Friday, November 09, 2007

I Still Don't Understand Economics

Back on August 19 I wrote a post in this blog titled "The Deficiencies in My Education," in which I lamented my lack of understanding of economics. I regret to tell you that not only does that deficiency remain, but it's gotten worse. I must tell you now that not only do I not understand economics, I will never understand economics.

Forget the sub-prime mortgage fiasco and the conundrum that the push for lowest prices can result in people losing the jobs that make those low prices so attractive. Forget the fact that the same set of numbers, crunched by different accounting systems, can yield either a profit (for the shareholders report) or a loss (for the tax man). Consider this:

Earlier this week, General Motors announced that it had suffered a 39 billion ... yes, I said billion ... dollar loss in the third quarter of 2007. In considering this number, consider also that the total value of GM's outstanding stock on that day was $20.4 billion. That means that, in one quarter, General Motors lost almost twice the value of the company in one fell swoop.

How can this be? How can a company lose such a staggering amount of money and continue to exist? And it's not limited to GM ... how many other companies (the airlines come to mind) routinely announce huge operating losses, yet continue to function from large, modern headquarters buildings staffed with exorbitantly-paid executives?

In fairness I should note that the article to which I linked above clarifies that the loss was a one-time "non-cash, non-recurring item" rooted in the arcane economic Sanskrit of the tax laws, but the fundamental fact remains that GM suffered a loss in a single fiscal quarter that was so enormous that it is literally beyond my ability to comprehend.

I'm convinced that there are no real economic laws or principles. If there were, I doubt that the vast, intricate, interlinked modern economy would function at all. I believe that economics is nothing more than applied psychology: if you can spin the news and project the proper air of sober gravitas and calm leadership, people will continue to believe in their placid, bovine way that all is well even as they watch their jobs head to Mexico and China, and the goods they used to make get cheaper even as they lose the jobs that would enable them to buy those goods. The old joke says that the economy is in recession when your neighbor loses his job, and in depression when you lose yours ... but it's not a joke any more.

As the 2008 presidential election approaches, I'm watching carefully to see what the leading candidates say they'll do about the economy. So far, I haven't seen anything that makes me believe anyone has a clue what to do.


I still don't understand economics beyond what appears to me to be the Real Person's Fundamental Economic Principle: there are no accounting rules or grand economic principles that protect you. You must have a job, you must pay your taxes on time and in full, and you must pay your bills when due.

After all, you're not a huge corporation with a staff of suits and accountants that can make everyone else believe you're prosperous when you can't feed your family or take them to the doctor.

And that's the worst thing about the country I love and served in uniform for 23 years.

Have a good day. More thoughts tomorrow.



John A Hill said...

I don't understand economics either. And I don't believe the numbers that GM and other huge companies put out either. I know that to them, losses can be money that they didn't earn--not money that they actualy lost. An airline that is well past the break even point but has empty seats on a flight will say that they lost money. They may have made a profit on the flight but they didn't make the maximum amount of profit, therefore, they lost money.

I think it would be to say that I don't understand their economics. I understand my economics. I know that my agency of the government (FAA) has said that air traffic controllers won't be getting a raise this year (again). I know that my supervisors will get a pay raise (again). I know that my health insurance premiums are going up (again). I know that the cost of gas and anything transported using gas is going up (still). In my economy, I'm losing ground.

But as you said, taxes and bills will be paid on time and in full. I know that my personal economic world is far better than most so I try to keep my whining to a minimum. After all, it's not like I lost 39 billion dollars or anything!

Another fine rant by Bilbo.

The Mistress of the Dark said...

I have to say that I agree with you and I took economics in college too, and passed it! But still I don't grasp a darn bit of it.

How can you post a loss like that and still be able to do business? Yikes. It's all so darn scary.

Amanda said...

I watch CNN over here and recently there is plenty of news on your election. Yesterday there was a specific piece on elections and economics. It appeared that the general public's concern over the economy is at its highest in about 20 years. And I guess your blog, and John's comment reflects that. I like your Real Person's Fundamental Economic Principle.

Anonymous said...

A comment from the anonymous poster, whom you may now refer to as the man who never was:

The reason you don't understand is that so much financial activity in this country occurs solely in reaction to tax laws, as opposed to market forces.
Additionally, these same tax laws provide the only reason for existence of a huge cadre of very smart people who could actually be contributing to our economy, say by making pies. But the people who live off the tax laws (lobbyists, lawyers, and accountants) do not bake pies. They only cut up the pies made by others. Their existence depends on your work, including the massive number of years you spent defending them from the barbarian hordes. There was economic worth in the work you and I did for the best years of our lives: we were the night watchmen that enable the factory owner to arise each morning knowing that his factory and its physical capital would still be there. Thus we were a necessary factor of production. The rest? Well, Shakespeare said it best. You know the quote I am referring to. Had accountants then existed, he would have added them to that great line, probably screwing up the meter entirely!

Jean-Luc Picard said...

How General Motors managed to lose all that is a puzzle.

Bilbo said...

John - good comments. Don't get me started on airline fares...

Mistress - don't worry about passing economics but not grasping it. It looks as if most professional economists don't, either.

Amanda - yes, people here are very concerned about the economy. It remains to be seen if that concern will translate into effective action in the upcoming elections or if, as usually happens, everyone goes back to sleep.

"Anonymous" - that's a very good point about financial activity being driven by tax laws rather than market forces...I hadn't looked at it that way before, but it's worth thinking about. Shakespeare was right about the lawyers...and yes, he should have included accountants, too!

Jean-Luc - my point exactly! How can you lose twice as much as your company is worth and still be in business? I'd like to have those accountants managing MY checkbook!