economicmultipliers_81

Economic Multipliers (81)

Do you know what these are?

They help CREATE wealth in systems.

Fiscal cliffs do not create economic multipliers.

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Who’s responsible when a nation comes to the edge of a fiscal cliff?

Better yet, if there is an edge, how do we never go off?

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In the early 90’s, I pulled some federal deficit numbers together for a presentation. Billions and trillions of dollars make little sense to the average American so I presented the deficit numbers in terms of the number of $50,000 jobs the deficit could have supported directly (of course the money was being used for other things … that’s why there was a deficit).

Guess what? Over the years, the numbers have gone up: For a few windows of time, I thought I’d show you by how much:

The deficit … in $50,000 job equivalents:

• • 1940-1974: ~ 220,000 jobs/year

  • 1975-1981: ~ 1.2 million jobs/year

  • 1982-2002: ~ 3.5 million jobs/year

  • 2003-2008: ~ 6.6 million ~jobs/year

  • 2009-2012: ~ 25.5 million jobs/year

Numbers like these can be deceptive: When prices and wages rise, money has less value. If these numbers were adjusted for inflation, they wouldn’t look AS different.

For just one period (1975-1981 … with an oil crisis and high interest rates and inflation, etc.), if the numbers had been inflation adjusted, approximately 1.2 million would read approximately 4.2 million: Does it seem like everything costs about 3.5 times more today?

Looking at the above numbers, you’d think that the deficit is the biggest problem: It’s not. Things that are visible are manageable: Visible things do not normally collapse economic systems or take them to the edge of a cliff.

The biggest problems are:

(a) overall debt (which the deficit helps create) along with the costs to service it (principle, interest and administrative expenses (people, buildings and materials cost money)),

(b) unfunded future obligations (which add to future deficit and debt numbers) and

(c) negative economic multipliers.

Overall debt: Nations with well-maintained equity can carry debt BUT the equity must last longer and create at least as much value as the debt (then you come out even) or more value (preferable because then you gain wealth).

Unfunded future obligations: A quick way to get into trouble, these are no-no’s that the founding fathers of the United States stayed away from: Do you tell your children and grandchildren that you’re going to buy something for yourself today and not pay for it but don’t worry, you’ve set it up so they won’t be sent the bill until possibly after you’re dead? … but it’s OK because by then, they’ll be making a lot more money and you’re sure they won’t mind getting a bill from you.

Negative economic multipliers: They must be balanced by positive economic multipliers just to come out even and it is a LOT easier to create negative economic multipliers than positive ones: Negative economic multipliers are like bad habits. Once you’ve acquired them, they are very difficult to get rid of and seem to take no time or effort to keep. Positive economic multipliers require steady study, work and maintenance along the way.

So who’s responsible?

• • In the midst of a crisis, who really cares … except the people who never learned how to solve any problems. You normally look for responsibility after crises are over but also keep in mind that some people like to keep other people and systems in the midst of non-stop crises: When they are able to do this, no one has time to backtrack and look for responsible parties. This phenomenon alone is another form of a system-wide crisis.

And, what must be done?

I’m hoping that the ‘youth’ of this nation are quick studies with good ideas for their communities, states and the nation (like dosomething (dot) org) because the ‘adults’ seem to be ‘out-of-control.’ Working in each of the three areas simultaneously, the nation needs to learn how to balance its books … pretty easy in theory but not in action because when anything becomes ‘unbalanced,’ NO ONE wants to be responsible for the bill (and the United States has accumulated a LOT of bills and the ‘adults’ seem to want to accumulate a LOT more).

Likewise, if the nation doesn’t address the behaviors that got it into trouble and those behaviors created opportunities for ‘system players’ to make millions and sometimes billions from the ‘system’ (different than making money because well-defined and socially and economically beneficial products and/or services are and were delivered), we should simply be looking for the next ‘too big to fail’ crisis in the making and an even bigger hole (more debt and future obligations) with more lack of accountability.

Since three things govern whether a nation is creating and will in the future be able to create wealth, we must ask:

• • Have we appropriately balanced equity against debt?: Constructing and having ‘things’ does not mean any individual or nation is getting an economic return from those ‘things’ or that any economic return will be used to service debt taken on during the acquisition of those ‘things.’ (See P.S.)

  • Do we have accurate projections of current and future obligations? Simple things like not budgeting adequately for disasters (floods, tornadoes, hurricanes, etc.) when disasters are a NORMAL part of life can be considered unfunded or underfunded obligations. Unfunded obligations aren’t necessarily ‘complex’ although they are many times ‘hidden’ in rather unusual ways and are a big part of future debt (so much so that it is possible to imagine a 100 percent tax rate (you get to keep no money) not being able to service future government expenditures … of course … this scenario is WAY over any cliff!).

  • Does the system as a whole have positive economic multipliers? Since every part of life involves some sort of ‘work’ … even the recreational parts … imagine that every time you minimize a ‘social expense’ by virtue of any action you take (or don’t take), you increase the probability that the system will be better prepared for and much more able to create positive economic multipliers. In a direct sense, this is the area that individuals have the most control over.

The most unusual challenge in dealing with any of the three is that the system today is being run by people who have become masters at PRIVATIZING PROFITS (a small percentage make money even when they are not creating wealth) and SOCIALIZING LOSSES (citizens get set up for higher future taxes to cover losses even though the greater percentage of them probably did nothing to destroy wealth): This kind of game is rigged.

For an amazing education on what has been happening, some good words for search engines are: ‘privatizing profits socializing losses’ and/or ‘capitalism for the poor socialism for the rich’: Some of the best thinkers in the nation and the world today are more interested in figuring out how to create large systemic failures that they can profit from than in figuring out how to create wealth for their nations while they create wealth for themselves. People like this have always existed but in the past, they didn’t have the ability to do SO much damage to SO many people in SO little time. (These failures are different than inadvertent failures because they have an ‘on purpose’ … ‘as long as I profit’ … component.)

When players in professional sports are caught betting against their team, they normally are thrown out of the game. We need to start figuring out ways to throw players out of the economic game who are betting against their teams. (See P.S. P.S.)

Today, another interesting component is that if the best of the best players that are playing on a global scale don’t want EVERYONE to win, ALL of the nations are in a LOT of trouble: It doesn’t matter how much anyone understands about economics if that is so. (Think of it as the equivalent of people who would burn down whole neighborhoods of uninsured buildings and leave the occupants (who they don’t know and it wasn’t their community anyway) in the streets to figure out ways to rebuild their lives).

In the midst of any economic storms, you want lots of safe harbors. It’s really not wise to create situations where lots of (or any) people or nations are standing on the edges of any cliffs.

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Now, I didn’t really tell you what needs to be done about the fiscal cliff because I don’t have all the answers AND the answers can be radically different for each individual, community, state and nation. But if you want to solve any problem:

• • First, you must understand the nature of it.

  • Second, you must understand who profits from it.

  • Third, you must understand how the problem itself keeps people from solving it (problems are like revolving doors … they keep coming around but many times in slightly different forms).

  • Fourth, you must understand the options you have to get yourself and others involved in helping create a solution: Everyone has time, money and resource constraints and if you can figure out ways to give people more of any of these, it’s easier for them to help you solve a problem.

  • Fifth, you must be realistic about results because everyone prioritizes differently and wants as much time, money and resources as they can get (for the things that they prioritize on).

  • Sixth, you must expect resistance. Every applied idea changes something and change can be a scary thing … even when people say they want a problem to be solved and say they like the solution.

  • Seventh, you must know that problems are solvable even if no one has figured out a way before … and make a commitment to helping solve them.

  • Eighth, you must create ‘negative incentives’ for the individuals who purposely create problems and ‘positive incentives’ for the individuals who don’t.

  • Ninth, you must anticipate the problems that are created by your ‘solutions.’

  • Tenth, you must simultaneously solve the problems caused by possible solutions if you want the best possible outcomes.

Ten items with lots of ‘sub-items’ … even though I believe that people do best if they keep their lists to three. Fortunately, many younger people are excellent multitaskers.

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P.S. Many individuals have ‘no debt’ policies except for possibly a home mortgage or car payment. They wait to purchase things or barter their time and materials for other’s time and materials and most of these individuals would say that governments should function in the same way.

Bartering is a great way to create individual wealth but know that it is harder for systems to create positive economic multipliers and system-wide wealth when ‘money’ is taken out of transactions. It is also harder for communities, states and nations to build supporting infrastructure that everyone uses (including barterers) and service the debt for it when any economic transactions are removed from the ‘taxable stream.’

Economics is an interesting field though because ‘barterers,’ in the process of engaging in activities that create positive economic multipliers for themselves, are many times less likely to be engaged in activities that create negative economic multipliers for themselves and others (they don’t have the time!): Economic systems many times undervalue the contributions of people who do not create a need for extra and/or unnecessary tax money to be spent.

Likewise, people who believe ‘governments’ can solve every problem many times ignore the fact that governments are them: If they can’t solve every problem, neither can the government.

I will always go back to: The easiest problem to solve is the one that was never created in the first place.

P.S.P.S. When American ‘players’ bet against their team, I consider it to be bad for the United States. When Chinese ‘players’ bet against their team, I consider it to be bad for the United States. When Brazilian ‘players’ bet against their team, I consider it to be bad for the United States. (Note: There is no significance in the selection of the countries). Bad bets anywhere are bad for every nation in the world that wants its citizens to enjoy a high standard of living and a good life because bad bets destroy global wealth.

You can’t create positive economic multipliers by destroying wealth. And shifting wealth is not wealth creation: The illusion of longterm wealth creation that it creates can be more damaging to any nation’s economic, social and even security systems than any wealth acquired in the shift.