Tuesday, May 13, 2014

Economics 101: Part 1

I have never pretended to be an expert ... or even especially knowledgable ... on the subject of higher economics. As long as each month runs out before my money does* and my retirement fund looks as if it will support me in my dotage**, I'm generally happy. But although I'm not any sort of economist, there are things that either seem clear to me, or seem stupid to me as I watch our two political parties and all their splinter groups howl uselessly at each other across the struggling wreckage of our once-vibrant economy.

Over the last year or so, I've been dabbling off and on with a file I call "Economics 101," which contains my stream-of-consciousness thoughts on things like the economy in general, jobs, health care, taxes, and so on. What follows in this post is the first part of my Economics 101 document, as I wrote it. What do you think? ...

Part 1:
Business, Jobs, and the Economy in General

Businesses exist because their owners have identified an opportunity to make a profit by selling some good or service for which there is a perceived need.  The entire purpose of a business in a capitalist society is to make the maximum profit at the minimum cost. Altruism may play a part, but only a very small one.

Businesses hire people because they assess that they can maximize profit by employing a certain number of workers. They fire workers when it makes economic sense to do so to maintain the desired level of profit. Contrary to what the GOP tends to believe, businesses don’t hire workers because their taxes are low or lay them off because taxes are too high. Taxes are just one part of the cost of doing business, and are factored into business decisions.

Consumers want the lowest possible prices. In order to provide the lowest possible prices to consumers, producers at every level must do whatever they can to hold down their costs so that they can charge the lowest possible price to the consumer*** while still making the best possible profit. They minimize costs in a number of ways, for example:

-  Pressuring suppliers to cut the cost of raw materials;
-  Increasing productivity by getting more work out of a given number of workers;
-  Paying the minimum wage necessary for each job position (this is why there is such tremendous opposition to the idea of a national minimum wage);
-  Minimizing benefits for workers to the lowest competitive level;
-  Demanding wage and benefit concessions from workers, with the implied threat that if concessions are not made, jobs will have to be cut;
-  Outsourcing functions to locations where labor costs are minimized (usually overseas); and,
-  Pressuring elected officials for concessions or loopholes that minimize their tax burden.

How about the political costs of doing business?

-  When businesses pay large sums of money to individual political candidates, parties, or PACs, who absorbs the cost?  Surprise! - it’s you and I, the consumers. You didn't think it was coming out of profits, did you?

The end result is that the consumer pays the lowest possible prices for the goods and services he needs by holding down a job that pays the lowest possible salary, with the minimum possible benefits. The ultimate economic result is the following:

-  Providers of goods and services arbitrarily raise the cost of those goods and services, citing “increased cost of doing business,” while at the same time cutting back on those costs in every possible way;
-  Because the costs of goods and services continue to rise while wages and benefits remain stagnant or decline, both necessities and luxuries continue to spiral out of the reach of the average worker. This means that, in the worst case, workers are forced to chose between paying for health care, mortgage, or food.

So, what happens when costs are minimized by laying off workers?  Companies produce goods and services to sell at the lowest possible prices, but people cannot afford to buy them anyhow, because they have no jobs.

That's enough for now. Think about all that, and let me know what you think. Tomorrow, we'll talk about taxes and spending.

Have a good day. Keep a hand on your wallet.

More thoughts tomorrow.


* A rare event, let me tell you!

** If I live in a box in the park and eat once a week.

*** In some cases, an item may be sold to the customer below the cost of production ... this is called a 'loss leader,' and is intended to attract a customer who will probably buy other things as well, which will offset the loss incurred in the sale of the 'loss leader.'


eViL pOp TaRt said...

What you wrote is pretty much like how it goes. I never thought of it really, but political contributions and PACs are passed on to consumers.

Taxes, of course, are going to be passed down to the customers. That's more of trickle-down economics.

The bottom line: they will pass the bad stuff off to the consumers.

allenwoodhaven said...

Uh oh. Bilbo is making sense again. Where will it lead and when will it end? Our politicians need to take this class!

Grand Crapaud said...

They are going to get our money, one way or another. Health care is a big factor.

Arizona Dave said...

RE: the minimum wage - I think people who oppose it should perform this though experiment: Abolish the minimum wage, and reduce your costs by paying all workers zero dollars. Who, then, would have the money to buy the widgets you're making? Rich people don't create jobs. Consumers create jobs by buying your widgets.

Bilbo said...

That's dangerous thinking, Dave! Taken to its logical conclusion, it means that all the bellowing the GOP does about protecting job creators means they ought to be protecting consumers ... and you don't want to be too close when their heads explode from the cognitive dissonance!

Anemone said...

I work at two jobs, one part-time to make ends meet. Still, life is good.

The Bastard King of England said...

An economic sense I've picked up over time is that businesses will try to provide as little as possible while still implying that they give full service. They promise us beans, but deliver a fart!

Mike said...

There you go, pointing out facts again. You're going to get yourself in big trouble for doing this.

Elvis Wearing a Bra on His Head said...

The big contention in government is what the spending should be on. There's fundamental philosophical political differences here.

We have an interesting experiment in Seattle, where the minimum wage will be moved up to $15.

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