Author: Lawrence

The Trump administration is planning to sell the U.S. Postal Service (USPS). From the Trump point of view, it is just another government bureaucracy running in the red with little chance of achieving a profit for taxpayers. With FedEx, United Parcel Service (UPS) and Amazon delivery service, who needs the U.S. Postal Service (USPS) anyway? Why not sell off your local post office to become a convenience store, such as a candy store, or, better yet, a fast food delivery service already equipped with a pick-up counter in the front of the store?

At first it might seem like selling off so many post offices around the country would be a huge task. However, hedge funds have plenty of experience buying up and selling off the assets of large firms. Hedge funds know how to take a little of their own money, more money from investors and a lot of borrowed money to buy up firms and sell them off in pieces for a handsome profit. But who would buy so many individual post offices? No problem. There are plenty of property management companies running local shopping centers and a few other commercial properties here and there. They often have to find new businesses for some of their properties from time to time, so finding a buyer in each city and town would be no problem.

Without competition from a government controlled postal delivery service, the private delivery companies could make mail delivery much more efficient. Why not charge a higher price for delivering a single letter to some location out in a rural part of the country than delivering that same letter to a location in the middle of a dense urban or suburban location where many other letters are being delivered daily? Efficient resource allocation requires that higher prices go with the higher costs of time and gasoline consumption while lower prices correspond to lower costs.

But there is another way of off-loading the administrative expenses of the U.S. Postal Service (USPS) so that the taxpayer could completely off-load the expense and yet still get all the benefits of the current system as well as fulfill all the pension obligations to postal workers. Turn the whole thing over to the Federal Reserve. The Federal Reserve Bank earns billions of dollars in the New York financial markets as well as from money it earns from the Federal Reserve’s twelve regional banks. It doesn’t need taxpayer money. In fact, the Federal Reserve often donates billions of dollars to the U.S. Treasury in years when it earns more money than it knows what to do with. Why not keep all the benefits of the current system but drop the taxpayer burden of paying for it? Who can argue with getting something for nothing? In return for paying for our postal delivery service, the Federal Reserve could get a new, more effective tool to stop inflation quickly and efficiently.

To give the Federal Reserve the new return-on-savings tool to stop inflation efficiently and effectively when turning the Postal Service (USPS) over to the Federal Reserve, Congress would need to reissue the Postal Savings Act of 1910. When I was a little boy in the 1950s and 1960s, many people had savings accounts at their local post office. In response to excessive inflation, instead of using its cost-of-borrowing tool and punishing people for inflation by raising the cost of loans when too much money was chasing too few goods, the Federal Reserve could create a return-on-savings tool by posting a sign at every neighborhood post office offering ten percent (or more) on savings to reward people for saving money when too much money is chasing too few goods causing inflation.

As was done under the Postal Savings Act of 1910, post office savings could then be reinvested in whatever nearby private banks were offering the best interest rates. The Federal Reserve could easily afford to eat the difference between the high rate it offered and the somewhat less generous private bank interest rates to stop inflation quickly and effectively.

Ironically, it would make the free enterprise system more efficient, because, in reality, without the post office signs offering a high rate, many people pay little attention to the interest rate on their savings or on their certificates of deposit after they have made their initial investment. The rates often drop dramatically over time without them noticing, but they are much more likely to notice the signs offering high rates in their nearby neighborhood post office. The Federal Reserve would make sure that the money got reinvested in the private banks that were offering the best rates and move that money around as necessary to always get the best rates offered by the private banking system. Once the excessive inflation subsided, the Federal Reserve could lower the post office savings rates to simply match the best available local private bank rates, or, in the face of economic downturns, lower the rates even more to encourage spending to avoid recessions.

The Federal Reserve has relied too long on its old cost-of-borrowing tool where it raises the interest rates on loans and mortgages to try to stop excessive inflation. But raising the interest rate on loans just transfers the inflation from things that require a loan to less expensive things that don’t require a loan. In addition to discouraging people from buying a house or replacing their old beat-up car with a new car, it causes farmers, who borrow money to plant more crops, to cut back on production just when an increased supply was needed to stop inflation where too much money is chasing too few goods. Many retail establishments that typically borrow money to allow them to run in the red through most of the year until the holiday season at the end of the year when they cover their costs and make a profit would have to cut back or stop when facing higher loan rates. This ultimately does stop inflation but by suppressing both supply and demand as worker hours are cut back or workers are laid off. Since they can’t spend money they don’t have, the workers cut back their demand for goods and services dramatically at such times, and that does finally stop excessive inflation.

However, a return-on-savings tool such as with the post office savings accounts would be much more effective and efficient in stopping inflation. People who ordinarily don’t save much due to the rather low interest rates on savings could switch gears and start to save more when offered a savings rate significantly higher than the rate of inflation. Moreover, getting people to save more money creates an automatic stabilizer for the economy as a whole. Less debt and more savings is exactly what is needed to allow people to ride out economic downturns without having to cut back on their essential expenditures.

Now is the time to contact your Congressional representatives to tell them to turn our neighborhood post offices over to the Federal Reserve instead of selling them off to become candy stores or who-knows-what.

John Locke’s (1632-1704) original idea was that you earn the right of property ownership through what today would be called “sweat equity.” Taking property or materials from the natural world and imbuing your labor into them established your property ownership. Capital ownership was earned through sweat equity.     

However, the link between sweat equity and capital ownership broke down when larger projects required more resources than individual workers could obtain through their sweat equity. In England the nobility provided the resources when investments were larger than individuals or even groups of workers could manage. Workers were not given any ownership in such capital equipment. Subse­quently, capital became concentrated in the hands of the capitalists with little trickling down to the workers.

Hard work pays off, but not for the workers doing that work. The workers’ hard work pays off for the shareholders who do nothing but watch the money pile up in their stock portfolio. We like to think of America as the land of opportunity with a level playing field for all who are willing to work hard. But the United States does poorly when compared with other developed countries in measures of upward mobility. We are listed near the bottom around country number twenty-six in such comparisons. Too often the key to financial success is just inheriting a lot of money and investing it in the stock market. 

When the workers work hard, stock ownership pays off with big increases in shareholder dividends and valuations enhanced through share buybacks. In theory all that money could be used to produce lots of products. But the workers can’t afford to buy those products because of the inadequate money flow to employees relative to shareholders. Most middle-class Americans end up with lots of debt. This diversion of money from Main Street to Wall Street is a reverse money flow, where money flows out of the real economy and back into the financial markets and ends up suppressing productivity and economic growth.

Conservatives like to talk about the importance of incentives. But where is the incentive for a wealthy person to work hard when the value of their stock portfolio keeps rising without any effort on their part? The return to capital is much higher than the return to labor and has to a great extent become a substitute or alternative to rewarding rank-and-file employees for their work. Today, the largest share of the profits in most large corporations goes to the top management and the shareholders, with little left over for most of the company’s workers. In the 1950s and 1960s CEOs earned about 20 times the pay of the median worker. Today, in the United States, CEOs earn over 200 times the pay of the median worker, while in Europe the CEOs have kept their pay at 20 times that of their median workers.

Investing in Adobe or Apple in the 1990s and just checking the box that says: “reinvest dividends,” provided shareholders with an over five thousand percent return, when some of that money could have gone to employees to reward their hard work. Sure, investors deserve a reasonable return, but the extreme emphasis on maximizing shareholder value has gone to an extreme at the expense of reducing our economy’s efficiency and productivity. It is true that someone retiring with a retirement portfolio of only $100,000 is taking a big risk when investing in internet startups and stocks. But most retirees with that little money avoid taking risks with their limited funds.

Most of the money invested in internet startups and individual stocks is from millionaires and billionaires who can afford to lose $100,000 here and there with no effect on their day-to-day lives. After all, how many pairs of shoes can a person wear, how many cars can a person drive, and how many fancy meals can a person eat at expensive restaurants each day? Even buying vacation homes can become a burden after a point. In reality, the wealthiest Americans already have so much money that taking risks with excessive funds is not something that requires great rewards. Most don’t know what else to do with all that money anyway. If there were no places to invest money, a wealthy person would need to pay a bank to hold on to their money for them. 

There is no shortage of money to invest in good ideas, but a shortage of creative entrepreneurs with the ability and willingness to work hard to bring good ideas to the marketplace and to inspire their employees to work hard in carrying through on effectively implementing the plans and programs needed for success. Investors, who have inherited a lot of money and don’t know what to do with it other than investing in broadly based index funds or, alternatively, gambling on individual stocks without much understanding of their potential, don’t need to be highly rewarded for spending their days at the country club playing golf. Our emphasis on rewarding shareholders, instead of actual entrepreneurs and their employees, undermines incentives in a distorted version of free enterprise.

To be fair there are some firms that are entirely employee owned such as Burns & McDonnell Engineering[1] in Kansas City, Sammons Enterprises in Dallas, Swinerton Builders in San Francisco, and Chemonics International Inc. in Washington, DC.  There are also many companies that allow for partial employee ownership through various stock option plans and similar arrangements. Government should create ways for all Americans to have some stock ownership that would grow over time and supplement Social Security and other sources of retirement income. In Germany workers are represented directly on corporate boards and incentives are designed to inspire workers to work hard and thoughtfully for their companies.

When the workers cannot afford to buy back the value of the goods and services they are producing and the wealthy dominate the financial markets, the relationship between the stock market and the real economy breaks down. The stock market thrives while the real economy struggles. I do nothing, and my stocks generate more and more money. The workers work hard, while their earnings stagnate. This was not always the case. After World War II the wages of workers kept pace with worker productivity until around 1974 when real wages flattened out even as worker productivity continued to rise. After 1974 the profits from increased productivity were diverted to the shareholders.

Unions once provided the balance to counter businesses controlling blocks of jobs with quasi-monopsony or oligopsony power. With about a third of the labor force unionized after World War II, employee pay kept up with employee productivity increases until around 1974 when employee productivity continued to rise but employee compensation flattened out and declined to some extent in real terms when adjusted for inflation. In recent years, the degree of unionization has dropped to ten percent or less.  It should be no surprise that so little money ends up in employee paychecks relative to enormous amounts of money given to the ten percent richest people in the United States who own eighty-four percent of the wealth on Wall Street.

Things have only gotten worse and more extreme since then. The top one percent have accumulated enormous wealth while the average worker has gotten nowhere except deeper in debt while living paycheck to paycheck. It is only in recent decades that the emphasis on maximizing shareholder value and CEO pay, and wealth inequality in general, has become so extreme. It is no surprise that workers have rebelled against the elite so forcefully and emphatically. 

To keep the economy from tanking in the face of such a distorted money flow, the federal government has itself gone deep into debt. The more distorted the money flow in favor of the wealthy, the greater has been the rise in the national debt to try to keep the economy from collapsing into a deep recession. The fundamental problem is not the government debt itself, but the distorted money flow that makes deficit spending necessary.

Another concern about government spending in general, but government debt financed spending in particular, is whether the government is “crowding out” private investment. This assumes that the economy could achieve full employment without deficit spending. For many decades, the US economy has had weak, inadequate aggregate demand relative to the excessively robust global aggregate supply. This soundly rejects the assumption that federal deficit spending is not needed to achieve full employment. In addition, we find an a priori assumption that private investment is always preferable to government investments and that future generations would be better off if there were no debt financed government investments. But this assumption is wrong when common property resource considerations allow for government debt that is judged by voters to provide a better return for future generations than private investments of equal cost. Some investments in education, infrastructure, and basic research, for example, may require government funding to be viable. Major advances in basic research that are unprofitable at the micro level for individual firms can be highly profitable for the nation and the world. Extensive examples of the benefits of government investments in basic research and technology infrastructure can be found in several books by Mariana Mazzucato.^[2][3][4]

As in any investment, public or private, the costs and benefits of taking on debt should be carefully considered before making the investment. But that fact does not rule out debt-funded public investments if such investments are sufficiently beneficial to future generations. Such investments often offer a higher return to the nation than any alternative private investment projects. This is particularly true of investments which would never be made by the private sector because their common property nature generates a free rider problem which the private sector cannot overcome by private contracting because of excessive transaction costs but is recognized by the public sector as a public benefit.  From this point of view, one might be just as concerned about private investment “crowding out” public investment. When all available resources are fully employed, there will always be a trade-off between public and private invest­ment.

On the other hand, when the economy is stuck at a lower level of capacity utilization with high levels of unemployment, government investment expenditures may more accurately be thought of as “crowding in” private investment expenditures by stimulating demand and increasing the money flow throughout the economy.    There are many such investments such as money for infrastructure, education and basic research at the National Science Foundation and National Institutes of Health.

In the past America has led the world in taking the initiative in providing and requiring school attendance for its children. But now other countries such as South Korea and China are making advanced education a priority and may ultimately leave the United States behind in educating their citizens. Most universities in Germany are tuition free. 

Pharmaceutical companies will only invest in medicines with patents that can effectively block competition. If a medicine could cure breast cancer using easily accessible household ingredients, don’t expect a pharmaceutical company to investigate it, reveal it, or develop it. Pharmaceutical companies are motivated to charge a high price for any medicine to cure an illness that threatens people with severe disability or death. Where the need is greatest, the price will be set the highest. Only the government through the National Institutes of Health can make the investments needed for the university research needed to find cures in a cost-effective manner that can offer cures at a reasonable price.

Concentrated economic power and patent laws have enabled pharmaceutical companies to gain enormous returns on relatively minimal investments in research. Patents were originally designed to encourage innovation by allowing a company time to earn a profit on investments that take a lot of money and time. However, patents have been extended well beyond a reasonable period to recoup costs and earn a reasonable profit. Patent trolls have matters even worse. When companies fail to adequately register patents for the products and methods they have developed, patent trolls register patents for those products and methods and then sue those companies for compensation under the patent laws. The patent trolls just exploit the system and discourage innovation. We now have a patent system that suppresses rather than encourages innovative invest­ments.

Infrastructure is clearly another area where public investment in public goods is needed because the incentive structure of private commerce does not lend itself well to building common property resources that benefit everyone without providing a clear path to matching private costs to private benefits. Historically, the benefits of the Eisen­hower Interstate Highway System cannot be overstated. The enormous benefit to our economy in general and to individual companies in particular in transporting their products has demonstrated the value of solving a common property resource transportation problem that require public investment. Fortunately, the passage of the “Infrastructure Investment and Jobs Act of 2021” is a good start toward at least repairing our damaged and deterior­at­ing roads, bridges, tunnels, ports, airports, and rail facilities. 

Cave dwellers had no choice. You did what the big guy said.  As tribes got larger, the king, the pharaoh, the emperor or the czar had total authority over their domain.  You could not hunt deer in the forest or take fish from the stream without permission from the king.

Apparently there was little discussion or debate, and mental energy was in short supply.  A little progress was made with the invention of the wheel and the use of fire, but thousands of years went by with little progress.

In earlier times, the king and the church demanded obedience. The earth was the center of the universe, and any fool with any common sense saw the sun rise in the morning and set in the evening as the sun traveled obediently around the earth. 

But Copernicus disagreed.  He argued that it was the earth that traveled around the sun and not the other way around.  At first, Galileo agreed with Copernicus.  But then the authorities threatened to execute Galileo for deviation from established doctrine.  Galileo had to recant to save his skin.

But somehow, starting with the Greeks and later with the Magna Carta of 1215, cracks began to appear in the authoritarian foundation.  People began to live longer and acquire more mental energy.

Groups of people seeking greater independence of thought, including religious thought, had to get the permission of the king to organize and collect enough money to purchase a ship and enough provisions to make it across the Atlantic Ocean. Even after their colony was established, they were not really fully independent, as they were often at the mercy of the authority of a dominant military power. The New York City area was under the control of the Dutch military before the English military took control. Even within the “rebellious” group, a hierarchy of authority maintained power. Creative thinking was organized and formalized by the American colonial elite with the establishment of Harvard College in 1636. 

Until the American Revolution, land in the American colonies was allocated by King George and the colonial governors that he appointed. Only those considered to be descended from the British nobility were given land. George Washington, John Adams, Thomas Jefferson and the other founding fathers of America were not commoners. Only Caucasian male landowners could vote. The American revolution was not led by commoners, but by the very colonial aristocracy that King George had established.

But as the United States of America was being established in the late 1700s, an entirely different type of revolution was taking place across the Atlantic Ocean. The French Revolution was an attempt to completely overthrow the French aristocracy. Aristocratic heads were being chopped off in the guillotine. The American aristocracy got the message. They taught their children to avoid showing off their wealth or their superiority and to always be generous with commoners. But to maintain their dominance, they used legacy almost exclusively in all the leading colleges. This bond of legacy, in turn, led to positions of power in government and in industry. Initially, who you knew was more important than what you knew. But eventually cracks began to appear in the American aristocratic hierarchy with the introduction of SAT and ACT tests as a consideration in college admissions.

Gradually commoners who rose through the ranks began replacing the aristocracy with a meritocracy in American industry and governance. Unfortunately, the meritocrats tended to judge themselves on the basis of their wealth and often failed to follow the modesty and generosity mandates of the old American aristocracy. Many failed to share their wealth and, instead, built up huge fortunes. The greedy pig theory of economics set in with the maximization of shareholder value mandate.

As America developed and expanded, the original colonists were greatly augmented by immigrants from an ever widening array of countries. This gave America a rather extraordinary advantage in that immigrants are typically not random draws from their original country, but instead immigrants are people with more independence and determination than average. In their countries of origin, this is sometimes referred to as a “brain drain.”

More often than not, human progress has come about through the efforts of rebellious “troublemakers.”  Progress is made by people with enough mental energy to think independently and to refuse to blindly go along with the crowd. We have gradually come to realize the enormous benefits that come from encouraging people to think for themselves instead of blindly following “the dear leader.” Instead of imprisoning people who think differently, we now give them Nobel prizes.

A leader who wants to hang on to the past and demand obedience in following tradition to conserve mental energy needs “advisers” who are essentially “yes men” who go along with whatever the leader wants.  Their job is just to tell the leader how great he is and to not raise any issues or concerns.  Even today, people often conserve their mental energy by following a left-wing checklist or a right-wing checklist to decide where they stand on various issues and policies.  Thinking independently takes too much mental energy and may separate you from your tribe. 

Putin established such an authoritarian system in Russia, which led him to think that he could easily take over the Ukraine in a few days. No one dared challenge his judgement or question his authority. The result is not just a disaster for the Ukraine, but also a disaster for Russia itself with the loss of Russian lives and with many young Russian men leaving the country to avoid the “military incursion.” But Putin needed to warn of some external threat (NATO) to justify suppressing internal freedom. Ironically, before Putin’s “incursion” into the Ukraine, NATO was weakening, with few countries paying the full two percent of GDP for defense. Putin’s incursion has now greatly strengthened NATO with Finland and Sweden joining the alliance in response to Putin attacking the Ukraine, and now NATO members are significantly increasing their military expenditures.

Former President Trump now believes that he made the mistake in his first term of having advisers who offered advice, instead of offering unwavering praise and obedience. In a second term, he will make absolutely sure to avoid appointing any independent thinkers with too much mental energy for their own good.  In every instance, they must be absolutely committed to following their dear leader and not their own thinking or the rule of law.

Trump could not come up with a credible military threat from Canada or Mexico to get Americans to give up internal freedom to defend their external freedom, so the best he could come up with was the external threat of millions of rapists and murderers with poison blood pouring over our southern border. That story would allow Trump (under Supreme Court official immunity) to further suppress internal freedom to protect us from such a horrific external threat.

The 2024 election appears to be a choice between either replacing the rule of law with the rule of Trump under presidential immunity as granted by the Supreme Court, or continue following the rule of law and thinking carefully with as much mental energy as possible from all our citizens with presidential advisers who provide criticism and advice and not just praise and adulation. Under Trump, “troublemakers” may be arrested for “disrespecting” the presidency just as Vladimir Putin can now arrest Russians for using the word “war” in reference to his military incursion into the Ukraine.  If Republican politicians are afraid of offending Trump when he is not in power, imagine how obedient they will be if he regains the presidency. 

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A Vermont janitor had $8 million dollars when he died in 2015.  His frugality and stock market investments, along with his longevity, paid off big time – but not his hard work as a janitor.

Actually, hard work does pay off – but not for the person doing the hard work. The worker’s hard work pays off for the shareholder. That is our system. Understanding our system and following the tough and demanding rules of compound interest can make you very rich.

Historically in America if you put $10,000 in the stock market when your baby was born, by age 80 he or she would be a multimillionaire just from that initial investment.

Don’t tell your child about it, just put $10,000 in a broad market index fund with a low expense fee in a Roth account, check the box that says reinvest dividends, put the stock fund in a trust account for your child. When you die, your child, who is then (hopefully) near or in retirement, might discover that they are well on their way to becoming very wealthy. At the close of the stock market yesterday (Sept. 30), over the past year the Dow Jones Industrial Average has grown over 26 percent while the NASDAQ has risen over 36 percent. For many years the stock market generally has increased on average over 10 percent a year with lots of ups and downs. But in recent years gross domestic product (GDP) has typically been growing at an annual rate of only about 3 percent or less! 

Many non-financial firms have discovered that investing in the stock market provides a much higher return than investing in their own businesses. Why invest in creating new products and services when you can on average get a much better return in the stock market? If you do the math of compound interest, you discover (using natural logarithms => ln) that the number of years needed to double your money is equal to ln(2)/ln(1.10) when your annual percentage yield (APY) is 10 percent. (Note: This is a precise calculation which is much better than “The Rule of 72” which is only approximately correct around an APY of 8 percent.)

Isn’t this wonderful. Your child may become a multimillionaire regardless of how much they worked or didn’t work, and regardless of how creative or unimaginative they may have been. You don’t even need to know the names of the companies you have invested in, much less have helped them in any way other than investing a little bit of money a long time ago. We like to say that America is the land of opportunity. And it is, if you have wealthy, well-educated parents. But less fortunate children with poor or middle class parents face a much tougher road to success. What if you finished your education with a high school diploma (i.e., no college debt), you relied on public transportation (i.e., no car), bought no house (i.e., no mortgage), and skipped marriage and raising children? You may over time be able to invest enough money into the stock market early enough to benefit from compound interest and become wealthy.

Is this what we want people to do? Frugality is great up to a point. But do we want everyone to engage in extreme frugality instead of getting a good education, raising a family while living paycheck-to-paycheck and building up mountains of debt?

Is our country better off by over-rewarding extreme frugality while under- rewarding hard work and creativity? Should we encourage passive investors or hard-working employees? How can we still encourage frugality (up to a point) but do a better job of providing work incentives and encouraging entrepreneurial creativity?

The fundamental problem is that so much money is being diverted from Main Street to Wall Street that the people on Main Street can’t buy back the value of the goods and services that they are creating at full employment.

Two thirds of Americans do not have a college degree. Over 40 percent are living paycheck-to-paycheck and are up to their eyeballs in debt. High levels of savings would provide an automatic stabilizer for the economy as a whole while high levels of debt create a very unstable system.

The objective is to raise the growth rate of our economy to better align with the return to passive investors in the stock market. Bringing down the artificially inflated average annual increase in the stock market could help stop the reverse money flow that has drained the real economy of funds needed to enhance productivity and economic growth. Less money flowed into new and better products suppressing productivity and economic growth. High levels of private debt had to be supplemented with high levels of public debt to keep the economy from sliding back into recession.

I have personally benefited greatly from the current system. But at some point I have to speak up against my own self interest in favor of the truth about what is in the best interest of our nation.

We need to stop over-rewarding passive investors like me and redirect more of the money flow to reward hard working employees and creative entrepreneurs. One way to move in that direction would be to restore the Security and Exchange Commission’s rule that existed before 1982 and designate stock share buybacks as insider trading and illegal.

Another step would be to follow Germany’s example and require employee representation on corporate boards. All too often corporate boards consist of the CEOs golf buddies, who only know what is going on within the company from reports that the CEO gives them about what a great job he or she is doing. Requiring some employee representation on corporate boards for all companies above a specified size could provide representation from product development, production, marketing, sales and product distribution. We should also provide companies with incentives such as tax benefits for starting employee stock ownership plans.

Burns and McDonnell in Kansas City started as a small construction company but grew to become a worldwide engineering company. All the company stock is owned by its employees. When retiring employees have to cash in their company stock. The secret to its success is employee ownership. As owners, workers are not only motivated to do their best for the company but also want their fellow employees (their teammates) to work hard to achieve great success for the company.

Hopefully, with these and other such reforms, instead of a stock market growing annually on average of over 10 percent while the real economy grows at less than 3 percent, we could create a better balance, stop the reverse money flow and bring them to both grow together at roughly 6 percent or more.

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Note:  This commentator is not a registered financial advisor. None of his commentary should be considered to be financial advice.  You could lose a great deal of money in the stock market.  Contact a professional financial advisor if you want appropriate and efficacious financial advice.

Does Adam Smith’s invisible hand of competition, which supports the greed is good philosophy, justify minimizing the role of government in our economy?  

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Too often in teaching and talking about economics, we have a tendency to oversimplify economic problems and focus solely on how the individual, seeking only their own advantage, ends up helping the community by offering better products at lower prices. Government is often seen as just getting in the way of this amazing outcome. As President Reagan said in his inaugural address: “Government is not the solution to our problems. Government is the problem.” But was this actor who became our president oversimplifying economics and overreacting to the brutal, authoritarian communist governments suppressing human initiative and economic growth? Have advocates of the Greed is Good Theory of Economics gone too far?

Adam Smith actually posited two invisible hands, one explicitly and the other implicitly, although only the first one is widely known. The first invisible hand tells us that greed is good because working hard and creatively in the marketplace to beat the competition and maximize your profits will produce better quality products at lower prices for everyone. We are told not to worry, because when this invisible hand dominates, we will all be made better off. Advocates of this greed is good philosophy want us to act individually and not collectively. This invisible hand is called the invisible hand of competition.

But Adam Smith also alerted us to what might be called his second invisible hand when he told us: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This is the invisible hand of collusion.

These two invisible hands are in constant conflict with one another. This puts us in a dilemma. On Sunday morning we are told that greed is bad, but on Monday morning we are told that greed is good. Should we be trying to help the “dear neighbor” or trying to run him off the road? 

What about the basketball player who has to decide whether to take the long shot (glory to me) or whether to pass to a teammate much closer to the basket (glory to the team)? If he follows the greed is good philosophy he will take the long shot. But if he is focused on working to make everyone better off and realizes that his teammate has a better chance of getting the ball in the basket, he will pass the ball to his teammate.

In caveman times, men who were bigger could look out for themselves, but women who were pregnant couldn’t run and they couldn’t fight so they looked to others (a strong male or a larger group) for protection. Even today, women tend to be more socially oriented than men. Elderly women are likely to have more social groups than their male counterparts. Are we better off acting individually under the greed is good philosophy or acting collectively?

We are constantly faced with this dilemma in life. Should we be helping ourselves or helping the community? Should we focus on our own needs or the needs of the community?

In the stock market, are we cheering for the good guys (normal profits from competition) or the bad guys (excessive profits from collusion)?  Warren Buffett has caught on. He invests in firms that have been able to create a barrier to entry. Are there economies of scale? Is there a first mover advantage? Are there network effects? Is there a natural monopoly? Are there government regulations that restrict entry (prescription drugs, copyrights, patent laws, et cetera)? Do we want to look for, invest in, and encour-age excess profits wherever they might be? Or are we going to restrict ourselves to socially responsible investing? We are often confronted with this sort of dilemma, where what is good for us as individuals may be bad for our community or the country as a whole.

Our industries are much more concentrated than we realize. Denise Hearn and Jonathan Tepper wrote the book: “The Myth of Capitalism,” which perhaps should have been named “The Myth of Competition,” because they show in industry after industry that competition has been minimized. 

Reading glasses cost just a few dollars, but prescription glasses, which are primarily supplied by two companies, cost hundreds of dollars even though they use about the same amount of plastic and glass as the reading glasses. Customization should raise the price a bit, but the prices charged are clearly taking advantage of the duopolistic nature of the business.

You may be surprised to learn that the beer industry is also dominated by just two companies, in spite of the many craft breweries.

What about the fossil fuel industry? Should the maximization of profits come first, and the overheating of our planet be ignored until the outside temperature reaches over 120 degrees Fahrenheit and you have to put on an air-conditioned space suit to take a walk outside? What about your dog collapsing from the heat when you try to take your dog for a walk? Cheap fossil fuels now are going to cost us much more later. Perhaps before too long, even older people will begin to have to pay the price of “cheap” fossil fuels, not to mention the burden put on our children and grandchildren. What seems good for us in the short run (cheap gasoline) is certainly going to be bad for all of us in the long run.

Traditional economics focuses so intensely on the interests and behavior of the individual that it ignores very important and productive aspects of our economy. Without interstate highways, air traffic control systems, free (taxpayer funded) vaccinations for highly contagious diseases, and the provision of elementary and secondary education, we would be a lot worse off than we are now.

We all have a limited amount of mental energy, so we naturally want to keep things as simple as possible. Our first economics course (“Principles of Economics”) is designed to do exactly that. We assume a level playing field, where we all have an equal chance in our “land of opportunity.” The most important decision you make in life is your choice of parents. You want to choose wealthy, well-educated parents. Of course, you do not get to choose your parents, which is why there is no naturally occurring level playing field.

To get a level playing field to give everyone an equal chance in life, in state after state and community after community, we voted and promoted the idea of education for all. We all take reading and writing for granted. Almost every one of us can read and write as well as carry out basic mathematics such as addition and subtraction. But who invested money in our education and made sure that we all got a basic education?  After all, education is a common property resource that we all benefit from.  And not just as individuals; I benefit from living in a country where everyone is well-educated. Education needs to be taxpayer funded, encouraged and supported by the government.

But how much education?  Every state in the United States of America has not only made elementary and secondary education available but has required it for all young children. Can you imagine making such a requirement today? The anti-government crowd would go ballistic! Yet state after state from Massachusetts (1865) to Mississippi (1918) required community funded education for all young children. This gave us an essential advantage in the development of our country’s economy over other countries which were slower to implement free education.

But now other countries such as Germany, Norway, Denmark and Finland also provide a free college education. Even offering two years of either college or a vocational education would be a step in the right direction. We cannot get ahead by falling behind in the transformation from physical work in manufacturing and mining (which is being taken over by automation) to higher-skilled careers for our citizens. If we really want America to be the land of opportunity, we need to make college or technical education available to all for free at taxpayer expense.

What about those government created state universities with their agricultural experiment stations? Government-funded agriculture experiments transformed America’s farms to make them the most efficient and most productive in the world!  Yes, our farmers worked very hard and very creatively, but the free rider problem, which is too often ignored, discouraged any one farmer from putting in all that time and money to carry out agricultural experiments that may or may not work out. But many of those government-funded agricultural experiments paid off big time in substantially improving American agriculture and making it the most productive in the world.

What about our amazing infrastructure with interstate highways crisscrossing the United States?  It was a Republican president who envisioned and promoted the Eisenhower expressways that crisscross America. Government enabled small businesses to grow larger by giving them a way to get their products much more widely distributed throughout the United States of America. Government is not the problem. More often than not, when presented with a common property resource problem, government can be the solution, especially with projects where the free rider problem prevents private businesses from making the necessary investments.

The fundamental problem is in our colleges and universities in our “Principles of Economics” courses where we have for too long been teaching and promoting the greedy pig theory of economics, which ignores community efforts to promote the common good. Ironically, we often get enormous benefits in our individual lives from government investments, especially in our health and wellbeing. The Department of Health and Human Resources and the Centers for Disease Control and Prevention have funded independent researchers whose primary motivation is to gain recognition by publishing their medical research results in professional journals and books as well as an award such as a Nobel prize in their area of specialization.

Devotees of the greedy pig theory of economics want to limit government to the enforcement of contracts and national defense. They consider Social Security and Medicare to be government overreach. To them, government is not the solution, but instead they see government as the problem. We will all be better off when our introductory economics courses do a better job of explaining the very important role that the government plays in making our economy more productive and more efficient.

For more, read the books by Mariana Mazzucato such as: “The Entrepreneurial State: Debunking Private vs. Public Myths” and my book: “Money Flow in a Dynamic Economy,” which introduces the new money flow paradigm, which explains economic inefficiency, instability, inequality, and the role of government.

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After World War II the United States along with many other countries experienced a population explosion. With soldiers returning from war creating new families, birth rates shot up. By the 1960s, books were written claiming that the dangerous rate of increase in world population meant that we needed to start looking for another planet to populate, as earth would soon become overpopulated.

In recent decades the dramatic drop in birth rates in the United States and elsewhere has produced a Darwinian natural selection paradox. The species that has come to dominate the earth has suddenly dramatically reduced its rate of population growth to below the population replacement rate of 2.1 children for each woman in her reproductive years. The world population appears to have reached a maximum with many countries subsequently experiencing a persistent and precipitous drop in their populations.

In the United States, with the large number of baby boomers retiring, an even more dramatic potential reduction in the labor force would be occurring if it were not for the ability of America to attract large numbers of immigrants. Without a substantial number of immigrants, the work force in the United States would shrink. Without additional workers, the cost of everything would rise substantially.

Someone needs to go out in the hot California sun and pick the fruits and vegetables that we all need, or we will all end up paying a lot more for our basic groceries. I am too old to climb up on my roof to replace my rusting gutters and downspouts, so I am forever grateful to those two Spanish-speaking immigrants who did it for me. I also need them to pay the earning tax matched by their employer to finance my Social Security income. A smaller work force with fewer people working would mean less money for Social Security.

The reality is, from a purely economic point of view, we need immigrants now more than ever. Chaos at our borders is never welcome. Many undocumented immigrants need to be processed to become legal immigrants so that they can properly contribute to our economy and keep prices down. Statistically, immigrants in general have a lower crime rate and a higher rate of new business creation than the general population of Americans. We often get the best and the brightest people coming to America in what is often seen as a brain drain in their originating countries. We should feel blessed to have such wonderful people coming to America in what has been a long tradition that began in 1492 with the first “illegal” immigrant coming to the Americas, Christopher Columbus.

Economists call the idea that there is somehow a fixed number of jobs in this world, and we need to fight over them, the lump of labor fallacy. It may be cheaper to produce textiles in China than in the United States, but that does not mean that the United States cannot expand the economy to provide jobs with greater productivity and higher compensation in America than those menial jobs that we have off-loaded to China.

What about jobs in the steel industry? Shouldn’t politicians increase tariffs to protect jobs in the steel industry to gain the votes of the members of the United Steel Workers (USW)? When competition from abroad is blocked, it results in higher steel prices that suppress jobs in industries using steel as a factor input in the production of their products. Protecting steel industry jobs with tariffs just takes jobs away from the workers in the steel-using industries. Taxing Peter to pay Paul may work to deceive voters, but it does not improve overall employment or productivity in our economy and just raises prices for everyone.

When products for Walmart are unloaded at the dock at the port of Long Beach, California, a U.S. federal inspector and a broker representing Walmart arrange for Walmart to pay the tariff on that shipment. To keep its prices low, Walmart maintains a very low profit margin and relies more on volume to make its money. Since many of the products Walmart sells are low-price day-to-day necessities, Walmart can and generally does pass the cost of the tariffs on to its customers. The wonderful pair of memory foam sneakers from China that I bought at Walmart a few years ago for $9.98 are now selling for about $15 after the imposition of higher tariffs.

More tariffs will directly and immediately drive up prices. Some politicians seem to think that the exporting country has to pay for a tariff we place on the products we import from them. There is no way that the Chinese government is going to pay us for any tariff we place on Chinese exports. At best the Chinese could cheapen their currency to maintain their competitive position, but even that may be unlikely as they would like the Chinese yuan to replace the U.S. dollar as the world’s reserve currency.

Are we losing to China in the international trade battle? The Chinese people take their natural resources and make products for us that we import at exceptionally low prices. In return, instead of sending them our products, we send them pieces of paper with George Washington’s picture on it ( U.S. dollars ). Ordinarily, those U.S. dollars would go out to the foreign exchange markets and drive down the price of U.S. dollars and increase the price of the Chinese yuan (also known as the renminbi or people’s money). That would make our products cheaper for the Chinese to purchase and the Chinese products more expensive for Americans to purchase to create a more balanced trade between the USA and China.

But the Chinese government does not allow that to happen. The Chinese administration is facing a political problem. Many Chinese peasants are moving from the rural areas in China to the cities. The Chinese government needs to find work for these peasants to avoid the political unrest that would come with large numbers of unemployed Chinese peasants in the cities. But China does not yet have a large enough middle class to buy up all the products that these peasants can produce. Consequently, China is taking advantage of America’s much larger middle class to find the buyers it needs for all these products. To avoid a rise in the price of the Chinese yuan and a drop in the price of U.S. dollars, the Chinese government requires that the Chinese businesses turn in those dollars to the Chinese government in exchange for yuan. The Chinese government uses those dollars in its sovereign wealth funds to buy US Treasury securities in the New York financial markets.

Has China been taking advantage of America in this battle over international trade? Let’s see now, we get the Chinese products, but instead of sending them our products, we send them U.S. dollars and keep our products for ourselves. The Chinese government then loans us our money back to pay for our federal government deficit spending by buying trillions of dollars in US federal debt ( US Treasury securities). Who is getting ripped off here? Hint: It is not us.

Eventually China will build up a large enough middle class to not have to rely on America’s middle class to provide enough demand for Chinese products. At that point China will allow all the U.S. dollars it acquires to flow out into the foreign exchange markets to drive down the value of the U.S. dollar and increase the value of the Chinese yuan to produce a more balanced trade between China and the United States.

In addition, the U.S. dollar is the world reserve currency and is used widely in international trade. As international trade expands, the demand for U.S. dollars increases so the US is able to print more dollars out of thin air without taxation and without undermining the value of its currency. America is not getting ripped off. In fact, it is almost like some type of colonial exploitation.

Can stopping abortions make American great again? What are the demographic and economic consequences of abortion restrictions? Advocates for more restrictions on abortions may be in for a big surprise. America already has a less-than-replacement birth rate, and it has been falling steadily. But won’t stopping abortions mean more children and eventually a larger workforce? 

Banning abortions won’t result in more children. In fact, in response to abortion bans, more men are already getting vasectomies and a new form of male chemical contraceptive has just been invented. Women may cut back on sex and make much better use of contraceptives. Even marriage rates are falling.  The fear among women is that having a miscarriage may be interpreted as some form of illegal abortion so that the doctor and mother may be brought before a court for the judge and the jury to decide if the loss of the fetus was really a miscarriage or actually an abortion. Women may decide to avoid this risk by just not getting pregnant. Will having fewer children make America great again?

But won’t having fewer children reduce the demand for day care workers and free more women up for the workforce?  In theory and in the past, this may have worked.  But in reality, in recent years retired grandparents have more and more filled the day care role. Consequently, most young mothers are already working, so having fewer children will not lead to much increase in the workforce, either now or in the future.  

Baby boomers are retiring big time. A shrinking workforce means that fewer goods and services will be produced. But the baby boomers are not dying off that fast, and the demand for health services is growing. Supply of goods and services will drop, but demand will remain strong. Too much money will be chasing too few goods and services. If you are unhappy with our current rate of inflation, you haven’t seen anything yet. 

Deporting massive numbers of undocumented immigrants will shrink our workforce, suppress the supply of goods and services and drive up prices. Imposing tariffs will drive up prices even more. Abortion restrictions will ironically cause us to have fewer children and potentially shrink our work force, which, in turn, will reduce supply relative to demand and drive up prices.

These policies taken together will generate inflation levels only seen in recent years in Zimbabwe and Venezuela. If you think that deporting all undocumented immigrants, imposing more tariffs and imposing abortion restrictions are going to make America great again, you are going to be in for a big surprise as the American economy shrinks and inflation drives prices and the cost of living through the roof.