attitudes.

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books?  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10), America’s 5th Revolution Volume II (Entries 11-20), America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan Visiting College Campus. Meets Former Economics Professor.

Jordan: “Professor, nice to see you again. Been a while since I was in one of your classes.”

albert_einstein_professor croppedProfessor: “Yes, a long time. I understand you’re spending a lot of time in Washington.

Jordan: “Too much time. I need these kinds of breaks to keep my thinking straight.”

Prof (laughing): “You’re not saying people inside the Beltway have distorted thinking?”

Jordan: “I’ll skip my thoughts on that one. But if you have a few minutes I would like to get your thoughts on some serious issues facing the country.”

Prof: “I’ve got about an hour before my next lecture. What’s on your mind?”

Jordan: “There are some disturbing trends in the economy.

Prof: “Such as?”

Jordan: “The United States needs to generate more wealth as a country. Taxing the rich does not create wealth, merely redistributes income. Like moving money from one pocket to another. What policies should we consider implementing to create more wealth for society? Not just wealth for some individual or some company but wealth for society.”

Prof: “Great question. Creating wealth is a simple concept but far more difficult to execute.”

Jordan: “Let’s pretend we are back in Econ 101. Explain the concept and then we can talk about execution.”

Prof: “OK students, quiet down. Just kidding. For me the easiest way to understand how to create wealth for society is to think manufacturing.”

Jordan: “Exactly what do you mean by manufacturing?

Prof: “Most people think manufacturing as making cars or airplanes or furniture. But in the broadest sense manufacturing is the process by which value is added to a product.”

Jordan: “If I understand, then farming can be considered manufacturing. You start out with seeds and you end up with a bunch of corn. Mining would also be the same. Start out with dirt and end up with say iron ore.”

Prof: “Let’s use your examples. How is wealth created? Let’s take raw material – iron ore, corn, lumber. Step 1 is consider the value of that raw material on its own – a hunk of iron ore, stalk of corn or a tree. Step 2 is think about a product that uses the raw material. Step 3 is compare value between the raw material and the finished product?”

Jordan: “Let’s take this coffee mug. The raw material is some type of clay and some paint for decorations.”

I Luv NY Mug CroppedProf: “Good example. What would you pay for the clay and paint as raw materials?”

Jordan: “Nothing because they are of no value to me.”

Prof: “What did you pay for the coffee mug — $10?

Jordan: “Try $20.  It’s a nice mug.”

Prof: “So value went from $0 for the raw material to $20 as a coffee mug?”

Jordan: “Yes. Whoever made the mug must have created the value.”

Prof: “He does remember Econ 101. Actually there are some other people in the chain but you have the idea.”

Jordan: “The other people – the trucking company, the place where I bought the mug, the company that mined the clay and the company that made the paint – all contributed to the wealth creation.”

Prof: “On a very simplest level, none of those people would be working if you didn’t buy the coffee mug.”

Jordan: “So each one of the companies involved in making and then getting the coffee mug to me contributed to value creation?”

Prof: “One can argue that the people between the potter and the buyer are merely middlemen. You could have purchased the coffee mug directly from the maker.”

Jordan: “So the middleman might not really add value, bur rather…call it ‘facilitate’?”

Prof: “The word ‘facilitate’ will work. ‘Catalyst’ will work also. A catalyst allows a reaction to occur without becoming part of the reaction.”

Jordan: “Hasn’t the internet started to replace the middleman? Many more companies seem to be selling directly to the customer.”

Prof: “The internet has been a disruptive force to the middleman, or distribution system. For centuries people in developed countries bought in physical stores. Virtually all these stores were operated by merchants who sold the goods but did not make the goods.”

Jordan: “Now, with the internet, in many cases I can buy directly from the manufacturer and have the product delivered to my location – no more brick-and-mortar store.”

Prof: “A lot of jobs associated with…call it merchandising business…have been eliminated.”

Jordan: “Did those people really add value and create wealth?”

Prof: “Technically, no. But what they did do was enable a lot more people to buy the product. Without the middleman, the potter who made the coffee mug would have a very limited population to sell to. With the middleman, the potential for sales expanded exponentially.”

Jordan: “Now the potter can use the internet and reach many more people than before. In some cases maybe even more people than with the middleman.”

Prof: “And keep more of the profits since no payment to the middleman.”

Jordan: “At the same time, employment declines because fewer people are working to distribute the product. So did we really create any additional wealth by selling on the internet?”

Prof: “Answering a related question will help you set policies for wealth creation.”

Jordan: “Where are we headed?”

Prof: “What if the coffee mug is no longer made in the US but now made in say China…bad pun, I know.”

Jordan: “I’ll forgive you. If the mug is made in China, the wealth created between the raw material and the finished product – coffee mug – stays in China and not the US.”

Prof: “You’ve got it.

Jordan: “Rather than $20 being spread among US companies, the only value in the US is for transportation and distribution — maybe $5-6. The potter is cut out completely.”

Prof: “One can make a good argument that no wealth is created for US society when products are manufactured outside this country. What we as a society confuse is wealth creation for an individual or company compared to wealth creation for society.”

Jordan: “Macro and micro economics. Or as a friend of mine calls it macro schmacro and micro schmicro economics.”

Prof: “I’ll remember those terms. But the distinction is important. What is of benefit to an individual or a company…schmicro economics…is not always a benefit to society…schmacro economics.”

Jordan: “Moving production of coffee mugs to China might generate more profits for a specific company…schmicro…but overall the US loses wealth as a result…schmacro.  Correct?”

Prof: “Yes…but…and the ‘but’ is the value of trade between countries.”

Jordan: “So trading between countries is not just a one-way street but can create wealth in both countries?”

Prof: “Trading is important because more demand can be created. Just like the internet opened up new markets for the potter who made the coffee mug, trade opens up new markets for countries.”

Jordan: “But isn’t trade usually one sided. I mean the country that exports seems to benefit the most.”

Prof: “The country doing the exporting is usually more efficient at making those products than the country buying the products. But for trade to work the country buying has to offer something in return – another product at a lower cost or some raw material that has value.”

Coffee beansJordan: “Let’s take coffee. Brazil is more efficient at growing coffee beans than the US mainland. Therefore, the US should buy coffee beans from Brazil.”

Prof: “The US is also very efficient at growing certain crops – corn, soybeans, wheat. And it exports lots of those crops.”

Jordan: “But Brazil and the US are not as efficient at producing electronics as say China. So Brazil might trade coffee beans for US wheat and the US might trade corn for electronics made in China.”

CornProf: “You’ve got it the basics. In theory…and I emphasize theory…each country trades products that it produces more efficiently. As a result products made in another country are less costly to consumers and wealth is created in each of the countries.”

Jordan: “I realize understanding wealth creation has many more variables. But the gist of it seems taking a raw material and refining it so it is worth more. Clay becomes a coffee mug. Wheat becomes flour which becomes a cake. Silica becomes silicon which becomes an electronic circuit which becomes a computer.”

Prof: “Very good Jordan.”

Jordan: “Prof, I have a somewhat related question that has bothered me for some time.”

Prof: “Which is…?”

Jordan: “The manufacturing of electronics is mostly automated. Labor cost as a percent of the cost of the product must be very low. So what is the advantage of making so many electronic products in Asia? Lead times are long and it is hard to protect intellectual property.”

Prof: “Let’s take a break and come back to that question. But I want to put the answer in the context of your first question – what policies will help the US create more wealth for society and not just individuals or certain companies?”

Jordan: “Good.  Now I want to refill by coffee mug.  Let’s see where this was made?”

 

 

 

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#30 Government Has No Assets?

05 Wednesday Mar 2014

Posted by Jordan Abel in Definitions, Economics, Societal Issues

≈ 1 Comment

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, I think the story will be more meaningful by starting at the beginning.)

Want a PDF version for Entries #1-10 and 11-20 formatted for tablets and e-books?  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10)  America’s 5th Revolution Volume II (Entries 11-20)

Scene: Same coffee shop. Jordan sees Greenie third day in a row.

Greenie: “Jordan, over here.”

010414_1635_16TeachingS2.jpgJordan: “Greenie – three days in a row. What will people think?”

Greenie: “People in this town actually think? Here’s your coffee. And no more meetings after today. At least for awhile.”

Jordan: “This is good service – coffee every day. What’s up?”

Greenie: “One more question about issues in economics that are counterintuitive – not really common sense.”

Jordan: “And that is…?”

Greenie: “A lot of people keep saying the government has too much debt. And they might be right. But I never hear these people talk about what the government owns.”

Jordan: “Greenie, you are very perceptive. Yes, the government has debt. The government also has assets – land, buildings, equipment. Lots of assets.”

Greenie: “Why doesn’t anyone talk about the value of what the government owns?”

Jordan: “Couple of reasons. One is talking about government assets would weaken the case against too much government debt. Another issue is the government does not really put a value on all that it owns.”

AccountingGreenie: “Really? You mean there is no what do you call it…balance sheet…for government property?”

Jordan: “No balance sheet. There is a list of what the government owns but no value is assigned to it.”

Greenie: “So an asset is only assigned a number, not a value. There is no value put on all the roads, bridges, building, parks, oil leases, military equipment, scientific equipment and all that other stuff?

Jordan: “No value assigned.”

Greenie: “That seems really stupid. When private companies buy something they assign a value. When you try to get a mortgage they assign a value to the house.”

Jordan: “It is a political problem. Not having a value assigned allows people opposed to any kind of government debt to emphasize the debt and not the value of what funds are used to buy.”

Greenie: “Companies take on debt all the time in order to buy more assets. Why shouldn’t the government recognize assets?”

Jordan: “Your point is well taken. Tax payers do not know the value of government holdings. All taxpayers hear about is a certain building cost say $50 million. That building might be worth $75 million.

Greenie: “If a company owned the building, everyone would cheer and say it was a smart investment. Many of those same people chastise the government for spending $50 million, even though the building is worth $75 million. By the way, why doesn’t the government value assets?”

Jordan: “Part history. Government never had a need to put a value on assets. Part tax law. Private investors can depreciate buildings and equipment over time, which reduces taxes. Government pays no taxes so no need to assign a value.”

Greenie: “What about lenders? Aren’t most loans backed by some type of collateral? Someone still holds the mortgage to my condo. The finance company’s name was on the title of my car until I paid it off.”

Jordan: “One big difference between lending to individuals or companies and lending to the government. The government can always print more money to pay off the loan. Individuals and companies cannot. So the lender needs some type collateral as a guarantee.”

Greenie: “OK, I’ll buy that is a big difference. But if government recognized the value of assets, seems like the tone of the conversation about the amount of debt might change.”

Jordan: “If the Federal government were a company, the balance sheet of the government might show a surplus of assets over liabilities – you know debt. That would definitely change the story about debt.”

Failure to CommunicateGreenie: “Reminds me of a line of a classic movie, ‘Cool Hand Luke.’ ‘What we have is a failure to communicate.'”

Jordan: “Great example and spot on. I think you need to include in your education program the implications of government not valuing assets. People need to understand parts of economics are not common sense.”

Greenie: “I will. Right now we have three parts of economics that seem counterintuitive. One is why in economic downturns…or upturns…the Federal government should behave differently than companies or individuals. Two is why backing the money supply with precious metal is no guarantee of value. Three is government has assets for which no value is assigned. Whew! That’s a mouthful.”

Jordan: “Might be a mouthful but should be a great educational program. When do you think you’ll be ready?”

Greenie: “Jordan, I need some time to make this easy to understand for everyone. A couple of weeks at least. I’ll let you know.”

Jordan: “Great. And I’ll buy coffee next time.”

Greenie: “Wow. Mr. Generosity himself. Don’t go overboard. But thanks. See you Jordan.”

#28 Economics: Micro, Schmicro. Macro, Schmacro.

26 Wednesday Feb 2014

Posted by Jordan Abel in Definitions, Societal Issues

≈ 1 Comment

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, I think the story will be more meaningful by starting at the beginning.)

Want a PDF version for Entries #1-10 and 11-20 formatted for tablets and e-books?  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10)  America’s 5th Revolution Volume II (Entries 11-20)

Scene: Bagel shop in Washington. Jordan runs into Greenie.

Greenie: “Jordan Abel. What a surprise. Hanging out with the little people for a change?”

010414_1635_16TeachingS2.jpgJordan: “Greenie, always a pleasure. Glad you have not lost your biting humor. You have time for coffee?”

Greenie: “Love to. Just got off the Metro and I need a fix.”

Greenie gets coffee and returns.

Greenie: “You know, Jordan, the new government needs to start operating more responsibly. It needs to start acting like a household — run a surplus and save money.”

Jordan: “Who have you been talking to lately? Never mind. I don’t want to know.”

Greenie: “And I won’t tell you. But really the question seems valid.”

Jordan: “I know the idea sounds logical…but what if I convinced you that ideal government behavior is exactly the opposite of ideal behavior by a household?”

Greenie: “How so? That makes no sense.”

Jordan: “Let’s talk about the role of each. Start with the family.”

Greenie: “OK. The family should not spend more than its income. It should also try to save for house down payment, college fund, retirement funds and unexpected expenses.”

Jordan: “And when the economy is good, what should the family do?”

Greenie: “Still be conservative but spending a little more is OK.”

Jordan: “What about borrowing?”

Greenie: “Try not to borrow too much, especially using credit cards.”

Jordan: “What about borrowing to buy a house?”

Greenie: “That’s OK as long as the payment, the maintenance and the taxes do not take too much of the income. Still need to eat and save some money.”

Jordan: “And when fiscal times are not so good?”

Greenie: “Cut back on some spending but you can only cut back so much…at least in the short-term.”

Jordan: “Is it OK to use some savings when times are tough?”

Greenie: “Not if you can help it. That’s like running a deficit. Do not do it unless absolutely necessary.”

Jordan: “I agree. So for an individual, a family or even a company, do not overspend. Be fiscally responsible.”

Greenie: “Right.”

Jordan: “The study of economic behavior for smaller units — an individual, a family and even a company is called ‘microeconomics.'”

Greenie: “Where do you come up with that term? Micro, schmicro, who cares?”

Jordan: “You should care because it is important to know the difference in how individuals or small groups behave and how the government is supposed to behave.”

Greenie: “So if studying my behavior is schmicro economics, studying the behavior and actions of government and other big stuff must be schmacro economics. I know. I know…it’s probably macroeconomics.”

Jordan: “Now let’s pretend you are head of the President’s Council of Economic Advisors — the chief schmacro economist. Tell me what you think the role of government is.”

Greenie: “Maintain security of the country, enforce laws, create environment for residents to work and earn decent living, build and maintain infrastructure, establish and maintain a money supply. Probably some other stuff, too.”

Jordan: “Good summary. And do you think those activities affect the overall economy.”

Greenie: “All of them affect the economy one way or another.”

Jordan: “How should government behave when the economy is rolling along?”

Greenie: “Ease back on spending, if possible. But make sure economic growth can be sustained.”

Jordan: “What about government action when the economy slows down or goes into recession?”

Greenie: “I’m not quite sure how one defines a recession but whatever the exact definition is, someone needs to spend money to get people back to work. Individuals, families and businesses are probably cutting back, so someone needs to take the lead…and I guess that means the government.”

Jordan: “You are making a good chief economist. The role of government is to manage economic growth when the private sector starts to falter.”

Greenie: “I’ve never quite looked at the economy this way. The macro, schmacro behavior needs to be almost the opposite of the micro, schmicro behavior.”

Jordan: “I would use the term ‘complementary’ rather than ‘opposite.’ Sometimes government actions are in parallel with individual behavior. Sometimes not.”

Greenie: “So a primary role of government is to make sure the economy keeps growing. That means that people need to spend money to create demand. If everyone cuts back, then even more people will be unemployed. Someone has to spend. If everyone saves, there will be much less demand.”

Jordan: “You are on a roll. Keep going.”

Greenie: “I do know the country cannot save its way into prosperity. And neither can a business or an individual. You need to create income before you can create wealth. Why does this seem so logical? And why don’t other people seem to understand this?”

Jordan: “What do you think is the reason?”

Greenie: “I think some people either do not want to know or no one has explained it to them. The logic does not seem all that complicated. I know there is more too it but the basics seem easy to understand.”

Jordan: “Your role as chairman of the Council of Economic Advisors is to explain the logic to the country.”

Greenie: “Jordan, you know I don’t really understand all the economics mumbo-jumbo. But I’ll try one more time. Macroeconomics is about the behavior of large entities like government and microeconomics is about the behavior of individual units like people, families, even companies.”

Jordan: “You are now an expert. And now, madam chairman, I need to go. Great to see you Greenie.”

Greenie: “And, great to see you Jordan. Enjoyed it.”

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