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State Of The Onion, April 2007, Part 2 - Economics
Unpeeling the layers

Copyright © 2007 Dorian Scott Cole
About this series.


As we unpeel the layers of the world we have created, layer by layer, and finally we unpeel the last layer, we realize that there is nothing at the core - it was all us and what we created. Perhaps it reveals our ideal values and how close we have gotten to them. Is it all a matter of perspective whether it is, "Here's another fine mess you've gotten us into," or "What a fine world this would be..." Is judgment is in the eye of the beholder. Read on.

Who are we to judge the product of our own work? Is there any way to judge? We are all in this together, and we all create the world we live in. We have to live with the results. We may be guided by noble and Godly ideas, or by ignoble ideas and passions, but by our hands and our wits, we devise our environment, and we live with the consequences. How well we fare depends on us.

The noble ideas are that we live in peace and harmony; that we create an economy in which all of us prosper, and have safety nets for when we fail - together we share our risks; that we have opportunity to pursue our careers and interests; that we have good health throughout our lives and into our golden years; that we have a government that represents our interests, protects us, and makes sound decisions, and through which we collectively enable our endeavors; and that no one is repressed. These are values. In the US, these might be called the pursuit of happiness. How are we doing?

This year I'll focus on the issues of Peace and the Economy (May/June). Next spring, the Environment and Health. Peace is the immediate concern. For Health and the Environment, there are a number of trends developing since the 2006 State of the Onion.

The economy

I feel like I've been on a quest to find the fountain of youth. The more you unravel of the economic riddle, the more you find to unravel. In short, the economy is a system that we create, and the greatest unknown in it is the human factor. So like everything else about the onion, layer by layer it comes apart and inside we find... us. But hope is misplaced if we think that the goodness of man will create a strong system. Creating a strong economy requires experiential solutions that are gained through trial and error.

There is one thing that I was very impressed by in my study. It is the number of economists who valiantly try to make the world a better place through economic theory and practice. Economists have the power to analyze and understand, but rarely have the opportunity to directly change anything.

In trying to understand the field, I used a myriad of resources, including Wikipedia and an economics textbook, but used two books primarily as references for their thoroughness, experience, and expertise: The Commanding Heights, by Daniel A. Yergin and Joseph Stanislaw, (copyright 1998, 2002 by Daniel A. Yergin and Joseph Stanislaw) and Understanding the Process of Economic Change, by Douglas C. North (copyright 2005 by Princeton University Press.


  1. Hard earned lessons of economic control
  2. The mystery of the economy - how it works
  3. Coming challenges
  4. The future economy - The lipstick economy
  5. Rating
  6. Summary

Hard earned lessons of economic control

What have we learned, and have we learned enough to create a good economy? We have learned some very important lessons.

  • Capitalism in the hands of the tight-fisted
  • Socialism - world savior?
  • Capitalism unbridled
  • Free market sense: Industry is good if left to itself - or to robber barons
  • Exporting capitalism - the myth of transforming other countries by free markets alone
  • Privileged circles - keeping wealth inside

Capitalism in the hands of the tight-fisted

Intuitively, the smart thing to do is to hold onto money. Keep it in your pocket. If you are a merchant or industrialist, lock up the market so that no one else can compete. Strike favorable trading agreements with those with whom you get supplies and keep all others out. Build your own little empire... a monopoly. This is the way to create a successful business, right? This is the way to make stockholder's eyes dance, right? So they thought in the Nineteenth and Twentieth Centuries, and so many businesses and nations think today.

This is a very difficult lesson that we have learned the hard way. Capitalism in the hands of the tight-fisted meant that power and control were in the hands of those at the reigns of industry and trade. These were the industrialists late in the 1800s and first third of the 1900s who worked people to death, ignored the suffering of humanity, underpaid workers, and only put money where it would build their empires. These were the Scrooges of the world.

What didn't happen during those years? Companies failed to innovate. They failed to expand. They failed to put money into the economy so that there would be more customers. The banking system failed to include the general public in its system so that people could become better off. After all, people believed, borrowing money was not healthy, and paying people more money was a waste of money.

The system was badly out of balance. If you think of the economy as a balance of intentions in a triangle, business must do well, people must do well, and the economy must have a mechanism that encourages growth (banking). One can't thrive without the other.

The US system performed better than the rest of the industrialized nations, but few nations did very well. The general public eked out a living, and were at the mercy of business interests. The things that encouraged growth, such as paying people well, investing in business innovation and expansion, and using the banking system, just didn't seem to make sense.

European economies were overstrained by war after war. People were starving and there were no jobs. Their economies did not have the power to recuperate. Trade with the US and the world fell. People generally lacked confidence in their economies. In the US, banks loaned money against security, and as recession deepened people and businesses defaulted on their debts, so banks were stuck with worthless property. As fear set in, the money supply tightened, furthering the downward spiral. In 1929, the Stock Markets failed, and by 1933 all the world was in the Great Depression that lasted through the 1930s.

Communism with its emphasis on social fairness and the socialist economic system was in vogue. Capitalism was demonized as being a greed infested system driven by mean-spirited businessmen who were so greedy and narrow-minded that they would not even invest in their own businesses, let alone invest in expansion, and had total disregard for the suffering of the general public. WWII was the death knell for capitalism as it existed during the Industrial Revolution. The sad thing was, the terrible tale was true.

What we now know of economics is that the natural tendency of business is to keep the money within tight trading circles of preferential wealthy trading partners, underpay their workers, and maintain the status quo in the market place. This risk-averse position "guarantees" income, making supply, demand, manufacturing costs, and the market predictable and controllable. It is a formula that works well for business in the short term, but not for the economy.

In modern economics, there are much better controls in the stock markets and money supplies that help prevent catastrophes like the Great Depression. Business hates "uncertainty," and in modern business, there are always efforts to control the marketplace and make it comfortably ordered, but government oversight usually prevents the excesses.

For example, the Telecoms would love for the government to protect their trading areas from competition and structure the marketplace so that they can charge whatever they want, especially for the growing Internet usage. If you compare satellite TV, or wireless phone rates, you see that the various competitors offer variations, but they are all actually about the same price. Various gimmicks are used to get people to lock in one or two year rate contracts, and those not under a plan can't reduce their rates. The highest rates are for phones not under contract. Competition is actually nil; their offerings just look like competition on the surface.

This way of ordering the marketplace has gone on for as long as people can remember. If you looked at audio equipment offers in the 1960s forward, you could bundle components, but the price usually ended up being the same regardless of your selections. Similarly, dealer and chain auto service centers expect to get ~$400.00 per customer visit, and the service they point to as "needs" on your car typically add up to at least that amount. Businesses typically have a business model (formula) that is based on the minimum they can get per customer, and they find a methodoly (such as rate plans, contracts, selected needs, and bundles) to lock that in and make the future "certain," or predictable. But the excesses are held in check by government monitoring.

Socialism - world savior?

Viewing the plight of human suffering and the ineffectiveness and indifference of capitalism, many countries turned to the idealism of communism, or they at least experimented with the socialist economic model. Communism seemed to have much to offer with its inherently socialistic economic system. It looked to be a very noble idea that would make everyone equal, removing the wealth from the wealth constraining "bourgeois," and spreading it around to everyone, and putting control in the hands of the people (government).

In many countries, it looked like the economy could be much better controlled if certain portions of the economy were given to the people by placing strategic companies under government control. Essential services to all would be guaranteed. Yergin and Stanislaw (authors of The Commanding Heights) call this getting control of the "Commanding Heights."

The Soviet Union was the economic example for Europe and anyone who wanted to watch. The economy in the Soviet state seemed strong. They won the race to put an astronaut in orbit. Their military was gigantic and powerful. They developed five year plans of economic productivity that were supposed to be miracles. The Chinese tried to follow suit. Cuba and N. Korea, and various S. American countries tried to fix their massive economic problems with some version of what the Soviet Union was doing, coaxed on by revolutionaries (insurgents). "Full employment" and economic equality were the battle cries.

Europe watched eagerly, developing communist and socialist parties that won political positions and shoved their nations toward socialism. While in the US, anything communist or socialist oriented was shunned, the US similarly went toward getting control of the Commanding Heights by regulating strategic industries.

The goals in the mid-Twentieth Century were very idealistic. They were to make economic systems fair and equitable; avoid the calcification caused by business short-term self protective influences such as low wages, no innovation, and no competition. The goals were to create investment in projects too big or unprofitable for businesses to do, such as infrastructure: roads, power, dams.... The mechanism to do these things were government control, investment, and government ownership of business and industry. This was largely along the lines of the Keynes formula of government investment through deficit spending. (John Maynard Keynes was a brilliant and famous economist in the early Twentieth Century.)

The impact was huge. Many countries experienced full employment, higher wages, technology innovation, and a better life for all. It looked like the right formula had been found. People got jobs, purchased food, and purchased homes. One of the most important discoveries in economics had been found and proven. But if it looks too good to be true...

Like too much of a good thing, things quickly went out of control. The economic systems lacked the mechanisms necessary for restraint. The end result was high inflation, businesses that were unresponsive to consumers, lack of competition and innovation - the classic self-preservation syndrome set into organizations, and in some ways companies became more unproductive than before. Ouch!

The socialist economic experiment in England was telling. When government takes the roll of provider, and the consumer can ask for anything... it isn't pretty. The newly socialized health system reeled from the impact. There became an infinity of demand, and long delays were inevitable.

The demand was for everything for free, so services from companies became an enormous drain on the economy. Unions demanded large wage increases, increasing the operating costs of government owned business, further damaging the government and the economy.

The telephone system was a perfect example of what happens when a company no longer has competition. The system grew very large and inefficient. Instead of being responsive to customers, service became constipated with regulations and red tape. It could often take weeks or even months to get basic telephone service.

In the US, as elsewhere in the 1970s, inflation was spiraling out of control. Wages rose, and then prices rose to keep up, so wages had to raise again to keep up with prices... resulting in double-digit inflation. Vietnam and the oil crisis added fuel to the fire. President Nixon finally resorted to a wage and price freeze to try to bring things under control. It didn't work. Finally tightening the money supply by the Fed did work, supporting what is one of the most important lessons in economics. If the government puts money out there, the danger is inflation, and inflation eats up any gains that are made.

Communism was the best example of all. Business was so inefficient under communism that the economy could not survive. There was more wrong with the economy than was right. What seemed like an ideal failed the people miserably. Redistributing wealth equally was simply a formula for making everyone equally poor.

What we know from this is that some things work. The government can give the economy a boost with an infusion of money (such as through tax relief and loans) and improve employment and everyone's wellbeing. But it can't continue doing so because it brings about inflation that destroys what has been gained. We also know the government can provide some additional control to safeguard against inflation by reducing the money supply.

We have also learned the hard way that if the government reacts to the economy every time some sector or special interest group squeals and threatens to vote against the administration, then economic control becomes politically motivated and ruinous. So the Federal Reserve (The Fed) was created to act independently from government control. The Fed tightens or loosens the money supply in response to economic performance and need.

We know that if the government becomes a provider of services, without keeping some market forces in the mix to prevent excesses, demand will become infinite. And if government takes over a business, this also removes that business from creating tax revenue, moving it from the plus column to the minus column in the overall economy.

We know that some infrastructure industries can work well under government control, such as the Tennessee Valley Authority which brought electricity to a large portion of rural America through hydroelectric dams. But other infrastructure industries perform poorly. The old maxim is very true that large organizations soon exist simply to promote their own existence. Without competition driving them, they become inefficient and cease serving the public. Left to grow without restraint, the company would expand its government approved programs and perks to the point that most people would be working for it, it would give away its services becoming a major demand on the economy, but it would produce nothing for the public. Most product and service businesses require competitive market forces to keep them efficient.

In the quest to provide full employment and improve everyone's standard of living, the formula for a successful economy went way out of balance. People's needs were overemphasized while business needs were deemphasized. It was like emphasizing eating while paying no attention to food production. It was great party until the pantry was empty. For the economy to work properly, business has to be emphasized.

Capitalism unbridled

With the battle cry "free-market," many disavowed any responsibility for the government to interfere in the economy. What worked best, they professed, is market forces at work: "Supply and Demand" economics and the so called "Trickle-down" effect. Under US President Ronald Reagan, and British Prime Minister Margaret Thatcher, Welfare programs, rightly, were reigned in, and union excesses were brought under control. Once again economies began to balance themselves. Have we finally achieved the right balance?

We are currently learning some very difficult lessons which have yet to be acted on:

  • Hysteria: madness in the market and its collateral damage
  • Industry is good if left to itself - or to robber barons
  • Exporting capitalism - the myth of transforming other countries by free markets alone. Failure invites reprisal. Will our own economy destroy us as China flexes its economic muscle and we find the market at home is no longer growing?
  • Privileged circles - keeping wealth inside

Hysteria: madness in the market and its collateral damage

If we could be wise in advance of problems, we probably should have seen the problem coming in the Y2K hysteria preceding the New Year 2000. Since I often work in the software field, and can actually write computer code, I know that it really isn't that difficult to change a few older programs to state the year correctly. Manufacturers made a bundle by selling the idea that it is difficult, or impossible - buy new. Economic collapse was already a prominent motif planted in the public psyche by all the mystery surrounding the year 2000 in prophecy. Nutcases made a bundle on books and articles foretelling economic collapse triggered by Y2K problems - an Al Qaida dream. Many anxiously watched as the clocks changed to 2000. Mysteriously the computers kept nibbling bits, the banking system didn't explode in flames, and Al Qaida began to dream of plan B. But for a while hysteria reigned supreme.

Hysteria reigned on another front as investors, flush with cash from a roaring stock market and blinded by potential high returns from new technology, plunked money into new firms with nonexistent business plans. When it became obvious that many of these firms could not possibly make money, the Crash occurred, which was one of the major impacts on the stock market. Hmm. Just like with the 1929 crash, the market responded to hysteria. Those Dot.coms that might have done well could no longer get capital.

Mass hysteria is not a new phenomenon, but it has new drivers. Recently (May 2007), a 747 passenger jet lost an engine after takeoff. That jet can fly just fine on its other engines, but since it was a transatlantic flight, it returned to the airport. All four cable news channels featured this story to the exclusion of other stories. Is there any wonder that panic ensues? The news emphasizes the sensational, making it appear more important than it is, to get viewers. (The plane was later reported to have an engine fire, which is dangerous, but this was not reported during the hysteria.)

We are currently seeing that hysteria plays a role in society, and in the economic market. The price of oil, which was rarely controlled by supply and demand after the cartels took control, is now fully propelled by hysteria. So far there have been no oil shortages. But the price of crude fluctuates wildly on reports of political instability, refinery outages, pipeline outages, and other perceived limitations. Gas prices are at a level that saps money away from local businesses (such as restaurants and other discretionary spending) hurting local economies, but no one knows how to get control over prices. The Congress could exercise some control with an excess profits tax, but seems unlikely to do so, especially with Bush in the Presidency who would simply veto the legislation.

On one hand, we see that the economy is resilient. This is a myth buster in the face of Al Qaida and the idea that the economy can be destroyed by attacking the stock exchange and other symbols of economic power (World Trade Center), or by manipulating oil prices. On the other hand, we see that hysteria is not caused by supply and demand, and that hysteria has a corrosive influence, driving up prices and limiting capital.

Yergin and Stanislaw mention the effects of "contagion" in the markets. In 1997 there had been a rapid buildup of small international loans. Suddenly came a crisis of high interest rates, plunging currencies, and devaluations. International investors tried to get out. Emerging stock markets crumbled. "In the future, investors will look not only at growth rates, but also at the quality of regulation and the political institutions."

The stock markets have better mechanisms in place now to prevent wide fluctuations in stock prices because of hysteria. But we haven't figured out how to prevent hysteria from having a corrosive role in the marketplace.

Free market sense: Industry is good if left to itself - or to robber barons

I think one of the greatest learning experiments of the Republican administration of the last 8 years, was to reeducate us about industry. The Bush Administration retained a strong "hands off" policy toward industry, fueled by free-market ideas and a sense that industry should police itself.

In fairness to the leaders in industry, the good news is that most CEOs, directors and managers believe it is important how they treat others and the environment.*1 They aren't irresponsible. But just like one or two in ten people in the world will harm you if so motivated, so will a few business leaders. Letting them go their own way without oversight and consequences is naive.

1. CEOs as public leaders: A McKinsey Survey

Over the last 8 years we have had coal mine operators thumb their nose at industry safety inspectors, neither paying fines nor making corrections before or after citations. A few independents in this dangerous industry are notoriously incorrigible. But rather than take strong action, the government simply left them alone. Mine accidents occurred and people were killed. In the West, mine operators routinely ignore rules that prevent environmental damage such as chemicals leeching into the soil and damaging water supplies, and erosion control.

Over the last 8 years, we have had utility companies artificially manipulate the supply of electrical power in order to create shortages and win higher electric rates. In a climate of "turn your head and ignore them" it was easy to get away with. They got caught.

Enron and other companies created what might best be described as an artificial energy company, with artificially inflated earnings on the books, and artificially inflated stock prices. They stopped playing by the GAP reporting procedures that other companies must follow. The result was that thousands of employees and investors lost everything.

Currently petroleum companies, which are multinational, operate outside of the business rules established by the US, especially third world cartels like OPEC. They are monopolies. They artificially regulate supply, and control prices, completely free from competitive forces. If they create damage in an economy - oh, well.

Airline, automotive, and other industries in the US, have failed to support employee pension plans, leaving their retirement plans in ruins. Sometimes this has been because of a failure to fund them appropriately, sometimes because they were misused for dumping employees from active roles, but majorly because they failed to be competitive.

The drive to be competitive always keeps downward pressure on wages. In a way this is good, because in the Twentieth Century, unions insisted on wage increases without corresponding increases in productivity, getting their wage and benefit gains out of consumer pockets. This drove up prices, increased inflation, and made companies uncompetitive, helping to drive them into difficulties like pension failures. But today there is hardly any mechanism for maintaining wages for many jobs at a reasonable level.

The government failed to intervene for years to increase the minimum wage, citing "sending the wrong message to industry." What is the message industry received? People can work for nothing? The Poverty Level benchmarked by the government is $18,000.00 a year for a family of 4. This appears to be a politically motivated figure designed to make the economy look good. It would be a very rare circumstance for a family of 1 to be able to live on $18,000.00 a year. Nationally around 14% of families live in poverty, and 25%*2 worry every day about how they will get basic necessities. Medical insurance has increased in price for years at astronomical rates, so many companies are reducing or dropping this benefit, and 15% of the population (44 million Americans) can't afford medical insurance.

2. Percept study

We know from hard-fisted industrialists in past ages, and from robber barons in today's world, that industry and commerce has to be monitored to make sure they don't cause destruction. We know that mechanisms have to be in place to prevent market reaction to hysteria. We know that if there are too few inspectors and weak penalties, some companies will always risk employee safety in favor of profits (including the food supply). We know these lessons well. You have to provide enough oversight and regulation to make sure that 2 in 10 don't harm the public or each other.

Most importantly, we know that to make the economy work, there has to be a balance between the needs of business and the needs of the people. When one is emphasized to the neglect of the other, everything suffers. Currently what we are seeing is very low unemployment, but we have 14% of families in poverty, 25% of families concerned about getting the basics, 15% of people can't afford health insurance, people are losing retirement income and medical benefits because of poor business planning and competition, and many people are getting laid off and can't get reemployed at a reasonable salary. We haven't found the right formula yet.

Exporting capitalism - the myth of transforming other countries by free markets alone

A birds eye view of the world over the last century shows the following: 1) Many third world countries have tried repeatedly to duplicate the US economic system without success. 2) Many third world countries do not believe in the US way of life or economic system, and reject it, continuing to live in economic squalor. 3) Many in third world countries blame the US for their economic despair. Many strike at the US economic system because they don't believe in it, and many because they blame it for their problems. Economic problems cause revolts, political chaos, and terrorism. 4) Opening free markets in third world countries often destroys local economies. 5) Economic success in China and other countries threatens to destroy US economic markets (or has destroyed them, as in textiles). 6) The US economic lead created by the knowledge industry depends on continued leadership, and both US born engineering education and gains by other countries in engineering may overcome any competitive lead the US has.

The why behind third world economic failure will be explored later in this article. Capitalism is exported successfully to some, but that formula is still lacking also. It requires some fundamental changes in the culture before it can be accomplished, and that is a very slow task. Russia has had a lot of difficulty in embracing and employing capitalism. China has Hong Kong as a resident example, and has an economy that is developing so fast that it has to cool it off. Taiwan, Japan, South Korea, and some other countries have successfully employed capitalism during the last century.

It is China's economic muscle in manufacturing, and other's in high tech, that may eventually threaten the US economic system through competition. It is continued third world economic failure that may threaten both the Western economic system and culture. We have to find the right formula for assisting other cultures.

Privileged circles - keeping wealth inside

Privileged circles are those groups of individuals and industries that keep wealth flowing in a tightly controlled circle that includes only themselves. It is the type of "personal exchange" that typified pre-Twentieth Century economies, and still typifies third world countries. Others are unable to break into the circle, and so remain in poverty. For example, a business deals with a certain bank where it gets privileged rates. It buys from certain suppliers where it gets privileged rates or benefits. Its customers are certain privileged people or companies. Its employees only shop at certain privileged stores. They are educated at privileged institutions. Those outside that circle could not work for those companies, become educated, or buy at those stores. They are permanently outside of the circle because there is no mechanism for bringing them in.

Do privileged circles occur in the US? Well... interesting things occur in the US, although I dislike the idea of branding and using culturally stratifying terms. Opportunities for privileged circles in the US are much less limited.

The medical community is one example. In the now defunct Soviet Union, a doctor often received less wages than a taxi driver. In the 18th Century in the US, doctors were dedicated people who often worked long days, traveling from patient to patient by horse and buggy, and were often paid with garden food and livestock. One can't imagine this among most of today's doctors.

In today's medical community, physician's offices are run by business rules, and a physician ("the office") in many cases won't accept a patient unless they have medical insurance... or they will discourage you from ever coming there with long delays. If they do admit the person, they typically ask for their money before being seen. It is likely that the hospital where they do their in-patient work won't admit the uninsured except in an emergency. If the person has a pre-existing medical condition, he probably won't be able to get insurance (except at very high rates) even if he wants it. If he is with a company that is barely competitive and barely making it, there is a good chance that his insurance will be dropped due to double-digit inflation.

So, much of the US medical community is a privileged circle. It is exclusive for those who have a mechanism to get them into the circle. That mechanism is typically employment with a company that provides medical insurance. Companies are finding that providing such benefits prevents them from being competitive, especially in a world-wide market. This is one of the more vexing problems of the US capitalistic system.

Large companies with high revenues also appear to create privileged circles. these large companies typically don't outperform or outcompete their competitors.*3 Their sheer size and position makes them privileged. These probably include the military/industrial complex, medical communities, and others.

1. The elusive goal of corporate outperformance A McKinsey Survey

In contrast, most of the businesses in the US are small businesses. Over the last decade, they created 60 to 80 percent of the annual new jobs, and employed half of the private sector jobs. They export 97 percent of the goods that get exported. They generate the majority of innovations that come from US firms. But the small business environment is a very competitive environment with many going out of business every year. For 38 million Americans who work for companies employing 1 to 99 workers, medical insurance is difficult to afford.

Small businesses outperform large businesses in all ways. The thing that privileged circles are able to do is support armies of special interest groups that converge on Washington and lobby Congressmen to create legislation that favors their wealth retention with special rules and privileges. Special interest groups have been a problem from the beginning of the US.

We have yet to create a level playing field for US business. Large wealthy companies use their resources to keep their influence level high. Smaller businesses don't have the resources. Privilege goes to money, and privilege suppresses the general population. We haven't found the right formula yet.

In summary, unbridled capitalism is a dangerous entity. We have to learn from experience how to control it. In today's world of instantaneous communications and rapid change, the market reacts explosively to hysteria, and is capable of damaging the economy. Similarly, there are a number of people leading industry that will neither play by the rules or will intentionally do things that harm others, unless watchdogs stay on them and enforce compliance. The economy is no guarantee of individual well-being, and we need to do more to get the formula right. If not, other countries who adopt capitalism may overwhelm us. Also, unless we can effectively help other countries employ economic principles so that they benefit, they will continue trying to harm us. We know a lot about making the economy successful, but it is still capable of destruction.

The mystery of the economy - how it works

In cultures before the Eighteenth Century, if you didn't trade your summer corn and fall pottery for the right price, you might starve through the winter. And then there was and is the woman living down the street who has a broken body and is not able to work, and there is no one to support her. Some problems have never changed. Understanding how to operate the economy is key to survival. And it is a lot more complex than it was when people just traded furs and corn with each other.

I suppose that when John ran out of furs to trade for corn, Jesse had sympathy for him and let him take the corn and pay for it when he trapped more furs. Somehow we came up with mechanisms to survive. Banking became a primary mechanism for the economy that allowed everyone to prosper and the economy to expand.

  • The expansive economy and monetary control
  • The role of knowledge and technology
  • The role of competition: certainty VS uncertainty
  • Keys to ensuring basic economic performance
  • Putting a head on the economy

The expansive economy and monetary control

Economies that don't operate in privileged circles, which are free markets, are expansive by nature. Expansive means that John can become employed. Expansive means that John can borrow money. Expansive means that John can become part of the economic system.

In contrast, many authoritarian systems, those with privileged circles, those without banking, those without a system of government and economic rules that everyone must play by - these are not expansive. People can get into them only by approval of the powers, and there is no economic certainty.

An expansive economy can conveniently include people. If Bob makes a deposit, the bank can eventually loan 333% of that deposit. That is, it can if the person who is loaned to can spend the money so that it goes back into the bank as a deposit. Each time the money is deposited, it shows up in the bank's balance. The bank must retain ~ 20% of its deposits in reserve, by Federal regulation. From experience, the banking system knows that this re-depositing will happen again and again so that 333% of the original deposit can be loaned out.

So industries that need money to hire new people, and Bob, who needs money to buy new things for his family, are included in the system by virtue of employment and banking. When more people are hired and paid, they also make more deposits. There is more economic growth, and so more people are included in the system. This is based on private capital, and it works well.

What happens if Bob and a couple hundred personal friends need money all at once, so the industry that wants to grow can't borrow any money. Normally this pinches the money supply and drives interest rates up so fewer people can borrow. But higher interest rates can slow the economy. Ideally the economy is best if velocity stays constant, or slowly increases with productivity increases.

The velocity of money is slowed by rising interest rates. Velocity means turnover, or the frequency with which the same money is spent and re-spent.

So, how can that industry borrow more money so that it can hire more people and expand the economy? One way is for the government to loan money through the Central Banking system. One way for the government to loan money is to sell bonds. Of course, you and I must eventually pay the interest on those government bonds, but this is a small thing compared to the large economic gain for all of us from expanding industry.

One of the basic measurements of expansion in the economy is Productivity. Productivity basically means that more goods or services are created for the same cost. Input remains the same, output increases. Technology is the main driver of productivity.

Benefiting others through the expansive banking system doesn't hurt us - it makes us all stronger. (By the way, "expansive" isn't a term used in economics, it is just a term that very well describes what happens in our economic system.)

The role of knowledge and technology

The US economy has been labeled a "knowledge economy." It is a statement of competitive positioning, and a description of what we produce. We supposedly are transforming from a manufacturing economy to one that produces knowledge that makes us more competitive.

Douglass North, in Understanding the Process of Economic Change, indicates one type of knowledge that has made a dramatic difference in the US economy. That is the knowledge of how to create a sound and growing economy. It is specialized knowledge that works with the institutions (systems of rules and control) and individual circumstances that we have. Our economic system is not something that occurs in nature; we created it. Unfortunately that fact alone makes it difficult to transfer to another country with a different set of institutions and unique circumstances.

Knowledge is what makes technology possible. Technology is the practical application of knowledge especially in a particular area, such as in engineering or medicine. A large number of US universities and industries are involved in primary research, which adds to the knowledge base and promotes the growth of technology. It helps our economy a lot that as a nation we believe in the power of knowledge and technology to help people, and believe in using research to create knowledge.

Technology has several roles in promoting our economy. First, creating knowledge is an industry in itself. This employs a large number of people, and the knowledge centers tend to be together in areas that bring critical mass to the development of more knowledge. It is like a fire finding enough fuel to burn brightly.

Second, technology frees manpower for other income producing tasks, thereby increasing productivity. When we use technology to find a way to produce something in a factory with less manpower, we lower costs and so increase productivity. When we use technology to free someone from having to do tasks in the home, the person can now work in the workforce and become more productive in the economy.

Technology is the main driver of productivity. Finding innovative ways to do more with less is one major role of technology. Productivity (Pr) = Quantity / cost. or Out / in. Generally this increase in productivity can allow profits to increase, stock dividends to increase, and wages to increase, which benefits everyone. It could also mean that the product or service sells at a cheaper price, so the company remains competitive and people keep their jobs.

Third, using the technology gives those who use it additional jobs. So more jobs are created.

Fourth, technology addresses needs within a society. This means that products must be produced to address that need. It also means that services must be provided to people to address that need. For example, if you invent an X-ray machine for diagnosing broken bones, then someone must produce the machine, and an operator must operate it. Suddenly there is a whole new market, and a whole new industry to supply it.

The Industrial Revolution was a product of technology. Prior to around 1750, population growth was very small, economic growth was sluggish at best, death rates were high, and the human misery index was high. But around 1750, when people began harnessing the power of technology to live longer and more productive lives, the chart for population growth shot straight up.

Technology is best thought of as a catalyst for improving humanity and economic growth. Technology drives innovation, which is one of the major keys of economic growth.

What is the future of the knowledge economy? The US is well positioned with the critical mass of brains and manufacturing in many areas necessary to create the knowledge and products that address humanities needs. However, other countries are very likely to create knowledge industries of their own, especially in today's "connected" world in which knowledge is easily shared and collaboration doesn't require bumping elbows physically. Also, technology typically peaks in any area of research, experiencing steady growth for twenty to thirty years, and then peaking. Additionally, the price of items created by technology usually decreased over time, placing it in very competitive markets with diminishing returns.

While technology is wonderful as a catalyst for economic growth, what it really does is provide long-term service opportunities for people, which creates long-term job opportunities. Hair clippers made barbers more productive. Styling wands gave them more work. Both are required to actually grow the economy, but if population growth is stable, only styling wands grow the economy. Service jobs are the future.

The role of competition: certainty VS uncertainty

If you have ever worked for a business, you will recognize the following. Businesses make a forecast each year of what their revenue and costs will be (and profit). Each year, to please stockholders, stakeholders, and cover increasing costs, revenue projections must go up. They never go down.

The role of the product managers (typically) is to make sure they create products that the public will want, and purchase at a volume and price that supports the companies forecast budget structure.

Forecasting a year out means that businesses try very hard to control the marketplace. People's jobs depend on it. Market conditions and product costs must be as certain as possible, and uncertainties must be reduced as much as possible. This is key to the business making a secure income. We all have to work and make money, so certainty is a good thing.

In some ways, similar to how commerce was 3000 years ago when people traded food for pottery, personal business exchange (bartering) grew into personal networks of exchange in which suppliers, third party business people (traders), and buyers were able to keep economics very certain. Today we can see ancient trade routes by the patterns we find of products in archaeological digs of ancient societies. Personal networks are still common in rural societies and those with privileged circles of exchange.

Organizations like the Templars made "impersonal" networks possible through international banking. If you gave one Templar money in France, you could use a voucher to get the money back from another Templar in Jerusalem. You no longer needed a personal courier and an army to travel with you to protect your money from robbers. Impersonal exchange made economic efficiencies possible.

Businesses in the 20th. Century, in urban areas, developed into impersonal networks in which businesses freely chose suppliers, and buyers (the public) chose manufacturers and sellers, on a competitive (impersonal) basis. How important is impersonal exchange to the economy? It is seen clearly in the difference between third world and first world countries.

Those countries that maintain personal type trade relationships progress very little economically (according to North). Those that successfully change to impersonal trade relationships are more likely to do well. The transition is difficult for many. For example, Japan, in the last decade, changed from strong ties between individual banks and individual companies. It was a major cultural change, but this old way was hindering economic growth.

Impersonal exchange is counter-intuitive. You would think that personal exchange would bring certainty and stability, and help growth. But what it actually does is prevent competition and hinders economic growth. For example, my daughter recently had a construction loan to build a house. The loan provider made special offers through her husband's place of work. The loan provider expected that the final home loan would also be through its institution. It was a perfect "certain" setup for the bank. Known employer with known job security, construction loan income, and final loan at whatever rate they wanted to give because of the relationship. But when my daughter saw the high interest rate and points, she simply went to another lender. Personal exchanges create uncompetitive situations and cost the consumer more.

Change is difficult for all organizations.*4 Most have developed something that works well through many generations of experience. If it ain't broke, you don't change it. There is a path burned into the sands of history (North calls "path dependence") that includes methods, government rules, and other things that provide a structure for reliability and continued success. Change these dependable things and everything can go into chaos.

4. The adaptable corporation A McKinsey article

So change isn't necessarily a good thing. It's often destructive to business. Businesses use a variety of methods to prevent change. Products change only incrementally (small changes) from year to year. Business human relations departments compare wage structures with each other so that they can attract the right level of talent and remain competitive. Businesses give preferred treatment to business partners and supply chains to get the best prices and work with companies with expertise in their field.

Businesses try to institutionalize their business methods into rules, and their product expertise into patents and trade secrets. Business knowledge is one major key to business success. Businesses use lobbyists to protect their interests in government legislation. So on the whole, business tries to keep the status quo, while making incremental changes to remain competitive.

When business becomes too protective, too cloaked with rules and special interests, rigor mortis sets in. The rubbery dynamic organization and economy become hard as concrete. They can't grow, but they stagnate, becoming more and more inefficient, and break in the face of tough competition.

Examples of this degenerative process is the system of manufacturing, unions, and business relationships that developed in the steel, airline, and automotive businesses. The airlines included a lot of government protection, and the end result was major industries that became very inefficient and couldn't survive competition. Many didn't survive, and others are in desperate fights for their lives. It is scary that at one time the saying was well understood, "What is good for GM is good for the nation."

Yergin and Stanislaw tell us that competition drives companies toward innovation, so companies are more focused on variety than quantity. In a changing competitive environment, our institutions are constantly reformulating the business rules. Competition drives change, and change is necessary to a dynamic economy.

Change is continuous in the workplace. How much change is good? When should a company embrace change, and when should it find ways to reduce uncertainty?

Major changes are occurring within the nation's workforce. Trade has become globalized and digitized, and businesses and employees move freely from nation to nation or employees work from home anywhere in the world.

To cut overhead costs and maximize productivity, most companies have flattened their pyramid structure of managers, emphasizing manager/supervisors and highly productive employees. Advancement opportunities are limited. Employee goals have also changed. According to Accenture, "It has been widely recognized that people and knowledge are now an organization's most valuable asset." "Whereas the workforce traditionally was populated mostly by full-time employees (mostly men) expecting to climb a linear career ladder, today's employees may prefer part-time or contract positions as they seek mobility or the ability to juggle family with work. And rather than being motivated primarily by prestige or salary, today's employees may be motivated by the development opportunities work offers and prefer to gain new experiences by moving horizontally within an organization."*5

5. The elusive goal of corporate outperformance Accenture: Trends Driving the Workforce of One October 2006.

The major companies, while they may not out compete their competitors, have made major strides that keep them in business, competitive, and profitable. They understand that it is better to have one highly skilled and productive employee than several mediocre employees. And they are even changing their performance measurements to "profit per employee."

We can see the challenges facing business and the economy. The entire workforce, industry, and marketplace are dynamic. No single company and no single technology can safely be predicted to win the market.*6 It takes a dynamic organization to respond and stay competitive. A McKinsey report concluded: "There is no one-size-fits-all answer for all companies in all situations. But by more thoroughly thinking through the level and nature of the residual uncertainty facing decision makers, strategists can define feasible alternatives and make better-informed choices to shape or adapt."*7

6. Innovation's uncertain terrain A McKinsey article
Making the most of uncertainty A McKinsey article

Keys to ensuring basic economic performance

Again from Yergin and Stanislaw, I see that an emphasis on quantity (productivity) creates a difficult environment for all. Either a company has to find ways to expand the market, or innovate to find less expensive ways to manufacture, often through lowering wages or cutting employees. Focusing on variety grows the market.

From North, I deduce the following about economic success. A high level of uncertainty prevents economic growth. A high level of certainty prevents economic growth. It is up to our institutions to create the rules for commerce that make the game dynamic. Institutions include the government, economic apparatus, and businesses who have expertise and ability to control (not the organizations of people and property).

The first thing that institutions have to create to encourage a growing economy, is order. Chaos prevents growth. Things aren't going to change when there is political upheaval, property seizures, corruption among officials, or sudden changes in the commerce rules established by politicians due to political decisions and special interest influences.

The second thing that institutions have to create is rules of commerce (General Accounting Procedures is an example). Rules must be created that encourage competition and fairness to consumers, while restraining things like monopolies, barriers to trade, and corruption, and corporate malfeasance.

To make the economy truly dynamic, the institutions have to allow for continuous restructuring of the rules to allow for the continuously changing conditions created by human beings. Because things change, the rules have to encourage the trial and error necessary to evolve.

Most importantly, these institutions can't be arbitrary in their guidance. They must incorporate the intentions of the people about commerce and the economy. Without incorporating intentions, the rules can go out of control to the point of destroying everything.

Economic performance is affected by a number of important factors. Perhaps most important is understanding how the beliefs of a society either stop economic growth or encourage growth. North gives several examples of nations, even different societies within nations, that grew well or failed to grow, depending on their beliefs about the economy and how it should work.

Rules and enforcement are vital, as mentioned earlier, but limiting government influence ensures a viable marketplace. The ability to adapt is an important key to survival. Intentionality will eventually have the most effect.

Putting a head on the economy

The economy is impersonal. It works best that way. It works best when companies are guided by profitability, not political pressure from constituents. The economy is a mechanism for providing prosperity. It responds to people's needs and market forces. Business and the economy are not, in themselves, any more moral or have a social agenda, than a dollar bill. The economy provides a position of strength and capacity.

Money is like energy; it just keeps transforming. Paul makes a product, we give him money. Jenny does a service, and Paul gives some money to her. We all pay some to the government, and they hire people to do things. Some people spend money using their credit cards. The credit card agency charges a transaction fee, and their people spend the money they earned, buying our products and services. John gets some of this money and deposits it in the bank. The bank loans out 333% of the deposit, benefiting many people or businesses. Money only goes away and loses its power to transform if you stick it under a mattress. But money is impersonal. It is the person who has the money who directs where it goes.

Individuals have the social conscience and social agenda. They are charitable and individually and collectively through institutions (Red Cross, religious institutions, United Way, government, etc.), much is accomplished through personal action and collective might. Interestingly, Christ spoke in large measure about money. He spoke negatively about the "love" of it, not the "use" of it. Money, and what we do with it, is important.

During the grand experiment with socialism, we looked at redistribution of wealth. Despite being an honorable and worthwhile goal - the result was not a pretty picture. Redistribution simply meant that everyone would be poor and no one would have enough. It was no better than the miserly economics of the 18th Century that limited wealth distribution.

Could there be a redistributive economics that actually works? Surprisingly yes, wealth can actually create redistribution. Market expansion, as I have already shown, is redistributive, and also expansion is an overall gain for the economy. The true means of growth is to include others in the overall economy. Give to others from a position of strength so that you don't destroy yourself. More importantly include others in the economy so everyone gains.

The zombie economy - what is most fearful to people is the specter of what looks like a human being, but doesn't have human intelligence. A zombie. This is what primarily characterizes our current economy. The thing we can best give the world is a head.

I would be very remiss to characterize the people of the world and financial institutions as uncaring zombies. There are many people, probably the majority of people, who work in financial institutions that have a social conscience and try to help those in need. We just have not learned the most effective ways of controlling the economy.

Intentionality (North's word - and the influence of some of his thinking follows) will eventually have the most effect. It is the difference between driving through a crowd in a car with a steering wheel, or a car without steering. One is an effective vehicle, and the other is a destructive one.

Intentionality is a fundamental part of humanity, and is very important to what gets accomplished with money. Take terrorism for example. Terrorist organizations that have been radicalized by third world economic failure and injustice, are dominated by beliefs about the economy that shun Western values. They look at the wealth of Western cultures and actually blame them for not making their intransigent economies sustained. They have no idea of the magnitude of the difficulty in raising them to prosperity, not the least of which is that redistribution of revenue only makes everyone poor - it isn't a solution.

Third world countries are typically in chaos. There is no certainty, no stable environment for business and the economy to grow in. Political decisions make major changes in the economy, moving companies from private to state owned and back again in a cycle of failure after failure in a desperate search for solutions. Corruption is rampant. Wealth is maintained in privileged circles of personal exchange. There is no flexibility and adaptability in these economies and organizations. Much of the knowledge gained from Western economic systems tends to be specialized and is not directly transferable to third world economies with unique situations (according to North).

In fact, economic change often creates more disorder. So attempts in the third world to duplicate Western economic success often results in failure. For those living on a dollar or two a day, to think that the West is evil, is understandable. But the problem lies in their cultural beliefs about commerce.

The economy is a machine without a head. It has to encourage impersonal exchange to be competitive, which is the key to being expansive (include others). But it has to have a head. The head brings intentionality to the economy. We have to ask ourselves some fundamental questions and understand what we want our economy to do.

For example, North points out, up to now the economy has been viewed as a zero sum game. All gains are seen as being made at the expense of someone else. But what happens if the economy is viewed as expansive, including others, creating a positive sum game? As I already mentioned, the economy expands and benefits us all. Intention is the key. Intention directs the economy to do our bidding.

In many other articles on this site, I use the example of business intentionality. What is the business of business? To make money. But money doesn't do anything. It's just paper, or a figure in a bank account. Why do we want to make money? Money benefits the employees by enabling them to purchase housing, education, food, etc. The same is true for investors. Money is a means to an end, and sometimes we lose site of that end.

What are our intentions with the economy? To provide employment, a proper income, and affordable medical care to all? Or to keep the money in privileged circles?

Insurance, by its very nature, tends to be tight-fisted and restrictive. Insurance is based on averages and risk. Limit the risk and you limit payouts, increase profits, and reduce premiums. Similarly, people exclude insurance because they think they won't need it. But if everyone was insured, including those with minimum risk and those with high risk, would the premiums average out to the same as they are now?

If we expand our economy to other countries, how can we do that without destroying the economies that are already there?

Why are we encouraging so much individual borrowing? Interest payments on credit cards means that money is being diverted, slowing the velocity, which slows the economy. It also severely limits the purchasing power of individuals, which removes that sector from the economy and also hurts the individual. Putting money back in the hands of these borrowers would help the economy, and eventually mean they could make larger purchases (such as homes) on credit. They could also save more, making the borrowing pool larger. Intentionality - short-term gains often mean long-term problems.

The future economy

We know where we've been. The US economy is resilient, and rebounds when it is hit hard. It is expansive. We have much better information about what works and what doesn't. We know more about what needs to be fixed in the economy. But it is difficult to rate the economy if we don't know where we are going.

Lacking a crystal ball, I have to depend on trends. The US population will peak in about 30 years, largely due to the increasing death rate as the population ages. About every age group will be equally represented. In 50 years, population growth may continue, but this depends on whether the US copies Europe, where birth rates have stopped growth.

Globalization and free marketization has made the world a much more competitive place. The US has a competitive advantage in expertise (knowledge), but this will dwindle as other countries catch up and even pass us in various areas of specialization. This can be a good thing. But economies such as China may overwhelm the US economy in 10 to 20 years. The world has to find ways to control economies so that they don't overwhelm each other. There have to be rules and enforcement. Right now, just getting China to enforce intellectual property rights is a major undertaking. It is a major cultural change.

Technology is the great driver of change. It gives us a better life, increases productivity, creates interesting and fun "things," and creates whole new industries. For at least the next 30 years, technological innovation will continue to make things dynamic. The price of technology items is always downward, so they are not lasting lucrative enterprises. Technology revolutions typically peak after ~20 years, although in healthcare it will last longer. There is likely (says my short-sightedness) to be a plateau reached in 30 years in which technology will cease to be a driver in the economy.

What will take the place of technology? Probably service and variety.

The lipstick economy

Four-thousand-five-hundred years ago, there was a trade route between the ancient civilizations in Turkey and the ancient civilizations in Sumer (southern Iraq). What did they trade? Well, pottery and such things, but also eye-shadow. Eye-shadow? Civilization in many areas had just barely climbed out of the caves, agriculture had been at subsistence level and they were now irrigating, and people were just starting to band together in towns and be governed and make laws and worship gods in collective ways. Eye shadow? Even ancient Egyptians used the stuff - even the men!

Human nature hasn't changed much. People like to make themselves look good, or make a statement. Merchants and traders sold eye shadow 4500 years ago, and it is still a big business today. Undoubtedly today we have much more variety. And today we have people who specialize in cosmetology and the craft of putting the stuff on.

Twenty years from now our audio players will likely come with all of the songs available, and when new songs come out the main cost will be the royalties, not the technology. The technology will be a vehicle for selling new songs. It boils down to a way of providing a service to make money.

"Lipstick on your collar told a tale on you." Connie Francis put this song about cheating, Lipstick On Your Collar, on the Billboard top 10 in 1959. The song undoubtedly had an influence on marketing. Later lipstick manufacturers advertised lipstick that wouldn't rub off and wouldn't smudge, prominently displaying lipstick on a man's shirt collar. And then lipstick went in different directions for a few years, and then reintroduced a "new" product that won't rub off. Deja vu. The lipstick market continually remakes itself.

Variety is the spice of life. We "need" variety. We need "style." It may be eye shadow or lipstick, or toasters, or audio devices with songs, but consumer goods is driven by variety and innovation, reinvention, or just plain reintroduction. Consumer goods is likely to continue to be driven by the need for variety.

After technology peaks, the medical field will probably be driven by the need for service, whether it is physicians, plastic surgeons, technicians, practitioners, nurses...

Knowledge will likely be very available, but education will be focused on those who need expertise in specialized fields, such as designers, engineers, politicians, lawyers, medical personnel, economists, writers.... These fields are as much based in experience as they are in the transfer of factual knowledge, and their practitioners will likely use work in these fields as a joint means of learning together with study. Yet technology is likely to diminish the need for some expertise.

As we turn more toward a service economy, the newer service commodities might be experiential products, including documentary style education, relationship enhancement, entertainment, body cosmetic enhancements, prepared food, individual transportation, travel (or virtual travel) experiences, and Internet related businesses.

The growth of the Internet, if business doesn't kill it with fees, will enable all kinds of businesses. Think for a moment of interacting with people over the Internet in three dimensions, using the Internet and holography. A visit with grandma to bake a cake or watch a movie might be just a click away.

Imagine travel to exotic locations either in mockups and projected images at local venues, or in your own rec. room. Imagine that you and a friend are in the dug-out with the players at the World Series, seeing and hearing everything, taking a beer and hot dog from a vendor, all from the comfort of your rec. room.

Imagine a computer technician who instantly arrives at your house to fix a problem with your refrigerator, smiles at you, sees the problem, and presents you with the bill, all without ever leaving his office.

Imagine a professor teaching you in a classroom full of people and responding to each of your questions, all laughing at his jokes, but none of the students left their living room, and he never left his office.

Imagine someone who lives in remote Montana, or Northern Canada, or Mongolia, or Antarctica, or on a space station, being a vital minute by minute, face to face, part of a business in New York or Sao Paulo, Brazil.

Imagine a mother in a hospital in Cleveland, who is reading her children a bedtime story as they sit around her in her chair and she gazes into each of their faces.

Imagine taking part in a murder mystery at a lodge, together with 6 other guests, without ever leaving your rec. room.

Imagine watching over your child at a day care, or at a party, without leaving your home or office... and discussing the events later with him at home.

Away from the Internet, imagine blending shades of blue, green, and pink skin colors and adornments that change your skin color as easily as changing your clothes. Imagine gourmet foods, decadent and exotic, with only needed nutritional values. Imagine home delivery of food, groceries, mail, and other products in under one minute. Now imagine the infrastructure necessary to support this delivery and the people needed to maintain it.

Each of the above services will address what people want, and will require delivery infrastructure, invention, manufacturing, and service - whole new industries based on providing experiential services. It will require superior communications technology and infrastructure to support it. The Internet will be like the roads of today. The less expensive we can make the "transaction"*6 costs on the Internet, the more services people will use on it, and this will improve the economy and everyone's standard of living. Raise the transaction costs and the economy will dwindle accordingly. It is like putting a toll charge on a road. The higher the charge, the fewer people use the road and spend money at the destination.

6. Transaction costs, need to be kept low. Like rising interest rates, they slow the economy. North points to many places in the economy where transaction costs occur.

The rating

Why ratings? Maybe President Reagan (or his predecessor?) started it with his, "Are we better off today than..." We create a lot of talk about things like the economy, and the government has statistics to assess various aspects of the economy. We use superlatives, like "the economy is good, strong..." they sound good, but what do these really tell us?

In these ratings, I suggest that there are qualitative and quantitative things that we really need to look at to determine how things are doing? If you say something is doing well, but only two thirds of the people are actually being served, there is a real problem with perspective. My hope is that these ratings encourage others to look at our economy, and other things, objectively and raise the profile on the areas where we need to improve. I would expect a rating of at least +3 in a "good" system.

What are our values? Possibly the noble ideas are that we live in peace and harmony; that we create an economy in which all of us prosper, and have safety nets for when we fail - together we share our risks; that we have opportunity to pursue our careers and interests; that we have good health throughout our lives and into our golden years; that we have a government that represents our interests, protects us, and makes sound decisions, and through which we collectively enable our endeavors; and that no one is repressed. These are values. In the US, these might be called the pursuit of happiness. How are we doing?

The Consumer Price Index (CPI) rose 3.5% during 2005. Managers, professionals, and service workers failed to keep up with inflation. Job growth is slowing in 2006, but wage growth looks somewhat better. The CPI rose 3% in 2006. Productivity grew only 1.4%, the lowest in a decade. A simmering economy, safe, but not robust and growing.

As I said in the 2006 State of the Onion, "Unrestrained competition is going to continue to spoil the pie, making the pie smaller so that everyone gets less. That's the nature of unrestrained competition. (Also see: Competing Against Ourselves.) The world is going to have to find a way to be competitive, but pay reasonable wages, or find a better way to make social services available: Social Security, Medicare, Medicaid, health care, and income security."

What indicators mean an economy is good?
Perhaps: what things, that are important or vital to society, can we afford?

Scale: -5 to +5

Employment and income security (was -1)
- In 2006: Employment is too easily lost for everyone
- Too difficult to regain adequate employment for people over 45 and for those who command higher salaries
- Too few employment opportunities for the young and the poor segments
- Too many  people in the US are hungry - food pantries can't keep up and social services can't be found - the economy can't afford to pay for services.

2007: There has been some progress since 2006. Most of this is still true but there have been slight gains in the ability to provide medical services.


Income (pay and wages): (was -2)
- 2006: Too many jobs don't support family living expenses.
- Disparity - there is great disparity between wealthy and poor, but the trend of the middle class income is downward. 
- Unrealistic minimum wage - inadequate for single living or sharing.

2007: Slight gains in the new minimum wage (still won't support anyone), and in the wage gains in 2006 and 2007 for manufacturing workers.


Economic strength: (was +2)
- 2006: Strong economy - rebound from setbacks, strong growth
Money is going into corporate profits, not employee pockets
Those laid off get McJobs or go off the unemployment figures

2007: Productivity is close to stagnant. The trend of money going into corporate profits is showing up in the slowing of productivity and the economy. The drag of oil prices is preventing real wage growth and productivity. The war in Iraq is weighing on the economy.


Community security
- Preparedness for industry and job loss, retraining, new industry acquisition


Housing availability, prices of food and furnishings (was +4)

2007: Housing prices are cooling, while food and furnishing prices are rising in the face of rising oil prices.


(Was -2) Major transportation industries, part of the backbone of the US infrastructure, are bankrupt, defaulting on pension and insurance plans, closing plants and services, struggling to even survive; while many industries cut off insurance plans to remain competitive.

2007: The transportation sector has been hit hard by rising oil prices.


Individual debt: very high; individual savings: very low

2007: No change.


Availability of higher education
Cost is too high for those who want it - starts future at a $40 to 80,000 deficit 


Total (Was -1) (Hmmm, maybe not so good - maybe we should refigure that)

2007: No change.




We are seeing that a well formed economy deals effectively with adversity such as market failures, war, housing slowdowns, high numbers of retirements, high national debt, limits imposed by unrestrained competition, high negative balance of payments, and high oil prices. We're seeing investors struggle to get their investments back after the stock market bust of 2001-2003 (through conservative investing, corporate limits, and dividends). This is big. While there is a lot of room for improvement that we should in no way ignore, the economy is exhibiting strength that will see us through the course. While we may act a little bearish, we can be bullish on what we have accomplished and how our economy performs.

Given the resiliency in the economy, and the future technological impact, the future actually looks very good for the economy. What we need more than anything else is to put a head on the economy so that it reflects our intentions.

The necessary things that benefit us all (things we can do better together than individually) that seem very unlikely to happen in today's competitive climate is for major changes in economic infrastructure to be made without government intervention.


  • People are likely to remain unable to get medical care if this is left entirely to private industry. Methods have to be devised to get people into the privileged circles.
  • The transportation industry is unlikely to make revolutionary changes without the government creating infrastructure and requiring manufacturers to make changes. Can vehicles get better mileage without polluting? Can there be a system that promotes the use of individual (private) commuter cars in a train-like vehicle, which can also be driven from the tracks around town?
  • On the environment, although some responsible industries and states may make progress on reducing global warming, others won't without the government setting requirments.

Government involvement doesn't mean that the government has to actually do these things. What the government needs to do is create the right environment for these things. Examples are creating rules and incentives to make these happen. Legislating requirments that industries must follow. Creating competitive contracts to research and build infrastructure, to find the best methods. Create time-frames in which projects must be completed, so that they don't become endless and never produce. It takes vision and leadership.

Next State of the Onion: May/June 2008

- Scott

Other distribution restrictions: None

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