Introduction to Economics - Relating the Words and Concepts to Students' Lives

Economics is the study of the allocation of scarce resources.  It takes effort to produce something of value.  Because producers invest time and effort to provide goods and services, they demand compensation from the consumers of their products and services.  This compensation is the result of the consumer's own production of valuable goods. We are all producers and consumers.  Each of us can produce only as much as our time, talent, and effort allows, and each of us can consume only as much as we can afford through the fruits of our labors.


The "price" consumers pay is determined by the balance of supply and demand for a given product.  More popular products cost more than less popular products, and products that are in short supply cost more than more abundant products.

Students may initially view these explanations as abstract, or not relating to the reality of their everyday lives, or as difficult to understand.  But we can all understand the desire to have experiences and obtain material objects, and we all know what it is like to not be able to satisfy all of those desires.  We make choices and decisions all of the time.  When we make these choices, we are making economic decisions.

The parent of the child who wants unlimited candy or no bed time decides to limit the satisfaction of those desires.  In time the child becomes more independent and discovers through experience that unlimited consumption of sugar or a life with no sleep is neither desirable nor possible.  The "price" of eating too much candy and sleeping to little is not justified by the short term satisfaction.  

A teenage student who values his time with friends and wants to ignore school work to play video games, go to parties, or generally "hang out" is often forced by his parents to give the proper priority to school work.  Or the young man learns through experience that the benefits of excelling in school and being in position to realize long term educational and career goals is worth sacrificing some social time.  In this example, the price of neglecting school work is too costly to ignore, so the student decides to act in his best long term interests.

The competitive athlete who dreams of being a professional at the top of the sports world eventually realizes the hard work and the sacrifice of other desires necessary to attain such a level of proficiency.  She is then left to weigh the joy and satisfaction gained by the act of honing her skills in the sport versus her desire to concentrate on other important areas of life.

Students can probably relate to some or all of these examples.  The desire to consume or accomplish or experience comes at a price:  sacrifice, work, or the exclusion of other worthy material things or experiences.  So studying economics allows us to understand how people attain desired products and services by making decisions to work, sacrifice, and strive.  When understood in the context of the study of economics, the words supply, demand, price, production, consumption, and the concept of "opportunity cost" give us a framework for making seemingly difficult topics like "tax policy," "budget deficits," "unfunded liabilities," "entitlement reform," and "debt crises" simple to comprehend.

Due to their age, students have only so many life experiences.  The topics we will study, and therefore the vocabulary and the stories, may not always be familiar, but they will grasp the concepts after they get familiar with the new words and stories.

The Lesson of Debt Spirals -- A Cedar Falls Update

The story of Cedar Falls debts and obligations keeps getting more interesting and involved. Although the city's recent bankruptcy filing is certainly a sad story, it's an instructive one, too. (We addressed the small Rhode Island town's financial dilemma previously on July 13 and August 6. Please refer to these postings as needed for a memory refresh.)

The Cedar Falls saga is typical of far too many governments making promises in the past and which promises now can't be kept. The effects of such past debt spirals abound throughout the world.

Today we'll update the Cedar Falls bankruptcy filing from the respective points of view of its pensioners and bondholders. Faltering Rhode Island City Tests Vows To Pensioners essentially paints a grim picture with no easy way out for anyone involved. Its resolution by the courts is certain to be followed closely by employees and retirees of schools, cities and states, as well as public employee unions and taxpayers throughout America.

In past years, the small Rhode Island community of 19,000 committed to unusually large pensions to its retirees such as police officers and firefighters (the state did its part to make a bad situation worse, but we'll leave that story aside for now), but the promised payments weren't properly funded. Not even close. Now the city is out of money. Let's look closely at the broader ramifications of this sad situation.

In addition to not sufficiently taxing its citizens or requiring contributions from employees to fund the pension promises it now can't keep, city officials did something else. To fund city operations, they also borrowed lots of money from bondholders. As a result, and on behalf of city taxpayers, the community agreed to repay those loans with interest.

Bondholders are people, too. They quite often are individuals who use personal savings to purchase municipal bonds. They are also often members of pension funds that invest by loaning money to cities. All of these "outside" investors are people who are very much deserving of being repaid.

On behalf of their constituents, neighbors and fellow taxpayers, the Cedar Falls city officials who made the pension benefit promises are quite likely the same people who borrowed the money from the bondholders. Be that as it may, there's not enough money to keep their many promises. Thus, the pensioners, taxpayers and bondholders are entangled in a mess affecting all concerned.

In simple terms, since there is not enough money to make the promised payments to the various legitimate claimants, something has to give. And that's precisely the question for the bankruptcy court to decide. Who is going to give, and how much?

This precise question of "who's gonna give what?" will be the same question faced by many taxpayers and government entities (local, state, national, global) in the months and years ahead. So let's look beyond Cedar Falls to see what this may mean for the rest of us.

The city undoubtedly used some of the funds borrowed from bondholders to pay at least some pension payments to city retirees. It also used those proceeds for city operations as well. And it chose to borrow the money rather than increasing taxes or reducing city spending. Those were the city's choices at the time, albeit obviously bad ones.

In so doing, city officials acted on behalf of all the taxpayers, so the taxpayers now have choices to make among the various bad alternatives. Had they not chosen the bankruptcy route, Cedar Falls either would have had to somehow pay more taxes to make the required payments to both pensioners and bondholders, gut city operations or pay the pensioners dramatically less than promised (due to Rhode Island law favoring bondholders over pensioners).

Since they chose bankruptcy, bankruptcy rules apply. The federal laws state that pensioners and bondholders are treated the same. If that's the way it turns out, both pensioners and bondholders will get less than promised. The Rhode Island law states that bondholders would be paid in full to the detriment of the pensioners. If that's the way it turns out, bondholders will be repaid and the cities of Rhode Island will be able to borrow in the future at market interest rates. That said, preferring bondholders over pensioners doesn't appeal to the pensioners.

Regardless of what's deemed to be fair by the pensioners and perhaps others (normative economics), the fact is that in the future bondholders won't loan cities money at low rates, if at all, if they aren't going to be repaid.

And to the extent that repayment is even questionable, bond buyers will charge much higher interest payments than otherwise. Besides, the city wouldn't be able to redeem the principal at its date of maturity. Thus, what lender would loan the city the money in the form of a "rollover" loan upon the expiration of the first loan? Probably nobody.

Cedar Falls will need much financial support these next several years and decades. It won't seem fair to the pensioners, but there really is no other answer than to fail to pay in their entirety the promised pensions. Unless, of course, taxpayers want to increase their taxes sufficiently to do so. In that case, there will likely be many people moving from Cedar Falls, thus making it an even smaller and poorer community in the future.

Now let's briefly look at the bigger city, state, national and global story of debt spirals and their effects.

To see what happens when bond holders become worried about getting paid on schedule and in accordance with the loan terms, The Making of a Debt Spiral is worth reviewing. The author of the book "This Time Is Different" describes what causes debt spirals and their impacts on countries, states, cities and people. It's much like a run on the bank, to use simple language.

With respect to additional government borrowing, that newly increased debt leads to rising borrowing costs, which then leads to either even more borrowing, spending cuts or tax increases. These choices then lead to slowing economic growth and its debilitating consequences. The cycle then repeats itself until the spiral is broken by default or otherwise.

The effects of borrowing are too little understood by most people and most government officials, too. Let's become knowledgeable and then pass on that knowledge to the government.

Thanks. Bob.

College Selection; Costs and Benefits

Recently we discussed college selection and its costs and benefits. We also emphasized the importance of avoiding or minimizing student loans when deciding which college to attend.

Colleges That Help Grads Get Top Salaries is about a survey which deals with this very topic. The study included 50 colleges throughout the nation, and it compares the costs of attendance and later salaries of graduates who attended Ivy league, Private and Public colleges and universities, respectively.

The basic conclusion, unsurprisingly, is that good public universities are the best bang for the buck, all things considered. Ivy League graduates were in second place, and private colleges finished last.

According to the survey results, the top six college selections in descending order are Georgia Tech, Texas, Florida, Georgia, Illinois and Clemson, respectively. Sounds good to me.

All that said, regardless of the school attended, individual SAT scores are deemed to be the best predictor of future financial success, according to another survey.

Accordingly, the takeaway would be to first achieve a high SAT score, then attend a strong in-state public college, get good grades, graduate on time or earlier, and then begin collecting the financial rewards.

And lest I forget, try to avoid accumulating student debt while doing all of the above.

Thanks. Bob.

The Real Story Isn't About What's Happening Today .... It's Tomorrow That Matters Most

There is a tremendous amount of uncertainty today in the U.S. and the world. Our politicians have negotiated a debt ceiling extension and will try to agree upon another amount of deficit improvement before the end of this year. We've been hearing much from the politicians about the need to get our U.S. financial house in order, and we will be hearing much more of such political talk for the foreseeable future.

In addition, we are barraged continuously with news that the economy is teetering between slow and no growth, and that unemployment remains unacceptably high. Both are true statements about the ways things are, and there's a high likelihood that we will have a soft economy and high unemployment for several more years to come.

Politically, we're hearing the various candidates for the presidency talk about what they'll do to make things right in America. In the rest of the world, similar conversations are taking place.

So we're hearing lots and lots of general chatter, talk show hosts included, about our problems, but the chatter is far too general. Somebody needs to step forward and begin to talk specifics in order for the talking to be actionable. That way we the people can decide the proper way forward for America.

We all know that we have big problems, and that the status quo can't continue indefinitely. Yet nobody is proposing genuinely specific solutions about growth, jobs, debt, deficits and what all this means for future spending for entitlements and education. Also not discussed specifically are what corresponding levels of taxes and borrowings will be required to support those future expenditures.

Here's what I know about our past, present and future America.

More freedom means less government, resulting in greater economic growth and higher employment for our citizens.

More government means more taxes and government borrowing, resulting in less economic growth, less freedom and higher unemployment for our citizens.

More taxes and government borrowing means bigger government and fewer individual freedoms.

So today let's talk about what the politicians are not talking about - the longer term. Because that's the real story that matters most.

Do Congress and the White House Deserve an AA+ Rating? is an article by a Professor of Economics at Princeton that reviews the rationale behind our nation's first ever debt downgrading last week. The downgrading simply confirms that our country's financial condition is no longer the envy of the world.

But that's not why I invite you to take the time to read the referenced article and its conclusions about our disappointing style of governance today. We need to focus on the failings of our national governance and how as a result we've gone astray with respect to living within our means.

In part the article reads as follows: " ..... one manifestation of the decay in the federal style of governance has been the discovery that the American voters can be pleased by providing them with a growing array of government services and financial transfers and by underwriting these with deferred taxes -- that is, current deficits. The deferred taxes are to paid off by generations not yet born or still too young to vote."

It then goes on, "In the words of Doug Elmendorf, current director of the Congressional Budget Office, in a presentation last year, 'The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly the benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.' "

A revealing and straightforward chart titled "Total Revenues and Outlays" is taken directly from a financial report by the Congressional Budget Office. The chart highlights what our political leaders have projected in the way of receipts and expenditures at the federal level through 2021. It's not a pretty picture. If everything goes as predicted, we still won't bring the budget into balance during the next ten years.

And that projected result in 2021 assumes that our nation will return to its historical rate of economic growth, which is at least unlikely. Unfortunately, that economic growth assumption is by far the single biggest factor in the receipts and expenditures prediction.

In other words, the government optimistically forecasts that expenditures each year will run much higher than, but in parallel with, receipts for the entire ten period. The receipts and expenditure lines won't intersect even once.

Here's my take.

If a private business (or family) predicted it would lose money for the next ten years, management would be fired immediately or the company's shareholders and suppliers would remove their money from supporting the enterprise. And that would be absolutely the right thing for them to do.

But in our government's case and the public arguments of its politicians, we ignore fiscal prudence. My guess is that we probably won't hear much, if anything, about balancing the budget with respect to SPECIFICALLY HOW it will be done. Or even SPECIFICALLY WHEN it will be done.

Oh, the politicians will tell us that that they feel our pain and that we must deal with our financial problems sometime and in some way. And that America will always take care of the old, the young, the sick, the poor, farmers and small businesses, among others. But they won't venture to tell us how this will happen. The plain fact is that it won't happen unless and until we get serious about fiscal sanity, economic growth and private sector job creation.

Basic economics is simply about making choices with respect to scarce resources. We can't have everything. It's as simple as that. We have to choose.

So if the oldsters want to continue the current level of social security, medicare, nursing home care and such to be provided by the government, will the money come from their kids or their kid's kids or elsewhere? And if elsewhere, where's that?

And if the progressives want government to spend more on schools, health care and such, will the money come from the oldsters, tax increases on everybody, or where? And how much will everybody pay, since the rich can't foot the bill by themselves?

We need one political party to make a credible plan and communicate that plan to the people. If the people vote for the plan, then let's follow that path.

And the other party should put forth a competing and credible plan. If the people endorse that plan, so be it. But as it is, there is no plan to get the parallel lines of revenues and spending by government to intersect in any specific way.

We the people need to insist upon credible and competing alternative choices from the politicians. That's only fair. No more sound bites, demonizing, sermonizing and such. Just tell us specifically what they propose to be done. In numbers as well as programs. And with a timeline that can be monitored by we the people during the implementation stage. That's phase #1.

Then when they don't deliver as promised, we can throw the bums out and try again in phase #2. And so on until we get it right.

Accordingly, and unlike the article's conclusion of awarding a B grade, I vote to give Congress and the President an F grade. That's because there isn't, and likely won't be anytime soon, a specific, credible and well communicated plan to bring our financial house in order.

And if we the people don't force the discussion to occur, we will deserve an F as well.

How will the future generations vote for the job we've done, are doing and will do? That's the real question that matters most.

Short termism and "vote buying giveaways" are on their way out, and that's good. The only question is when. It can't happen soon enough.

Thanks. Bob.

Pricing and Quality .... How Established? ... The Unsettling Sameness of Our Medicare and Chinese Housing

Despite coming from completely different directions with one belonging to the American health care system and the other being housing related in China, our Medicare system and Chinese low-income housing have lots in common. Too much, in fact.

In our own case, Medicare and its out-of-control cost structure will inhibit much needed economic growth for years to come. Our economy is already growing too slowly as it has definitely hit stall speed. We have too much debt, both individually and as a country, and our recently enacted medical legislation will simply exacerbate the problem of controlling costs and improving service. Our government mandated health care system needs to change, along with many other things, if we are to resume substantial economic growth anytime soon.

All that said, the broader economic story and Medicare's impact can wait for now. Let's just talk about the similarities of Medicare and Chinese low-income housing today.

The stories of American Medicare and Chinese low-income housing can be told quite simply and clearly. Both systems have opted for government control and pricing in lieu of market based competition. As a result, the impact on users is and will remain unnecessarily harmful, to say the least.

Three Simple Ways Medicare Can Save Money describes the impossible task Medicare has undertaken with respect to pricing and quality in our medical care system. Even if the government officials are indeed and always the smartest guys in the room, as they seem to believe, nobody is smart enough to come anywhere close to doing what the market can do to achieve the desired end result of low costs combined with high quality medical care.

We free Americans should know better than to cede control of health care to the government. It won't work, and we should change this pricing and health care delivery system asap. We're free to choose a market based approach, so let's get moving.

On the other hand, even if the Chinese citizens do know better, they can't vote or otherwise opt to change to a market based system on their own. Therein lies the fundamental difference between Medicare and Chinese housing. We the people did this to ourselves, and the Chinese citizens essentially have no say in the matter.

Stated another way, we are free and empowered to correct our mistakes. That's the fundamental difference between self government and command and control government. We're free to choose, and they aren't.

Cracks in China Housing Push describes the price fixing involved with government housing programs for low-income housing in China. Government has decided how much public housing to build, and how much the contractors will be paid. The "customers" will take what they're given. It's as simple as that.

As you read through each of the articles, you will notice the sameness of our Medicare pricing and its effects on quality and Chinese low-income housing pricing and its effects on quality. That's a story worth knowing.

Here's the broader lesson. The combination of price and quality equals value. This is true for any product or service offering. When markets exist, price is established by the market. The buyer and seller each act in accordance their own best interests, or act to maximize their own utility, in economic terms. In any event, they attempt to come to an agreement with respect to what the buyer will pay the seller for the value received. If one of the parties doesn't agree to the terms set by the other party, no transaction occurs. Thus, buyers and sellers are free to act as they choose.

If nobody buys at the price set by the seller, the seller has to reduce his price or withdraw from the market. On the other hand, if prices are set too low and the quantity for sale is insufficient to meet the demand from buyers, the seller will either raise his pricing or produce more items for sale. And if the buyer can buy from another competing seller equal quality at a lower price, he will often do so. That said, if the quality or price, or a combination thereof, doesn't match up to competitive offerings by other potential sellers, the seller will either go out of business or improve the value (price and quality combined) of his offering to attract buyers. That's how market based competition works.

When a government monopoly or quasi-monopoly establishes pricing, the buyer's freedom to choose is removed. As a result, the "buyer" gets whatever quality the government offers and at whatever price has been set by the government. Since the "buyer" in effect will be forced to purchase the offering at the designated price, there is no reason for the "seller" to be concerned about the quality of its offering either.

In the case of market based competition, price and quality interact to set the price, as well as who will be the seller. Some win and some lose. That's the brutal way markets work, and that's the way customers benefit. The customer is in charge all the way. It's his money, and it's his choice. Being free to choose to buy or not buy at any particular price from any competing seller is a powerful thing indeed.

In the command and control case, the choices are made for us by government officials. In a complex economy where people are involved (that's everywhere), who makes the choice makes all the difference in the world.

Here's the central point. Low costs and high quality go together. High costs and low quality do, too.

In the U.S. the choice is ours to make between the respective roles of markets and governments in setting prices and achieving quality results. That's not the case in China.

So as Americans let's exercise our freedom to choose which system we want for delivering low cost and high quality health care. Will we choose for it to be determined by the government or by free individuals operating in a free market? A no brainer for sure.

Thanks. Bob.

Our Book Club ... Emerson's Self Reliance

Chad has introduced a book club section on our Learning Center web site. We welcome any thoughts of yours concerning the essay by Emerson on "Self Reliance", which is the first writing being discussed.

We have also begun a student section on the site, since we teach government and economics to interested students during the academic year. Our first session was Monday. If you wish to attend, follow along, chime in or otherwise participate in our ongoing online educational effort, we welcome any assistance along those lines as well.

My daily musings have been categorized as daily thoughts in yet another section.

Thus, that brings us all up to date on the web site and its current configuration.

As mentioned, Chad selected as the initial book club essay "Self Reliance" by Ralph Waldo Emerson. It's an excellent choice and a favorite of mine. One especially insightful paragraph in Emerson's essay reads as follows:

"What I must do is all that concerns me, not what the people think. This rule, equally arduous in actual and in intellectual life, may serve for the whole distinction between meanness and greatness. It is the harder because you will always find those who think they know your duty better than you know it. It is easy in the world to live after the world's opinion; it is easy in solitude to live after one's own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude."

This section always brings to mind Robert Frost's poem "Stopping by Woods on a Snowy Evening". It reads as follows:

"Whose woods these are I think I know.
His house is in the village, though;
He will not see me stopping here
To watch his woods fill up with snow.

My little horse must think it queer
To stop without a farmhouse near
Between the woods and frozen lake
The darkest evening of the year.

He gives his harness bells a shake
To ask if there is some mistake
The only other sounds the sweep
Of easy wind and downy flake.

The woods are lovely, dark, and deep
But I have promises to keep.
And miles to go before I sleep,
And miles to go before I sleep."

To me Emerson and Frost are each saying some very timely things for us to reflect upon in light of today's unsettling events throughout the world. Albeit said differently, they very much agree, at least as I interpret them, that we Americans have two basic roles with respect to our rights and responsibilities as citizens of a self governing and free society.

Emerson teaches that we must learn to listen to ourselves as we find our way to personal fulfillment and the pursuit of happiness. We are advised to reject the all too normal way of simply following the crowd or herd by conforming to what others do or say we should do. Quite simply, we must choose and then follow our own path through life. He further tells us that in addition to rejecting conformity for the sake of conformity, we must reject consistency for the sake of consistency, too. In other words, we must not fall into a rut and automatically do tomorrow that which we do today, just because it's consistent behavior. As time and circumstances change, we should always be at the ready to change both our minds and direction, too.

Accordingly, it is both our right and duty to think and act as individuals, as opposed to group followers, in light of the then existing circumstances. It's as simple and as difficult as that.

Our citizenship was based in large part on the ideals of individual freedom and self reliance. Those basic and fundamental rights are protected by our Constitution.

Yet in addition to these rights as individual citizens, we were also given duties and responsibilities. As members of a self governing and free society, we are called upon to assume a broader societal role by being both active and informed citizens.

Accordingly, as I interpret both Emerson and Frost, while we are encouraged to embrace the freedom and joy associated with individual solitude, we are also asked to engage as citizens of a greater society. For that matter, in addition to U.S. citizenship, we should remember that we are world citizens, too.

With respect to the U.S., other than national defense and security, we should not look to or otherwise depend upon the government for our happiness, prosperity or security. In fact, we should actively seek to limit the role of government to that of largely leaving us alone to pursue our chosen dreams.

Here are a few concluding thoughts.

1- Prosperity results from the independent actions of individuals acting privately in a free market and never from government.

2- With respect to self reliance versus conformity, had more of us listened to Emerson, and for that matter to our parents as well, we wouldn't have the massive and principally real estate related debt deflation in the private sector today. We wouldn't have incurred today's massive public sector debt either.

3- Neither would we be following too closely behind the disastrous example of Europe's welfare states, both with regard to medical care and other entitlements. We will find only pain by conforming to or following the European example of a big and socialist government. In that regard, many European countries are already insolvent, and at best their economies are going to be quite weak for years to come. As for us here in the good old U.S.A., it's time to get our act together. Past time, in fact.



Thanks. Bob.

Fixing Our Financial Mess Will Be Simple But Not Easy

Our nation's debt and ongoing financial deficits are not difficult to understand and would not be difficult to solve, assuming the political leadership is prepared to act in accordance with their duties and responsibilities as servants of the people.

The Preamble to the Constitution reads in its entirety as follows:

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

Although the Preamble does not assign any powers to the national government, it reminds us why the Constitution was adopted by the Founding Fathers. Its words are worth remembering.

The Preamble is an aspirational statement of purpose about the importance of promoting the "general Welfare" of our citizens. The American people have consistently stepped up to reality, and our citizens have invariably made good choices when deciding between competing realistic alternatives with respect to improving that reality. We always have moved forward together, and we will do so again this time.

So today we'll discuss why, unlike citizens in most societies, we'll be able to decide our own future course. That's why I'm always optimistic about America.

As highlighted in the Preamble, We the People must work hard to deliver the "Blessings of Liberty to ourselves and our Posterity". And we also must strive continuously to achieve "Justice" and provide for the "common defence" through our Constitutional system of self government. To reiterate, the future is in our hands.

Let's use a brief comparison of two different types of governments to better serve to illustrate this critical self governance point. To do so we'll briefly compare our form of governance to that commonly prevailing in Europe. {For now we'll leave aside a comparison of totalitarian systems like Russia and China.}

We have a sovereign government known as the U.S.A., and it has 50 states such as Georgia, Illinois, Texas, New York, California and so forth. In contrast, Europe has no such single sovereign government. Its sovereign governments are in individual countries like France, Germany, Spain, Italy and so forth. There is no United States of Europe, either in form or substance.

Yet they try to act as if they were one government for financial purposes. Suffice it to say that even the adoption of a single currency such as the Euro can't and won't offset the lack of a single decision making political entity.

In sum, intergovernmental institutions simply aren't effective politically. The power resides in the various sovereign states. For additional evidence of the powerlessness of multi-national institutions, we need look no farther than the League of Nations, the United Nations or NATO. They each are examples of ineffective multi-national institutions.

As a result, the various sovereign states of Europe function similar to the way the U.S. did more than 200 years ago. Under the Articles of Confederation from 1781 until the subsequent adoption and ratification of the American Constitution in 1788, each of the 13 states was a de facto sovereign. As is the case in Europe today (Europe's Less Than Perfect Union), our country under the Articles of Confederation was initially incapable of effectively governing itself. That inability to govern was precisely why the Constitution was ratified in 1788. It continues as our form of government today.

To recap, today Europe consists of many sovereigns with no single governing body. We, on the other hand, have a united form of Constitutional government which consists of two distinct parts, principally 50 states and a single national government.

Our Constitution specifies where the various individual and institutional responsibilities and powers reside. Its preamble begins with perhaps the three most powerful words in the English language - "We the People" -, and proceeds to set forth the manner in which we'll govern ourselves through periodically elected and appointed representatives. The Constitution is the supreme law of the land, and it separates the powers of the national government into three distinct parts (legislative, executive and judicial).

We also have a form of limited government, especially at the national level. In that vein, the Tenth Amendment to the Constitution reserves to each of the individual states and the people the powers not explicitly granted to the national government. It reads in its entirety: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

Europe has no such written governing document. Neither does it have a single political sovereignty that can make laws for its several countries nor for the European continent as a whole.

To bring all this governance stuff up to date and how it affects our current worldwide financial mess, let's first consider a sobering fact. Compared to America, Europe's financial mess is much bigger than ours today, and their embrace of big government has moved them much farther down the road to socialism, too. But let's set aside Europe for now and instead focus on our financial and governance problems and how we will proceed to deal with them effectively.

How will we solve our financial problems, and how easily can they be solved?

Let's start with one inescapable fact. What is simple is not always easy. That said, we simply need to muster the political will to solve our own problems, unlike Europe as a whole. There is no doubt that we have the capability to write our own script for the future if we have the will to face reality.

My bet is that the events of the past several weeks have shone a needed spotlight on the debt and deficits which will lead to an effective resolution of the American financial mess (A Downgrade Awakening). We won't solve it immediately, and we won't solve it quickly. In addition, it will be a loud and contentious debate, but it will happen in real time and in a manner that we the people will be able to register our opinions and raise our voices, too. And when the debate is over and the issue has been addressed comprehensively, it will have been resolved with a workable plan that will accomplish the people's objectives. Then our path forward will be both clear and appropriate. That's because the people will have spoken.

As a result, when compared to European and other sovereign states, we have the much easier task ahead of us. We decide what to do, and then we do it. On our easier side of the street, we also have a more prosperous society and smaller government, too. When compared to Europe, our job is actually fairly straightforward and simple.

Now that we know our current American economic growth, debt and deficits financial mess is ours to solve, it won't be all that hard to remedy. But we do need to fix it before it breaks.

Thanks. Bob.

Book Club - "Self Reliance" by Ralph Waldo Emerson

In a recent post to the "Government and Economics" portion of the Student Section, I wrote about the opportunity and responsibility to use time wisely.  Referring to the students of our Government and Economics course, I advised that "the activities they choose, the enthusiasm that they exhibit in the pursuit of excellence, and the time they dedicate to these areas will determine their success and satisfaction."

The notion that the quantity and quality of time devoted to an activity will determine "success" is easy to understand.  But the idea that the "satisfaction" derived from such work is a result of the effort and vigor that we expend is not as apparent to many.  A benefit of reading the works of great authors is that it causes us to think and apply the ideas to our daily lives.  The first work we are reading in our "Book Club" is "Self Reliance," by Ralph Waldo Emerson.*

Regarding the value of work, Emerson says, "A man is relieved and gay when he has put his heart into his work and done his best; but what he has said or done otherwise, shall give him no peace."  Had I not been reading "Self Reliance," my advice to students probably would have excluded the notion that the "satisfaction" of having done one's best is every bit as important as the success that comes from such effort.

It has been said that "the journey is more important than the destination."  This is so true.  For once a destination is reached, there is nothing more to strive for and we immediately beginning searching for something else to pursue.  As a basketball coach, I advise players who profess to want to be "great" to work harder, longer, and smarter than their peers.  But I quickly qualify that advice by saying that one should only take that path if the process of working, often alone, for such a large portion of time is truly fun and exhilarating.  Even after dedicating the time and effort necessary, achieving the desired result is not guaranteed.  So the only reason one should make such an investment is because he truly enjoys the journey.

The importance of enthusiasm is also conveyed in Emerson's line.  I find it noteworthy that he uses the word "heart" rather than "mind."  I believe that we will be the most successful and the most satisfied while pursuing excellence in activities that we genuinely enjoy.  We should take the time to find what moves us and pour our hearts into the activities that interest us most.

*Click here for a not so well formatted but free version of the full text of Self Reliance.  And click here for a better presentation of the first half of the work.

Using the Most Important Finite Resource - Our Time

In my notes from yesterday's Government and Economics course, I found the following paraphrased statement:  "It is more difficult to be a citizen in a free society because we have to make, and live with, our own decisions."

The high school students we teach are likely getting to the age where they want the independence and authority to make their own decisions about what to do with their time.  Bob shared with the class his familiarity with the number 168, the number of hours in each week.  Deciding what to do with that time is a big responsibility because time is a finite resource, meaning once it is spent there is no getting it back.  We all have the same amount of time, so we differentiate ourselves by using it wisely, or not.

Arguing With Success, from today's Wall Street Journal, explains that recent assessments have proven that the Harlem Success Academies, which are charter schools in New York City, have "outperformed their public-school peers, often by a wide margin."  Many successful charter schools have credited their success to longer school days and school years.  The "At a Glance" section of the Harlem Success Academy's website gives the following statement as one of the six things that make its schools different from others:

Time Matters: How you use time and structure the school day has a tremendous impact on student performance. We maximize every minute and continuously review our schedule to ensure the most efficient use of time. We have a longer school day and year.

In one of last week's posts addressed to basketball players on my basketball blog, I advised that "the players who work the most and who have the most productive workouts will be the players who distinguish themselves."  The quantity and the quality of time dedicated to achieving a goal is the most important tool at our disposal.

The Harlem Success students, ranging from 5 to 14 years old, have had the decisions of what to do with their time mostly made for them by the adults around them.  Our Government and Economics students, who also happen to participate in sports such as basketball and volleyball, are at or near the age that requires them to decide how to use their time.  The activities they choose, the enthusiasm that they exhibit in the pursuit of excellence, and the time they dedicate to these areas will determine their success and satisfaction.  They should be excited about this opportunity to practice the responsibility of citizenship.

The "Student Section" contains posts related to the Government and Economics course that Bob Cook teaches.  To learn more about the educational offerings of the Augusta Metro Youth Foundation please contact Chad Cook:

cookchad08@gmail.com

706 550 2229

Class Notes and Assignments - Week 1 (Monday, 8/8/11)

Government and Economics - Week 1 (Monday, 8/8/11)

Living Within Our Means As Americans

Living within our means as a country, and for many individuals as well, has now become a necessity. Our financial situation has become untenable. We can't continue to spend money we don't have if for no other reason than our lenders will soon run out of patience with us.

Soon we will have to begin the transition to living within our means, and given the political will to do so, we can begin whenever we make that choice or series of choices. Accordingly, the choice before us now is how and not whether we shall choose to live within our means.

How did we allow the debt and deficits problem to get so far out of hand that our choices are so limited now? And when did all this happen?

As to when, it took decades. My own view is based on the Cold War as well as several additional contributing factors such as the opening of China in 1978 and the fall of the Berlin Wall in 1989.

When the Cold War began as World War ll ended in 1945, the world's economies were pretty much divided between consumer driven market based economies and top down driven command and control economies. Other than the financially debilitated UK, the U.S. essentially entered the post World War ll period as the only large free market based economy. Japan and Germany were non-factors economically for many years after the war, and Russia and China were both communist command and control economies. After fighting two world wars, the UK that emerged therefrom was broke. After World War ll, they also began a decades long period of socialistic programs as well as austerity, at least until the Thatcher government came along in 1979.

The U.S. pretty much had the fruits of worldwide capitalism and market based competition to ourselves. As a result, we dominated the world economy and grew ever more prosperous each year. Until things changed, of course, but that story can wait for now.

During our initial dominance of the post WW ll period, we created many entitlement programs for our citizens but didn't set aside the money to pay for them over the long haul. Because we didn't pay for the programs by funding them properly, the post war baby boom generation demographics have made our nation's long term financial picture especially bleak now. As a result, down the road we will be unable to pay social security, medicare and medicaid benefits without big changes to catching up with respect to funding or reducing those promised benefits, or a combination of both.

That's due to having fewer and fewer workers per retiree from the post war period until now and in future years, too. We've gone from ~10 workers for each retiree to only 3 for each beneficiary. And soon it will be 2 for 1. On top of that, many female workers have joined the the work force since the end of WW ll, so there will be no further influx of that segment of the population to offset our growing list of retirees. All in all, this demographic debacle in the making was for a long time predictable and foreseeable. And its financial ramifications were ignored.

In addition to not funding our future related entitlement promises properly, we borrowed to purchase things in the here and now, and especially real estate related assets. Of course, we indirectly borrowed much of this real estate related money from other countries such as China.

Accordingly, both our unfunded entitlement promises and our funded debt picture changed enormously over the ensuing years. And this was true for households, municipalities, states and the national government, too. Free lunches for one and all. Except our future generations, that is.

As if that weren't bad enough, worldwide competition heated up right before our very eyes. But our "dominant" eyes were pretty much closed to the effects of this new and increasing competitive reality. So when the Chinese began their version of market based competition in 1978 and the Berlin Wall fell in 1989, we didn't heed the ominous signs about future global competition for goods and services. Why?

Perhaps because we're so very human. By that I mean that we tend to see the future as an extrapolation of today. In other words, we individuals have a tendency to believe that whatever is happening now is what's most likely to happen in the future. Of course, that's not true, but that is pretty much how we tend to see things. In other words, trendlines continue until they don't. Then entirely new trends emerge, even though we don't foresee the very much foreseeable when it is right before our eyes.

When we exited the 1980s and entered the 1990s, worldwide competition had already intensified. In fact, new competitors worked for less and worked hard at the same time. Nevertheless, we kept on creating new and largely unfunded programs for ourselves despite the developing demographics within our society and despite the new global competition. In addition to China, Eastern Europe and Russia, by then the Japanese and Germans also had totally recovered from their WW ll setbacks and were in the global competitive game, too.

So today we have much of the debt that we've incurred for economically non-productive and non-competitive assets that we've acquired, especially real estate related. And we have made promises to ourselves for future entitlement promises which we won't be able to keep without a strongly growing economy, which only comes from being competitive with all comers in the world, bar none. We've made promises we won't be able to keep, in other words.

The foregoing is intended to be only a brief, simple and straightforward explanation of where we are and how we got here. What we the people choose to do about it is what's important now. Our choices will become clear in the months and years ahead. And that will tell us about the future of America and Americans.

Even if we choose to continue down the present path leading to more entitlements and more socialism, we'll still have to find a way to live within our means. One way we can do that is by taxing ourselves more and more for the things we vote to give ourselves.

As we do that, our economy will grow very slowly, if at all, and we'll begin to look more and more like a modern day European welfare state. In that regard, entitlement spending in the U.S. already has grown as a percentage of federal spending from ~28% in 1965 to ~66% today (America Gets Downgraded). Of course, LBJ's Great Society entitlement programs of medicare and medicaid, along with greatly expanded social security benefits and other government goodies, began in the mid to late 1960s.

My point is simply that choosing the route of funding through higher tax rates will beget lower economic growth over time. And more spending by the government, for whatever reason, will also require more revenue in the form of higher tax rates. And lower future economic growth than what we've experienced historically will deliver a different America in terms of what we leave behind for future generations of Americans.

If we choose the path to higher growth, fewer entitlements and smaller government, however, in time we'll end up with higher tax revenues through lower rates of taxation. But that requires we choose a smaller government, which in turn will result in fewer and less expensive entitlement programs and promises.

That's what's great about America. We're free to choose.

Thanks. Bob.

Student Section - Government and Economics - Opportunity Cost

School is starting, so students have officially begun learning again.  Those despondent over the loss of the "free time" of summer may wish they could postpone the end of the break despite the objections of their parents and teachers.  But in addition to being impossible, doing so would bring consequences.  As students of our Economics and Government course learn the meaning and application of the economic term opportunity cost, they may begin to view nothing, not even time, as being free.

Every time we choose to do something with our time, we are choosing not to do something else.  The same concept relates to the use of our money or any other resource that we may possess.  So postponing the resumption of school to gain more free time would actually cost students the knowledge they would otherwise gain by getting back to work in the classroom.  This is a simple and obvious example.  But citizens regularly confront equally straightforward decisions and often fail to make the seemingly simple connections.

In a recent survey,* two of three Americans said we should spend more money on our public schools.  But when asked if we should be taxed more money to pay the extra costs, two of three Americans opposed additional spending.  So the same adults who would appropriately advise students to return to school rather than extend the summer break allow themselves to be fooled into thinking that spending more money on our school system comes at no cost.  Hopefully our students will learn not to forget the commonly accepted, but less commonly applied, warning that there is no "free lunch."

*The details of the survey come from the following Wall Street Journal article:  Do We Really Need to Spend More on Schools?

The "Student Section" contains posts related to the Government and Economics course that Bob Cook teaches.  This first post relates to a part of the discussion during our first class session this morning.  To learn more about the educational offerings of the Augusta Metro Youth Foundation please contact Chad Cook:

cookchad08@gmail.com

706 550 2229

Dare we "idiots" trust ourselves?

Recently we discussed the idea of vouchers for education in lieu of being given the sole choice of using taxpayer money to attend government schools. We recommended both free choice and appropriate financial achievement incentives for individuals and families, which we believe would result in a much better educational result for the money expended.

Let's take a look at health care, and see if the same logic applies. I believe it does. With respect to our American health care system, government now writes checks for ~50% of health care in America. Regardless of the cost, the question du jour is who should make the decisions about individual care and its use, government bureaucrats or the individual family using the service?

We'll look across the pond for advice, since England is even farther down the socialistic health care road than we are, at least so far.

Britain's Incompetent Decision-Makers offers a compelling and totally logical argument in favor of changing to a system of individual choice in using health care. People would receive cash and use it for as much or as little health care as they wished. This trust ourselves approach would be in lieu of the current method of having government officials decide how much health care the country as a whole can afford and then apportioning it however the bureaucrats so choose.

The straightforward idea behind trusting us idiots - er - people and giving us money directly would be that we best are able to make decisions for ourselves. If instead of allowing the government to make all the health care decisions, individuals would choose how much to spend on health care, just as we do for such things as cars, homes, shoes, education, food, elderly care, vacations or whatever.

It's really very simple. In lieu of a system where we ask government officials to act on our behalf, we would simply trust ourselves to act in our own best interest. By treating the people like the responsible decision makers in health care, we would achieve greatly improved results from the health care system. Subsidiarity in action.

The simple point is that we the people either trust ourselves to make decisions about our general welfare and what's best for our families, or we trust disinterested government workers to make those decisions for us.

Of course, the politicians don't actually call us idiots. If they did, we wouldn't vote for them. But no matter what is said or not said, we are treated that way.

My view is that given more responsibility, people would learn to make better decisions over time. In economics this is known as "maximizing our own utility", meaning simply that we always try to act to make ourselves as well off as possible. Based on our individual preferences, we make our choices accordingly. That means we will spend our available resources on whatever we believe will give us the greatest benefit and personal satisfaction. Virtually all of us will choose to help ourselves and our family members.

In any event, this idiot's view is that we are generally better able to decide what's best for ourselves than are disinterested others acting on our behalf.

I wonder why that's so hard to understand, or do our political leaders really believe they have the answers for each of us? If so, they're even bigger fools than they appear to be.

Thanks. Bob.

Put the Oldsters to Work

In 2000 10% of Americans were older than 65. By 2030 the percentage of oldsters will have doubled to 20%. How's that for a quick lesson in demography?

Yet today we act like it was fifty years ago. Early retirement is in vogue. In fact, most social security recipients begin receiving payments at age 62, the earliest possible age of eligibility. So even though we're living longer, we're working fewer years prior to taking social security benefits. That creates both a problem and an opportunity. The problem, of course, is financial, but we can solve that by looking closely at the opportunity.

Although more people are retiring early today, more than ever these same recipients are continuing to work in addition to receiving social security benefits. This developing situation is discussed in Why Hasn't Employment of the Elderly Fallen?. Many are undoubtedly working because they need the additional money, and others may simply want the personal satisfaction from working and staying productive.

Whatever the case, we have a big opportunity as a nation. Simply put, there are lots of very good financial and other reasons to tap into this "new and growing" valuable resource base of oldsters.

The physical type of work performed by the typical American worker has changed dramatically since the inception of social security in 1935. We no longer are primarily an agricultural nation. And we don't have the difficult industrial atmosphere of heavy manual labor either. Today instead we have millions of jobs in air conditioned offices. And we have millions of taxpayer supported government jobs, too.

And we're also in need of reducing the public payrolls and strengthening our educational system while reducing payroll there as well. Programs like VISTA (volunteers in service to America) and the Peace Corps were established in the 1960s. Today we have Teach for America and similar efforts. They all emphasize engaging our youth in helping to make our society and world a better place.

It's time to engage the oldsters by asking them to help our nation by rendering patriotic service in their elderly years. Perhaps those now out of the work force could give five or ten years to government administration such as driver licensing, teaching, social security administration, city or county clerkships or similar administrative activities.

If the older person chose not to do so, which certainly would be his right, perhaps he would willingly forfeit some or all of his social security or medicare benefits. And if he did opt to work, he would not be paid until the benefit he was already receiving had been fully earned. Of course, those not able or sufficiently skilled to do the work would be excused from the oldsters program of earning our keep and making America a better place at the same time.

In part, these oldsters would displace current public employees, so the current public employees could seek employment in the private sector. Any such displaced public sector employees would be eligible for unemployment benefits until they could find work in the private sector.

In addition, much needed value added work could occur due to engaging the oldsters. This Is Your Brain on Summer discusses the effects of summer vacations on students and how they lose knowledge during the school break. This is particularly germane to the poor urban youth in elementary school, and the consequences are lasting. Thus, rather than lose that knowledge summer after summer, vouchers could be used to pay oldsters to help students gain speed instead of falling behind in the summer months.

There are countless other potential benefits for oldsters, youngsters, society and our financial dilemma today from such an effort. Social security, medicare, medicaid, public employment and education, to mention several, all would benefit from an oldsters program. Of course, teachers unions may not like this, and public sector unions such as the SEIU won't like it either.

So who would like it? Taxpayers would. So would students. And my guess is that many, many oldsters would as well.

Someday we'll have to do stuff like this, so why not begin sooner rather than later?

Thanks. Bob.

Disruptive Change and R.I. Public Worker Pensions

Recently we discussed the public employee pension dilemma in Cedar Falls, Rhode Island. It appears that the Cedar Falls issues aren't peculiar to that community. In fact, the R.I. problems are not restricted to Rhode Island either. They're very much a major part of our overall American debt and deficits problem.

But R.I. is a special case, too. Many public workers who have retired are now being paid more than they were paid when working. In addition, there are more retirees receiving payments now than there are current employees making payments into the state pension fund. And on top of that, less than 50% of the funds needed to pay retiree benefits are in place and properly funded. The rest of the funds to pay current retirees will have to come from current workers. This obviously is a formula for disaster unless disruptive change occurs and the state adopts the necessary financial changes to keep the plan afloat.

{Along these lines, disruptive as opposed to incremental change is ahead for many of our other public workers, too, along with many other segments of our society as well. But we'll focus on the state pensions in Rhode Island herein.}

Softer Approach on Pension Problems describes the hard working and hopeful state treasurer's efforts to familiarize the R.I. public workers with the dilemma facing them and their state with respect to paying future pension benefits to state workers.

Nevertheless, one retired Rhode Island worker is skeptical, to say the least. She said this after listening to the state treasurer's softer fact based approach, "It's us against them: retired workers versus current workers."

To which I'll simply reply that if it's really a contest, the retired workers have won. Game over. The first Ponzi payees - er - retirees always win compared to the later ones. And in this case, current retirees didn't fund even one half of their pension obligations to pay their benefits. As a result, current state workers are now forced to fund those unfunded old obligations as well as whatever pensions can be paid to the current workers with remaining monies, if any, whenever they retire. It's a double whammy of sorts unless, of course, the current workers intend to stick their kids with the bill just as the current retirees have done to them. Ponzi, anyone?

So what kind of change is needed? Disruptive, for sure.

Simply put, disruptive or discontinuous change is required when tweaking won't do the job. Clearly, tweaking won't supply those funds which were not provided adequately during the past several decades. Rhode Island, like other states such as Illinois, grossly underprovided for its pension obligations for many years (similar to the social security fund nationally). As a result, today two thirds of each dollar contributed goes to make up for the prior generation's shortfall and not to future pension funding for current workers. Yes, that's correct. Today's workers are paying the money which wasn't paid by prior workers. And if that's not bad enough, today's workers are even fewer than the number of retirees they're supporting.

The SEIU public employee union head said this, "I want to minimize pain to everyone. But it comes down to fairness." Let's examine that union leader's statement in view of the us (retiree) versus them (current worker) comment earlier.

The union official wishes to minimize pain to everyone and achieve fairness for all. That's nice. My question to him is simply this: To whom and for whom?

In looking to fairness and what ought to be, in far too many situations we adopt a "believing is seeing" stance, and our beliefs tell us what in turn we will see.

Therefore, in seeking the pain and fairness question's answer, recognizing the difference between POSITIVE and NORMATIVE economics is instructive. Positive economics deals with facts and therefore addresses "what is" or "verifiable" questions. Positive economics is an analysis that is limited to statements that are verifiable. Positive statements can be proven true or false. An "if-then" prediction, for example. If A happens, B follows. The conclusion is testable. The state treasurer is using positive economics to share the issue with workers and retirees when she says that the system is unsustainable today, and that basic math proves the case. Whether that statement is true or not, at least it's testable.

On the other hand, the union leader uses normative economics by adopting a subjective rather than objective approach. Normative economics is based on what "should be" or making "value judgments" about what is deemed to be good, bad, fair, should be, ought to be and such.
Depending upon whose rose colored glasses are being used, the same facts are viewed differently by different people in normative economics.

Thus, that returns us to the us versus them view of the world. We'll talk about this positive compared to normative world view as we go along, but for now, Rhode Island is helpful to bring the picture into better focus.

I wonder how clearly the state treasurer, the union leader, the retiree and the current worker will see things. And more importantly, will they see the same things the same way? That's going to be determinative if they are to bring about the required disruptive changes to the state's pension plan in an informed and adult manner.

As a broader issue, we have lots of positive economic issues continuously clouded by our normative views of the world. Politics is a great example of that. But no matter what we believe should be, we need to first know what the reality is. Thus, we need to know about the positive economics of the problems we're facing. Reality won't budge, so we may as well become familiar with it at the outset of our problem solving approach.

Without a handle on that fact based reality, we'll not be able to make an informed choice on what to do about improving our reality. It is what it is.

Only thereafter can we in a normative manner decide who ought to get what and who should pay what, and know that we've all tried our best to promote the "general welfare" while doing so.

Thanks. Bob.

Belief-Dependent Reality versus Scientific Method

The review of the book "The Believing Brain" is entitled A Trick Of the Mind.

The author describes what he calls "belief-dependent reality". Some call it simply confirmation bias. The point is that we tend to seek out information and patterns which confirm our existing beliefs. We also often choose to ignore any information which is contrary to those established beliefs. Unfortunately, this tendency to confirm our biases prevents us from acquiring new knowledge, or arriving at a better reality. If we don't make an ongoing objective effort to get to a better reality, our knowledge will stagnate.

The scientific method is a disciplined approach to reinforcing or acquiring knowledge. The objective method of inquiry is centuries old and works well. It works like this. First we formulate a hypothesis or theory (plan) about what we expect to happen as a result of conducting the test. Next we perform the test (do), and then we review test results to see to what extent our expectations were met (check). If what we thought would happen in fact happened, our prediction was confirmed and our existing knowledge base was reinforced. However, if our inquiry didn't produce the expected outcome (expectation failure), we have an opportunity for attaining new knowledge. In that case, we take remedial action (act), and then repeat the process. Plan, do, check and act is another way of describing the scientific method. As is predict, track, act. It's also sometimes referred to as the learning wheel.

Whatever we choose to call it, it's a disciplined method which furthers our knowledge of reality. And it does so continuously as we predict, track and then act again. The habit of continuous and rapid improvement, if you will.

The key to all this is starting with reality, or as close thereto as possible. Taking the time and making the effort to see things as they really are and not as we would prefer them to be. If we can learn to process facts objectively, the rest will be easy. And our reality and knowledge will continually improve.

After getting that initial look at reality, we proceed through testing and improvement to arrive at an even better reality. The initial "expectation failure" leads to new knowledge. Stated another way, true learning results from our failings. Some call that experience or the school of hard knocks, but it's really much more than that. It's a disciplined approach to learning.

When we predict something to occur and something else happens, expectation failure occurs. And we learn that we didn't know what we thought we knew. We then have an opportunity to increase our real knowledge by using the time tested process called the scientific method.

As Will Rogers said long ago, "It's not what we know that hurts. It's what we know that ain't so."

Later the comic Richard Pryor put it this way, "Who are you gonna believe, me or your lying eyes?"

All this may seem to be pretty easy and straightforward. But in reality it's not so simple. In fact, it's hard. Here's why.

Our beliefs shape or influence our reality. Different people often experience the exact same things and see them in entirely different ways. That's due to belief-dependent reality or confirmation bias. We are inclined to confirm our initial views by only seeking "friendly" information or patterns which reinforce our existing beliefs. We simply misinterpret relevant facts and events.

In other words, the human tendency is not to see things as they are. And as a result, any two of us generally don't share the same reality. As the crowd gets bigger, the shared reality becomes harder to achieve. But that just means we must try harder and communicate better.

Since an early age, many of us have been told the wrong thing about "seeing is believing". All too often we don't believe what others see; to the contrary, we see based on what we believe, and that is what often makes life difficult for us.

What do we do about it? Well, all we can do is resist the always present tendency to confirm our biases. Knowing we have such a tendency will help us to deal with it, if not to overcome it. Keeping an open mind is absolutely essential.

Enjoy the journey to continuously acquiring new knowledge and working toward a better reality. Then work hard to improve that reality by acquiring more knowledge. Knowledge is the key.

Thanks. Bob.

Planning, Saving and Investing -- Better Late Than Never

Your financial adviser can't help you pretty well describes the reality for most individual investors. That's why it makes sense to share concerns and views with those you know and trust and who either have been, are, or soon will be in the same or similar "investment boat" and in need of a forum for seeking objective direction, advice and knowledge sharing.

The article states that too many investment advisers adopt a goal to "beat the market", even though very few do so. In addition, these advisers don't have time to develop with their clients realistic individual investment goals and so they follow a cookie cutter, one size fits all formula for almost all customers. Finally, advisers spend very little, if any, time counseling their clients individually about their goals and how well the plan is unfolding with respect to being on track or in need of revision.

Investment advisers or brokers don't beat the market over time, because the market is really hard to beat. Thus, the stated goal of the adviser is unrealistic at the outset. And this is especially true if after-tax instead of pre-tax investing results are considered and individuals don't follow a speculatively dangerous borrowing approach whereby they use proceeds from loans to invest alongside their own money. Finally, intermediary fees and expenses of the broker or adviser subtract in a meaningful manner from an account's investment performance as well.

So why then do advisers establish beat the market goals for their clients, why do they not measure results after taxes and why do they look only at results before transaction costs and brokerage fees?

Well, the following answer taken directly from the referenced article makes good sense to me, "The truth of the matter is that the economics of the business do get in the way of adviser's doing right by their clients." That's because out of necessity most advisers are "asset gatherers"as opposed to investment counselors, meaning that they make their money based on how many clients they have and how many assets they have under "management". Individual investment advice and planning simply isn't part of the broker's or money manager's profit or business model. The broker has neither the time nor the expertise to counsel individual customers in a value added and appropriate manner.

Accordingly, as individuals we're better off avoiding or minimizing intermediary expenses to brokers and money managers, and also avoiding unnecessary transaction and taxes resulting from frequent trading within the account. We should, at least for the first ten years or so, adopt a follow the market, dollar cost averaging approach to equity index investing. That view is diametrically opposed to the business interests and business model of many brokers and money managers, but it's also usually the best one for individuals to adopt when investing for the long haul.

What then should we do? Well, one thing we can do is have an open forum for free discussion. And I do mean free. If nobody is selling anything, then at least we can be sure to get somebody's best objective assessment as to what makes sense and what doesn't. In other words, if we've put our money where our mouth is, it doesn't hurt for others to listen, assess and then follow their own path. But that means each of us needs to formulate a PLANNED path about saving, investing, measuring and revising which we intend to follow.

We each and all need an individual investment plan, in other words. It can and will change from time to time as circumstances dictate, but it needs to exist as a clear and ongoing point of reference. Otherwise the old adage of if we don't know where we're going, any road will get us there applies. And that's not a good road for any of us to travel.


To The People Who Haven't Saved Anything Yet is another piece of investing advice which makes the simple but entirely accurate point that it's better late than never when it comes to saving and investing. One very specific part of the commentary is worth highlighting, and that is the inherent benefit in the planning process itself and not the actual plan. Stated another way, the planning process is more important than the plan developed. The planning process becomes an ongoing habit, but the actual plan will undoubtedly be altered over time as our goals and circumstances so dictate.

Of course, prerequisite to any saving and investing approach is spending less than we earn. Assuming we have that habit in place, it's time to formulate goals and timetables, since goals without timetables are nothing more than dreams.

In the end, or from time to time, what amount of accumulated funds do we need to have, by when and how do we intend to accomplish that? By earning, saving, investing and assigning a rate of return assumption to that series of variables, we'll have a plan to follow. That in and of itself is a great start.

Let's not leave where we're going to chance, and let's definitely plan the route we'll take to get there and when we plan to arrive.

Thanks. Bob.

Knowing Enough About Finance

We are members of a free American society where personal choice rules. Personal choice is optimized when individuals possess the requisite knowledge to make informed choices. Much choice involves money and what to do with it, whether it be borrowing, spending or investing.

Unfortunately far too many of our citizens are unable to make informed financial decisions due to a lack of training and knowledge. That's too bad, since the subject matter isn't all that difficult to understand, assuming the interest is there.

In Financial Literacy must be taught in our schools, the well argued case is made that too few of us are trained to deal with our own money. Virtually no personal-finance training is given to students at the middle school, high school or college level, and then it's pretty much the same story when we enter the workplace as young adults.

With the current financial fiasco we're facing, in many cases as individuals and for all of us in our various cities, states and nation as a whole, we must address in a serious way this individual and national shortfall. Acquiring "enough" knowledge about personal and government finance is imperative to our future well-being as individuals, families and our overall society, too.

We can see this shortfall all too clearly in the current debt ceiling negotiations being conducted in Washington. The math being argued by either side simply doesn't add up in any fundamental or long term sense. To wit, there have been no discussions, at least in public, about how to remedy our financial problems in the long run. Big government and higher taxes for all or smaller government and greater self reliance for all? Large government entitlements and taxation or more personal responsibility and greater individual financial freedoms?


All can and do agree on one thing. We will have a national deficit of ~$1.6 trillion this year. Yet the sticking point in negotiations seems to be the following: The Democrats want to tax the top 2% of earners another $70 billion each year while leaving the tax bills for the other 98% the same as they are. The Republicans want to increase no taxes. What about the ~$400 billion in interest on the national debt? Will we ever bend the upward borrowing trend? If so, how? Not by agreeing to one or two trillion in spending cuts over ten years. That math doesn't work either.

Meanwhile, individual states are concerned as well. They receive an estimated $500 billion annually from the federal government and fear they will lose much of this federal funding in the future. Their fears are justified. That's because the federal funding they've been receiving from the federal government comes from money borrowed by the federal government. That in turn increases the federal debt and deficits, the subject of the current debt ceiling debate.

The biggest piece of the state budget is medicaid, which is ~50% financed by the state and 50% by the federal government. Then the next biggest piece goes to public school districts and colleges. These localities receive funding from the states, which have no money to grant unless they receive funds from the federal government, which has no money to grant, unless it borrows it. And the debts increase.

In fact, medicaid and public school funding represent more than 50% of state budgets, while the state gets 30% of its funds from the feds. To repeat, the feds have no money to grant, since they get 40% of their funds by borrowing.

The Republicans won't discuss additional taxes and the Democrats won't discuss reducing entitlements such as social security and medicare/medicaid. They both appeal to the same "middle class" voter who enjoys eating free lunches. But the food is going to start getting expensive real soon. We have to pay for what we eat, and we have to decide from whence our food will come. That means choice and that means it's essential that we all end up KNOWING ENOUGH ABOUT FINANCE.

Here's a serious question: Why have a debt ceiling if we raise it all the time? We certainly aren't making any progress with respect to keeping a lid on the national debt. And in addition to the ongoing national debt and deficits saga, our various states', cities' and individuals' very real long term financial problems aren't being faced squarely either.

Disruptive change is coming to town. Choices will have to be made soon. So let's each do what we can to ensure we make well informed choices. We'll be able to do that by "knowing enough about finance".

In the coming weeks and months, every effort will be made to do our very small part to help interested people learn more about personal and government finance, as well as the choices associated therewith.

It's really about nothing less than the relationship of free markets to governments, along with the relationship of general prosperity to personal freedom. Knowing enough about finance is essential to our individual and national well-being. It's actually a personal and moral issue for each of us concerning what kind of people we choose to be. That's for sure.

Thanks. Bob.

Government as Provider ... Bastiat's View

Frederic Bastiat, although he died in 1850, can still be counted on to deliver a direct, clear and insightful commentary about the relationship between individual freedom and government.

In For Love of Laissez-Faire, the new book "The Man and the Statesman" is reviewed. The book itself consists of a compilation of 209 of the economist's letters as well as several essays and related materials. I haven't read the book but wanted to share the review, since the book sounds quite interesting, especially now.

Regarding the relationships between individual freedom, economic growth and government's role as intermediary, Bastiat explains it all succinctly and clearly. The reviewer says that the title of one of Bastiat's essays (That Which Is Seen and That Which Is Not Seen) "might be the wisest 10 words in economic analysis". In that essay he makes it clear that rebuilding that which has been destroyed often adds nothing to economic growth.

However, the rebuilding effort isn't so perceived when we ignore how the money may have been spent "but for" the fact that it was spent on the rebuilding project. Analogously, if our money is taxed by government for whatever reason and purpose, we can't spend that very same money in the manner and on the things we would have otherwise chosen.

Therefore, what we would or may have done with our money, had it not been taxed by the government, is that which is not seen while what the government actually does with the money is what is seen. Such as "stimulus" funds acquired through taxing.

Here's another striking sample of Bastiat's clarity of thought about individual freedom and government's propensity to interfere as an expensive and frequently inefficient intermediary or redistributionist force. When writing about the 1848 French Revolution, he said the following:

"Poor people! How much disillusionment is in store for them! It would have been so simple and so just to ease their burden by decreasing their taxes; they want to achieve this through the plentiful bounty of the state and they cannot see that the whole mechanism consists in taking away ten to give it back eight, not to mention the true freedom that will be destroyed in the operation."

Let's translate. Government redistributes wealth created by its citizens by taking from some and giving to others. That is only a part of what government does, however. It also serves as an intermediary and that's what Bastiat meant when he said that it takes ten and returns eight. That process of taking ten and returning eight represents the cost of government and is an expensive act of redistribution.


To be fair, let's ask another question: In addition to its intermediary redistribution function, does the government add other meaningful value?

For example, does government invest and administer social security retirement savings better than individual citizens themselves could do, or those for hire in the private sector could do? I think not. In the administration of health care programs? Again, I think not. Public education through government schools? Same answer. I think not. Postal service? Hardly. Nursing home care? No.

Except for our general defense needs and for gathering funds to help out those individuals and families who need help but can't then help themselves, the conclusion is simple. The primary role of government should be to stay out of the way of its citizens and the free market economy.

Yet today total government spending amounts to almost 40 cents of each dollar the American citizens produce. In order to bring what Bastiat said up to date, today government now takes ten and gives back not eight but just six. That process of subtraction has substantial debilitating effects on our country's economic growth prospects, especially as our governmental debt load continues to grow exponentially.

All this means that big and disruptive change is ahead. The role of our government in relation to our citizenship rights and responsibilities needs to be updated. We the people are free to choose which path we'll follow, but choose we must. And soon, too.

This choice will not be solely or even mostly an economic issue. It will be about what kind of country we'll choose to be.

Bastiat's clarity of thought and expression can help us think through the various possibilities.

Thanks. Bob.

Comparing Governments: Top Down China vs. Bottoms Up America

It's time to talk about our American Exceptionalism. Let's compare ourselves to China.

We're free to do as we please as individual citizens. They are not free and are ruled by the communist party.

We have freedoms of speech, of assembly, of the press and countless other personal freedoms as well. They don't enjoy such freedoms and are often censored, jailed or worse when they speak out.

As an example, we can use the internet freely to say whatever we have to say to anybody who wants to listen. They can't.

We generally trust each other and those in government to try to do the right thing. We really do.
Chinese don't trust their leaders at all. And they really shouldn't.

But if for some reason we come not to trust our political leaders to do what's right, we replace them by voting them out of office. The Chinese have no such power as they are governed by the ruling party, the communists.

We have the rule of law. They have the ruling party.

Chinese per capita income is similar to that of Jamaicans, or roughly 10% of ours.

A few days ago, I posted about the story of China's Train Wreck and its implications for their society.

Today I encourage you to read a remarkable article about Chinese corruption and such titled Trouble on the China Express. Reading it helped me to remember what a truly unique country and system of government we enjoy as Americans. Yes, the political "sausage" being made in Washington these days is indeed ugly. That said, the political process, ugly as it is, is open for one and all to see. And if we don't like what we see, we can say exactly that, and we can do something about it, too. The Chinese simply don't enjoy those freedoms. Nor do many others among the citizens of the world.

Finally, listen to what one internet user said about the recent train wreck and related issues in China, "When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted. China today is a train traveling through a lightning storm. None of us are spectators; all of us are passengers."

Well, at least we Americans have something in common with the Chinese. "NONE OF US ARE SPECTATORS; ALL OF US ARE PASSENGERS." The fundamental difference, however, is simply this; we Americans decide who will drive our trainload of passengers.

Unlike the Chinese, the American people have the inherent right and power to change what we believe needs to be changed. All we need to do to exercise that power is to muster the political will to take the necessary action. We have the Founding Fathers to thank for that.

Thanks. Bob.