Today’s youth pose burning questions about capitalism. For examples: How is it that we live in a country of extraordinary wealth but have low ratings on many societal quality-of-life measures, like infant mortality, affordable housing, food insecurity, and maternal health? How do we continue to abide by a system that generates untold wealth while risking natural calamities due to climate change? Wasn’t the point of technology to let us work less and live more freely? Instead, technology has created increased productivity that benefited incomes for the few at the top while the rest of us can’t even afford health care and a roof over our heads as gig workers. I studied economics after asking myself, “How is all this order – jobs, incomes, homes, and goods – created? What makes it all seemingly work?” I learned that capitalism is the mechanism that incentivizes…
An “inside-baseball” economic concept suddenly matters to all of us
Just a month ago, restaurants across the nation were closing their doors (at least to in-house dining). Pick one in your city and think about the ripple effects of its closing: It’s not just the restaurant owners whose income has fallen. The shutdown is also affecting the earnings of the staff, the food and alcohol distributors, the bakery, the linen service provider, the paper products supplier, the cleaning service, and the marketing agency that created ads for the restaurant. Plans with an architectural firm for a remodel are on hold, as is the contract with the general contractor and selected sub-contractors. The waiters, waitresses, and kitchen staff have stopped buying clothing and household furnishings. The farmers have stopped buying farm equipment. The marketing agency has laid off its staff, who have cut back their unnecessary spending. The beer manufacturers are dumping their beer…
Note to progressives: Drop the word socialism and you’ll win more voters
Bernie Sanders is a good man who unfortunately did no one a favor, including himself, by branding himself a socialist. He isn’t one according to the standard definition of socialism, which is a system where the government owns the means of production (such as factories, agricultural fields, and hospitals). Whether Bernie says it or not, he believes in capitalism as an economic system. He just wants to distribute the wealth generated by capitalism more fairly. For decades, capitalist governments in Western Europe have been ensuring everyone has healthcare, access to vocational training, various safety nets, and often free college. My husband has been working with companies in the capitalist systems of Europe for the last 40 years. The more progressive ones have often been called “welfare states,” a label Europeans embrace to communicate demonstrated concern over the welfare of their people. (That label…
Are we facing a V, U, or L-shaped economic future?
Will we have a V, U, or L future? Since the 2008 deep recession, we’ve had an upward movement of Gross Domestic Product and other measures of economic well-being. Growing income inequality and too-low wages were notable criticisms. But even these issues were being addressed. After all, there is no better anti-poverty program than a strong economy. Then came the COVID-19 pandemic. A business owner friend said it’s like a boxing match Round One when the first punch is a bout-ending knockout. He has never seen such a sudden downturn in his many years as a business-to-business CEO and owner. What will our national growth rate look like in the months and years ahead? There are three potential outcomes for the nation, a V-pattern (rapid recovery to pre-pandemic levels), U-pattern (slump followed by recovery), or an L-pattern (the economy stays depressed for years…
Are “Too Big” Companies Proof that Capitalism is Bad?
The Democratic presidential primary pitted an anti-capitalism leader against a set of moderate contenders, with Elizabeth Warren straddling both by arguing about breaking up too-big-for-our-good companies to encourage more capitalistic competition. Who is right? There are three main mechanisms by which companies get really big: (1) by capturing economies of scale that give bigger sized companies an inherent advantage; (2) by developing or acquiring non-competing, synergistic products that accelerate growth; and (3) by acquiring direct competitors to gain control in a market and reduce supply. Facebook and Google are examples of #1. An example of #2 is Intuit acquiring Turbo Tax to extend its line of personal finance tools. The airline mergers are a classic example of #3, which in this case led to industry consolidation. It’s within that third strategy—acquiring the competition—that you can easily find fodder to both defend and criticize…
Why changing healthcare policy is so messy: Part One
The market mechanism is a remarkable process. Buyers and sellers exchange money in an open system that produces prices and production levels to equate supply and demand. (Also known as Keynes’ invisible hand, the market mechanism is an alternative to central planning.) Chinese leaders added the market mechanism to its communist political system, and economic growth skyrocketed. In theory, the market mechanism leads to an ideal allocation of goods, services and workers’ efforts for society. In practice, ideal output misses the mark when prices fail to reflect societal benefits and costs, consumers are not well-informed, or monopolistic-like power exists. One area where the market mechanism often fails is healthcare. A healthy population benefits everyone, from employers in need of a productive workforce to the government (and taxpayers) who cover the costs of the social safety net to each of us as individuals…
Recession questions: Time for scenario-based planning
The current economic expansion, albeit slower than many in the past, has earned a record in longevity. That fact alone does not indicate an imminent recession. But it is worth asking, “What could be next?” Economic trends can foretell a continued expansion or downturn, so it’s essential to monitor them. An excellent July 29, 2019, WSJ article looks at such trends and concludes storms are on the horizon. Low interest rates are keeping the stock market and consumer economy chugging along, but early indicators like housing and business investment have turned down. Remember that economists, unlike umpires, make their calls well after the fact. Those downturn signals are troublesome, especially when coupled with a slowdown in Gross Domestic Product growth (2018 versus 2017 based on revised numbers and 2019: Q2 versus 2019: Q1). The expected drop in interest rates and continued growth in federal…
Keeping the ACA baby, but changing the bathwater
The Affordable Care Act (ACA) got a couple of things right, so right that we should not throw the baby out with the bathwater if we want to move towards a cost-effective, value-driven, and equitable healthcare system. There are four parts of healthcare insurance reform: private insurance reform; subsidies for low-income individuals who cannot otherwise afford insurance; government coverage (such as Medicare and Medicaid); and operation of markets (exchanges) where insurance is purchased. The ACA scored high grades on the first three elements and poor grades on the latter. Let’s examine why. Private insurance reform included adding children up to age 26 in insured groups (also called pools). Including young people improved the risk diversification of the pool, which was good for everyone’s rates as those twenty-year-olds are so healthy. This policy also kept more young people insured. Pre-ACA private insurance benefited insurers’…
Can we at least agree on the role of Government?
With President-elect Trump’s arrival in the Executive Branch, perhaps it’s time to step back and think about the role of government. If we agree on the role, we can better debate from the left and right how this role is best carried out. Free markets have many advantages, but also offer some real pitfalls. The government’s role stems from the self-serving interest of market participants – companies and consumers alike. This greed is good: it leads to innovation, wealth creation, productivity, striving to improve, and many other positives propelling our economy and society forward. But what is best for the individual or family is not necessarily best for the nation, hence the role of government. What are the big things that markets can’t carry out well on their own? They cannot set laws or ensure their just enforcement. In fact, a comprehensive legal…
Top 5 Productivity Sinkholes
Whichever way you measure national productivity, it’s growing at a snail’s pace both in absolute terms and compared to past growth rates. (See Sidebar.) And that’s not a good thing as increases in productivity improve our standard of living. SIDEBAR: Measures of Productivity Labor productivity, the measure most often cited, captures the amount of goods and services produced (output) with the number of hours worked to produce those goods and services. Multi-factor productivity compares output to the amount of combined inputs (labor, capital, energy, materials, and purchased services) used to produce that output. Economists argue this measure better captures the impact of technology advances. Not all experts agree productivity is an issue. Bloomberg blogger and investment expert Barry Ritholtz argues that productivity is higher than we think because our current measures fail to capture innovations in the digital world that have changed how…