Response to questions from big think.

Is fiscal responsibility essential to creating a stronger, more prosperous nation, or is the matter overhyped?

Worse, the matter is totally confused. By identity, government budget deficits = ‘non-government’ accumulation of financial assets denominated in that currency.

That means net savings desires of the non-government sectors can only be accommodated by the government’s fiscal balance. (Deficit to add financial assets; surplus to reduce financial assets.)

Therefore, if government deficit spending is insufficient to satisfy the total net savings desires of the non-government sectors, the evidence is unemployment and excess capacity in general, which is also known as a lack of aggregate demand.

There are a plethora of reasons for Americans to work later in life today. It is difficult to live off of Social Security benefits alone, we are living longer and 401(k) plans are far less reliable than traditional retirement plans. So do older members of our society get a fair shot when it comes to employment? What about younger workers? Does youth and inexperience repel employers?

Employers attempt to maximize their profits. That means ‘hiring off the top.’ In other words, they try to hire the best first, and the seemingly less attractive workers get hired last.

What is the most exciting thing going on in business today?

The combination of weak demand, due to world budget deficits being too small, and rising prices of food and fuel, due to the Saudis acting as the swing producer (they are a monopoly supplier at the margin), is creating a highly disruptive ‘stagflation’ condition much like the 70’s.

Where is capitalism failing today?

Capitalism is functioning within the given institutional structure, which includes tax laws, labor laws, govt. spending decisions, contract law, etc.

What needs to change in the system?

The system changes continually with changes in the application of the institutional structure and with the advancement of knowledge on how to use any given structure.

Currently, we have a floating exchange rate system in place, which is capable of sustaining full employment and price stability. This is a major advancement over the previous gold standard, which necessarily resulted in periodic recessions and depressions and allocated real resources to the production and accumulation of gold.

However, we continue to fail to recognize how to sustain sufficient demand for full employment and we fail to utilize techniques of government spending that will promote price stability; so, the promise of floating exchange rates has yet to be realized.

Everyone deserves a fair price for their work,

As a matter of ‘game theory’ if a person has to work to eat and survive, but business only has to hire if it determines it can sufficiently profit by adding employees, it is an ‘unfair game’ biased against workers, and we should expect real wages to stagnate over time.

And this is exactly what we observe.

but should there be caps on CEO salaries?

The corporate structure is part of the general institutional structure, which is producing the seemingly higher than necessary CEO salaries. Simple caps would have other consequences.

More fundamental changes to the institutional structure are needed to put incentives in place for alternative distributions of incomes.

Is it fair to lay off workers when your own salary is worth tens of millions of dollars.

At the macro level, with sufficient aggregate demand to ensure full employment, efficiency increases total output. Therefore layoffs without production cuts potentially benefit the entire population.

However to get that outcome, the current institutional structure has to be adjusted to include the necessary incentives.

Or, does the market require high salaries to retain the highest quality leaders and the lifestyle they must lead in their high risk jobs?

No. The reason for the high CEO salaries is a function of the corporate structure that includes the legal arrangements between shareholders, board of directors, and management. It is the resulting interaction that will continue to push up CEO salaries.

Is war the biggest growth economy? It pours unknown amounts of wealth from around the world into technology, man power and manufacturing as well as using up, or destroying a great deal of natural resources.

Again, this is the result of institutional structure which is currently providing the incentives that give us the observed results.

And the situation is actually much worse than described above.

Current tax and other elements of fiscal policy are supporting biofuels. The result is that we are directly and indirectly burning up our food supply for fuel. This is already creating food shortages which have the potential to kill more people than were killed in World War II over the next few years.

How many people have an income either directly or indirectly derived from armed conflict? Since the industries that profit from the various aspects of war have become so vast and dependent on world wide struggles, will they ever let the world create peace?

First, biofuels will kill tens of millions over the next few years if nothing is done to stop that process. That is far higher than any of the current wars.

Second, the lack of understanding of the application of fiscal policy to ensure full employment and price stability is contributing to
regional conflicts.

Third, profiting from war is an example of how institutional structure functions channel economic resources. The outcomes are a function of the structure.

Are you worried about America’s economy?

Yes, I see weaker demand, supported by rising exports that diminish demand in the rest of the world, while inflation accelerates due to imperfect competition in the production of crude oil.


4 Responses

  1. Its a poorly thought out biofuels policy that is resulting in the rise in food prices. Brazil because they use sugar cane and not corn can grow their fuel without destroying their food supply. Similarly if in addition to ethanol we promoted the use of methanol which can be produced from any organic refuse, we could raise the prices of many non-food agricultural products. This should benefit third world agricultural economies. And eventually it would result in transferring the money currently going to Saudi Arabia to a wide range of agricultural countries. The problem is using only corn for ethanol not biofuels per se.

    Robert Zubrin suggest this policy in his book Energy Victory.

  2. biofuels generally use up acreage that could be used for food, as well as water and fuel. If these are not available for growing food, nothing is lost by producing biofuels apart from labor and possible environmental side effects. Same for using waste products that wouldn’t be used for other purposes.

    Also seems the monetary system will create enough purchasing power to consume pretty much anything that can be produced, so producing more fuel most likely will lead to more total fuel comsumption, and so not take anything away from the Saudis. So the benefit is having more fuel to consume, rather than a substitution benefit at the macro level.

  3. Right so its our choice of corn that is the problem since that is taking away acreage that used to produce food. Combined with our ethanol tariff which is prevent importation of ethanol from non-food sources like in Brazil.

    Zubrin suggests mandating all vehicles sold in the US run on gasoline, methanol, or ethanol, or any combination of these fuels. Consumers could then choose fuels, effectively breaking the OPEC monopoly and forcing gasoline prices to essentially match the equivalent energy price of ethanol or methanol. Government would have to step in with taxes if OPEC then dropped to price of oil to extinguish this competition but either way prices would drop.

  4. On the last bit, prices would still be set by the Saudis if there was sufficient demand for their 9 mm bpd.

    It is doubtful that biofuels could produce enough fuel to meet the growing overall demand sufficiently to reduce the world call on Saudi production?

    So as long as there is demand for 9 mm bpd from the Saudis it doesn’t matter how much the total demand is- they can still set price.

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