Monday, February 23, 2009

Economics 101

Economics is the name, common sense is the game. There are tons of economic theories out there, all supported by well thought-out hypotheses, solid research, mathematical formulas, and backed by "proven" principles. Economics is a complex science, but it is ultimately guided by common sense, I believe anyone can understand economic prinicples if they are given the basics. Let's dive into some of the details.

Supply and Demand lie at the foundation of economics, at least in our [capitalistic] free society.
Demand is created where a need or want arises. I demand something like bread, and I have some limited number of resources to buy that bread. On the flip-side, some baker has a supply of bread (or he sees my need and decides to start making bread), thus he a will set a price for that bread. If the price is too high I will seek another option (either make my own, find someone selling it cheaper, or find an alternative product). If the price is too low, the baker will soon sell all his bread, and find that he cannot afford to keep buying the ingredients he needs to make the bread, and he will soon stop selling it. So the baker will price the bread so that I can afford to buy it and he can afford to make it. Make sense?

Another simple aspect to economics that I have learned is that there is a short-term benefit and a long-term benefit to everything. As you weigh the economic benefit of something, keep this in mind. Let's look at the biggest economic news of the day and why I am very skeptical. See if you agree. If not, tell me why.

American Recovery and Reinvestment Act of 2009 - $787,000,000,000 (billion) of government spending that will attempt to stimulate our economy.

  • What's in it?
    Here are some details if you want to see them: hines_stimulus_overview.pdf
  • Where does this money come from?
    I think there are only 3 options here: Taxes, debt, or the printing press. Mind you, all of it comes from the people at some point. Check out this video to explain some of these "funding" issues.

  • Who will it benefit?
    Read the overview above and decide this for yourself. I'm not saying that helping to weatherize low-income families homes is not a good thing, but I would question the stimulative effect that the $5,000,000,000 (billion) in funds for this program will actually have.
  • Will it have the desired affect?
    Let's look at this from an economic perspective. Let's also assume for the moment that we think the spending in the bill is all going to good causes that we agree with. This should allow us to be fairly objective.
    The good: When this money is spent over the next few years, it will create a demand for goods/services. We will now have the opportunity to create a supply for this demand, which will allow the creation and retention of jobs and facilitate the flow of money.
    The Bad: Part of the problem with government spending is that it creates false demand. When this money is spent, the demand is gone. If the government changes their mind on where the money is spent, the demand is gone. Demand is now being created by taking money from the people and spending it on the items in the "stimulus" bill. If the people stop spending as well, demand will remain unchanged. This is where we can see many long-term consequences.

Are you with me?

You may notice that the good part of this plan is that, if you agree with all the spending, there is potential short-term benefit. If you see it as I do, you will see that the long-term consequences could be severe. If we borrow the money for stimulus, we will now be that much more in debt when the demand dries up. If we print the money, inflation takes over and the value of the dollars we have drops and we are no better tomorrow than we were today. If the money comes purely from taxes, people will have nothing left to spend and will be forced to rely on the government for their basic needs.

Hmmm. I for one don't agree with much of the spending in the bill. Go through it again and remind yourself where each dollar comes from and whether you yourself would spend the money that way.

Is this freedom?


  1. Very good writing. I'm interested to know what you would propose as a solution to the economic crisis. That is a loaded question, I know :)

    Jenny (sister-in-law)

  2. I love that question and I have the outline of the "do nothing" plan for a future post.

  3. I'm so glad you're writing blogs now because I'm learning a lot. These aren't things we talk about around the house (although perhaps they should be).