Thursday, June 23, 2011

Berneke is a moron

I loved Greenspan. I thought he really had a clue. I had hoped that Berneke had one too and he obviously doesn't.

Berneke doesn't understand why the economy is still tanking. Duh. Wages are going down and prices are going up. Duh.

There is a lot to economics, especially the Keynesian system where the value of money is backed by the government and based on the value people place on it.

There is a pretty simple basic premise to the Keynesian and that is that prices and wages should always be going up.

Here is the kicker, when prices go up and wages go down the economy is trashed. The same thing happens if wages go up and prices come down, the economy is trashed. A Keynesian economy is only stable when both prices and wages increase at the about same rate.

Back in the 1990's wages went up faster than prices. More than anything that is what caused the Clinton Recession. After Bush came into office the Bush admin worked very hard to balance prices and wages, barely keeping the US balanced on the edge of a recession. When Obama came into office the Obama administration pushed things out of the delicate balance and wages began dropping while prices increased. Bam, economy toasted.

Even if you hate Bush and love Obama it really doesn't matter. What matters is that wages are dropping while prices are increasing and that is destroying the US economy.

Employment has to increase and wages have to increase or the US will be a second world nation behind India and China. Already the education in India and China is better than in the States. Unless wages come back up in the States and education improves in the States you might as well start planning your immigration.

What individual did more to advance the economy in the United States than anyone else? Henry Ford. Ford paid higher wages, which his workers spent on goods and services increasing employment through secondary providers, which increased the tax base exponentially.

The concept of "Prices" is a difficult thing to understand. With a relatively new product as demand increases productivity improves and a balance between supply and demand develops. Typically pricing at the begining of the demand cycle are high and then they eventually stabilize to a balanced ratio of income.

For example Ford built cars and they were originally very expensive. As demand increased productivity improved and prices came down until an average car in 1920 cost about the same percentage of average income as it does today. The important thing in the balance between supply and demand is the average price to average income ratio.

Some people claim oil is cheap right now based on percentages of inflation. If you figure the ratio of the average annual cost of a gallon of gasoline, or a barrel of oil, compared to the "average" annual income in the United States you will find that oil is about 4-6 times more expensive than it has typically been.

It is the ratio between price and income that matters. Nothing else.

People complain about social services, unions and high blue collar wages. The truth is that as blue collar wages drop the economy in the United States dies. When we fail to provide for the most important resource we have, people, we fail to invest in the future and the economy in the United States dies.

The reality is that the United States has to increase spending on social services, improve education (the current US public education system sucks) and increase wages especially at the lowest end of the available labor.

1 comment:

John D. Ayer said...

Here is a link to average family income in the States:

Here is a link to the average weekly cost of a barrel of oil:

To figure the ratio divide the cost of a barrel of oil by an income.

A barrel of oil in Jan 1978 cost $13.08 and the average family income (top of lowest income range) was $6,318 so the ratio is 483 barrels per family.

A barrel of oil in Jan 2009 was 34.57 and the average family income was $20,453 so the ratio is 591 barrels per family.

The cost of a barrel of oil in Jan 2009 is lower than the cost in Jan 1978.

A barrel of oil in Nov 2009 was 76.34 and the average family income was $20,453 so the ratio is 267 barrels per family.

The cost of a barrel of oil in Nov 2009 is about twice that of the cost of a barrel of oil in Jan 1978.

Get the picture? The actual prices and income don't matter, what matters is the ratio of cost to income in John Maynard Keynes economic theory.