Posts Tagged ‘supply side’

Keynesian Economic Crystal Meth

Thursday, March 17th, 2016

Dear Friends,

It seems to me, economists have been seeking the holy Grail of nonstop economic growth for as long as there have been economists… but as with all natural complex systems, the economy must expand, sleep then expand again. The expansion part of the cycle is where new ideas are implemented, and the recession part is where old inefficient ideas are destroyed, to free up the resources for the next wave of new ideas. Like an animal or plant, an economy grows rapidly for a while then sleeps. If someone were to force a plant or animal to stay awake forever, as speed addicts do, the animal or economy becomes sickly. Economists and politicians want the laws of economics to bend to their will but like all of God’s laws they do not lend themselves to bending.

A politician may want to be able to eat belladonna, but no matter how much they might want to, the moment they do, they die. Someone else might want to fly without wings but jump from a towering cliff and God’s law of gravity enforces itself. The point is, God’s laws are not flexible, breaking them always has consequences. No matter if someone poisons himself, jumps from a cliff or snorts crystal meth to stay awake, God’s laws do not broach noncompliance. Trying to force an economy to only grow is just such a violation of God’s law of economics.

Great depressions are caused when government backed by economists try to stop the boom bust cycle of economics. FDR turned Herbert Hoover’s recession into a great depression by trying to force economic growth by fiat. Following Keynesian economic theory, Roosevelt attempted to force economic growth by controlling how much and what a farmer could plant, determining the prices retailers could charge, employing people to do absurd things like count the tips on maple leaves and huge government paid for engineering projects. What he got was a depression that lasted for a decade, soup lines, mass unemployment and a dependency class.

Obama and his economic brain trust have attempted the same thing. He has had the good fortune of having a federal reserve that has kept interest rate at or near zero for the entirety of his term, he has run up a deficit greater than all the Presidents before, he has passed reams of new regulations and usurped a third of the national economy with the Affordable Care Act. Meanwhile, like FDR, he has had a fawning media cover for him at every turn. Today, the soup lines are hidden by food stamps which is at an all time high, the unemployment numbers are massaged by the BEA with terms like U6 unemployment, virtually all the jobs that have been created are low paid part time work and the stock market has expanded because of firms buying back their own shares, on margin, instead of organic growth by investors.

Now the latest gimmick the brainiacs are trying are, negative interest rates, helicopter money, bail ins, and banning cash. Negative interest rates are already being used in Europe and Japan to push demand. What they are, is exactly what it says, savers are charged interest to stash their money in a bank or by buying bonds! To keep people from pulling all their savings from the banks and setting on cash, which would drive the banks out of business, the masterminds want to ban cash. Helicopter money is where the Federal Reserve would print a few billion dollars, lowering the value of all the money now in circulation, and deposit it in people’s bank accounts. If all that fails to save the economy and threatens the banks, those of us who have saved money will have our money withdrawn from our bank accounts, and given to the banks.

Methedrine can make a tired person wakeful, the negative side effects will manifest themselves sooner or later. Keynesian economics, or demand side economics, is like using crystal meth to keep the economy awake even when it needs to sleep. There are two competing philosophies of economics that don’t seek permanent economic growth, the Austrian school which stresses the effect of savings on an economy, and Joseph Schumpeter’s boom bust theory. The Austrian school’s theories have only been used twice in the US, once during the 1920’s and then in the 1980s. The result was fast economic growth with short weak recessions. Meanwhile, every time Keynesian crystal meth has been tried, the long term effect has been depression and outright economic collapse. Gods laws cannot be compromised, no matter how smart a brainiac is, or how much she might want to. Isn’t it time for politicians and economists to grow up and follow the laws of economics? Just say no, to economic crystal meth.


John Pepin

Bureaucracy vs Complexity

Thursday, June 21st, 2012

Dear Friends,

It seems to me, the main difference between bureaucratic and complex systems, is that bureaucracies are inefficient and primarily benefit those in charge, while complex systems are extremely efficient and the benefits are more widely distributed. This is a well known truth yet is overlooked by most people. This fact can be applied to many areas of life but is most appropriate in the sphere of economics. Overlooking or disregarding this reality leads to all sorts of negative outcomes, like huge trade deficits, lowered economic outcomes, low or even negative GDP growth, and even outright tyranny.

Bureaucracies are hierarchical in structure. This type of system is characterized by a top down decision making structure. The commanders in such a system can be a single person or a group of people. All governmental structures are built this way. The decisions are made at the top, the middle men enforce them and the people dutifully carry them out. Unfortunately, the natural evolution of this type of system, is for those in charge to become more and more selfish. Feeding both their greed and egos until all the efficiency is wrung out of the system and only the people at the top get any benefits.

This is only one avenue of inefficiency in the bureaucratic system. Perhaps the primary source of inefficiency in a bureaucracy, is that so many decisions need to be made every second of every day in a modern economy, it becomes impossible for any group of people, no matter how smart or benevolent, to keep up. The task is simply too herculean. Just think about how many decisions need to be made when you build a house. The floor plan must be thought out, the type of heating system must be determined, the electrical feed must be decided, the exterior siding and trim must be considered, the color of the home is important to it’s blending into its surroundings, the interior color scheme and trim must also be considered, the roof system and treatment must be thought out, the list goes on and on. This doesn’t even take into account the millions of smaller decisions that need to be made, like figuring the rise and run of the cellar stairs, how long to cut each stud, the rafters must be measured and bird’s mouths cut… etc. Now, magnify this a hundred million times, and we have the decisions that are made in a simple economy in a single second.

Command and control economies, like socialist and communist, are forms of bureaucracies. If we look at the historical examples, of governments that have been socialistic or communistic, we see that this paradigm holds true. Those at the top get the goods while the people get the orders.

Complex systems are distributive in their structure. Decisions are made at the lowest level possible by the people who have the most information regarding them. This distributed decision making structure of the complex system, is the fundamental reason complex systems are so much more efficient… than bureaucratic ones. As the decisions themselves, are made by those most able to amass the necessary information to make them, in the most efficient way possible, the benefits are also distributed to the people… not the bureaucrat. Another reason complex systems are more efficient is that they build in competition. Competition forces efficiency, because those that are less efficient, are surpassed by those who are more efficient. This makes the limited money available more wisely spent and thus achieves the most bang for the buck.

Demand side economics is a form of bureaucratic decision making process, while supply side economics is a form of complex system. Demand side, as expressed by John Maynard Keynes, empowers the bureaucrat to take money from the earners and spend it to drive up demand. Supply side encourages those people who earn money to make their own decisions what to do with it. The one presupposes the individual will make the most of their own money while the other presupposes the government will make the most of someone else’s money.

The upshot is that demand side’s inefficiency’s create incentives to corruption, huge government deficits, general poverty and outright oppression, the other, supply side, leads to economic growth, personal freedom and general prosperity. But demand side has one thing going for it, it empowers those in charge, to misspend money earned by others, to massage their egos, enhance economic outcomes for the rulers and create a perpetual ruling class. As Thrasymachus said, most people just want to be left alone but those great men want power…

So I ask, is it more important that “great” men have power, or that there be general prosperity?


John Pepin

Obama’s Spurious Logic

Sunday, June 17th, 2012

Dear Friends,

It seems to me that when Obama and the minions in his administration and the unbiased press, claim that Romney will return us to the failed policies that got us into the “great recession,” he is engaging in the most pernicious form of sophistry. What the World needs today is less spurious logic and more thoughtful action. When Obama engages in sophistry he essentially admits his ignorance of economics or he is maliciously trying to avoid blame for his own failed policies. This has profound negative consequences for us, our children, and the people of the World.

Obama seems to have the notion that it is growth in government that creates growth in the economy. This is ignorance writ large. Growth of government does nothing to grow the economy of any country or nation. Government growth necessarially lowers economic outcomes. Every dollar that government takes from the private sector is misspent, due to the fact that no one is as careful spending the money of others, as they are spending their own. Therefore, government spending is less efficient than money spent, by those that worked to earn it.

His spurious logic bypasses the fact that the housing implosion was a result of government’s meddling in the free market by a democrat controlled congress. The democrats in congress claimed that certain neighborhoods were being red lined. This was rectified by congress, during the Clinton administration, by forcing banks, credit unions and other lending institutions, to lend money to people who were not good for the loans! This meddling in the free market led to an explosion of people buying houses that they couldn’t afford. As long as the price of housing went up the bubble got bigger. But, as we all know, (except Obama), bubbles must eventually pop. When it did, the collapse of so many loans resulted in what Obama’s “great recession.” Like FDR’s great depression.

It ignores the fact that it was supply side economics that brought us out of Carter’s stagflation. Ron Reagan instituted Hayak’s supply side economics and the results speak for themselves. The American economy was in far worse shape when Reagan took office. Reagan instituted regulation reform and lowered taxes. He made it easier to start a business. This led to a huge jump in growth of the US GDP. His policies made more people rich and savaged the ranks of the poor raising many into the middle class. This was a bad thing to Obama and his ilk because it is the poor who are their main political supporters. It is in their interests to have a large and growing impoverished class.

When Obama claims that republicans only want to give the rich tax breaks he doubles down on his spurious logic. This is patently sophist because, supply side gives tax breaks to those who are trying to get rich, not those who are rich. The already rich are the primary beneficiaries of Obama’s policies. Those that are trying to get rich are the very people who create jobs! The already rich have a negligible effect on the job market because they have their money in trusts. They had their wealth given to them by their parents, who engaged in the market system and got rich by it. Their children, the already rich, want to close the door to people who seek to join their ranks. This is the embodiment of Joesph Schumpeter’s theory.

When our politicians engage in spurious logic, to hide their own shortcomings, the American people are poorly served. The results of growing government, are visible for all to see, in Europe. The fast approaching economic collapse of the European welfare state model, will create a whole new level of poverty in Europe. A level of want and need that Europe has not seen since Charles Dickens wrote his books about poverty. Obama will visit this future on the American people by his policies. As a result, we will not be in a position to help the people of Europe, climb out of the economic catastrophe their politicians have given them and their children. We as people of the World have to open our eyes and think for ourselves. We must look through this sophistry. If we don’t, our children and their children, will inherit poverty, want and war, as our legacy. Is that what we want or are we willing to call evil evil and sophistry sophistry? The decision is ours to make, but we had better hurry, time is running out.


John Pepin

Limiting Supply Makes Prices High

Monday, June 4th, 2012

Dear Friends,

It seems to me, when government limits supply, prices are always high. This axiom holds true, no matter what country’s government does it, or what form of government it is. In the dynamic world of economics, supply reacts and is interdependent with, demand. Both sides of the demand vs supply graph effect prices. This is basic economics yet our leaders act and argue like this fact is irrelevant. When they do… they do so at our risk.

The supply demand graph is a well known theory in economics. It explains how prices are set in an economy. One line on the graph is the supply line, the other is the demand line. They chart the amount of supply of a good or service at various price levels against the relative demand for that good or service at those same price levels. Where they intersect is the equilibrium price. As demand goes up prices necessarially rise, giving producers an incentive to raise supply, to make more profit. As the producers raise supply, the price intersection on the graph comes back down, back to the equilibrium price.

When government, through regulation, taxation or political favoritism, limits the ability of the producers to raise supply in the face of a demand increase, the supply line moves and the equilibrium price is raised. The more supply is constrained the higher prices will climb. This not only effects prices but more importantly… jobs as well.

When a government constrains the ability of it’s markets to react to a rise or drop in demand, the producers of that product or service, have incentive to move to another country, that doesn’t put the constraint on the ability of the market to meet demand. This siphons jobs from the country that limits it’s markets and sends them to other countries that do not. This is why Singapore is so wealthy.

Milton Friedman said, When a firm faces competition from a better competitor, there are two possible actions it can take, the first is to go to government to get anti competitive regulation passed, the other is to adapt. Of the two, the first is the easiest most taken path, and leads to general poverty, the second leads to a vibrant economy. Anti competitive regulation is a form of constraint on the market’s ability to flex with market demands. Another example is, unrealistic or poorly planned environmental regulation. If environmental regulation gets too expensive then firms have incentive to move their operation to other more lax countries. This doesn’t help the environment, (the product good or service is still produced but with no standardization leading to a worse environment), but does create tensions in the market.

Energy is an example of an industry that has been constrained in it’s ability to meet market demands. The American government has an obvious anti energy bent, in it’s regulation, rhetoric and actions. From the Keystone pipeline through the moratorium on offshore drilling to the crippling anti coal regulations, the US government led by Mr Obama, has openly stated it’s intention to make energy more expensive. The huge amount of natural gas that has been discovered in the continental US, despite the government, has caused a plummet in the price of gas based energy. Supply has outstripped demand. Today we see States and the Federal government seeking to put an and to this cheap energy, by placing moratoriums on hydro fracturing, the means to access the inexpensive gas.

Energy is by no means the only example, food production has been intentionally lowered under the FDR administration, lumber prices were raised when the government outlawed logging in Washington and Oregon, to protect the Spotted Owl, (which, as it turns out, wasn’t being effected by logging at all, but by the encroachment of the native Barred Owls)., the list goes on in every country and throughout history. When government engages in this type of action we are poorly served. Not only in our pocketbooks, from the higher prices, but in our job prospects as well.

The price of labor is also set by the demand vs supply of jobs. So when government limits supply prices are high and wages are low because jobs are few.


John Pepin

Incentives Count

Thursday, May 10th, 2012

Dear Friends,

It seems to me that, in every human endeavor, incentives count, but no place more than in the field of economics. Government sets the incentives both obviously and not so obviously. Society and culture also create incentives and disincentives. Incentives are far more important than animal spirits or demand to an economy’s well being. The set of incentives that government creates by it’s actions, laws, regulation, taxation and rhetoric, can devastate an economy, or create the environment for rapid economic expansion. If a person wants to understand why a given economy is faltering or succeeding they need only look at the incentives that government has in place. Your family’s economic well being are subject to this natural law.

The most obvious is the societal attitude to wealth creation. In a society that holds wealth to be a bad thing, there will be few wealthy people, and they will almost certainly be the people who run the government. Under this type of incentives the government will usually be some form of autocracy or plutocracy. Monarchy and aristocracy are most often cited but tyranny and oligarchy are never far away under this set of societal attitudes. The Dark Age in Europe is an example of this societal attitude to wealth creation, with the Renaissance being the watershed moment, that changed the mind set of the people… to embracing wealth creation.

Every parent knows that you punish that which you want less of and reward that which you want more of. Only an idiot would knowingly reward acting out, stealing, lying or any of the other bad behaviors we civilize out of our children. We know this as parents, but amazingly some of us seem to forget this, when it comes to the economy. When government takes the position of a bad parent the economy suffers and the people suffer.

Taxation is most often thought of when talking about the incentives that effect an economy. Taxing something creates negative incentives to that action. Look at the great lengths, companies and individuals go to, to avoid taxes. They invest their money foolishly to get some tax write off. Look at GE in the last few years. They have paid no income tax because they play ball with the government. They buy the electric cars that don’t work, they invest in “green” technologies that cost more, to produce less, etc… This will eventually put GE at a disadvantage to their competitors in the future but today it makes them seem more profitable. Taxing income is an obvious form of discouragement to wealth creation.

When government places more and more regulation on an industry it creates bars to new companies entering that industry. Older more established firms have a regulatory step up, in that they have grown their business around the existing regulation, and can better cope with new regulation as a result. New firms have to research the laws and regulations and have less interaction with the regulators of that industry. Regulatory capture also creates a bar to entry for new firms, because older firms have built a rapport with their regulators, who may not like seeing there “friends” being out competed, so they may look more closely at the actions and business model of a new entry into the market. This is highly pernicious due to it’s undermining the very nature of a competitive marketplace and smothers new ideas. The very definition of Schumpeter’s law.

No matter how much demand there is for a product or service, regulation, taxation, attitudinal incentives and cultural moors have the ability, alone or as a group, to destroy any industry. Incentives can make an economy vibrant or stagnant. When government punishes wealth creation, no matter how, wealth creation slows and can be brought to a complete stop. When this happens we see economic stagnation and depressions. If you think about it a moment, the level of economic activity, as measured by the creation of firms, and how close to perfect competition there is in a country’s economy, is a metric of the incentives to wealth creation and vibrancy, of markets in that country. When we apply this measure to the American economy, since Obama took the Presidency, we see that the incentives his administration have set up… are uniformly negative to wealth creation. We can clearly see that the rhetoric of class warfare is a form of attitudinal negative incentive to wealth creation as well. Under this set of incentives we can expect a continuing lowering of the material standard of living in the USA, and since America is still the engine of the World’s economy, the material standard of living of the people of the World will also suffer.

Even if this concept is completely lost on the Obama administration it is obvious to the American citizenry. Perhaps that is why the Tea Party is ascendant today. They understand incentives…


John Pepin

True Economic Stimulus

Thursday, January 12th, 2012

Dear Friends,

It seems to me, one of the only ways government spends money that is useful to the economy, is in a space program. The technology development from such endeavors is alone sufficient, add to that, the potential opening of the vast resources, that space offers, the potential for human growth and economic advancement are phenomenal. An effective program would amount to a supply side economic stimulus program. Therefore it would necessarily create jobs. With the caveat that the government must allow the developed technologies to filter into the private sector. More jobs and better paying jobs, are what such a program offers to the nation, willing to take on the risk and reap the rewards…

The secret is smart infrastructure growth. Had the US spent the money it has, more intelligently, the human race would be on Mars now. To the World’s benefit. Lets do a thought experiment, lets say, the next few steps in a potential space program. Each step costing no more than an aircraft carrier.

The first step should in some way leverage existing space infrastructure like the International Space Station (ISS). This would be utilized as a construction platform at first. We would build reusable transfer vehicles, that would go to lunar orbit (HLO) from low Earth orbit (LEO) and back. We could call them HILOs. These vehicles would be fueled by water, lugged up as cheaply as possible, turned into hydrogen and oxygen, by electricity created with solar panels in orbit. After the new infrastructure is operational the ISS would be a way station in low Earth orbit. Next to it would be the space fuel station.

This space fuel station would be specified, with standard features required, and then posted for the market system to produce. Perhaps it would be even better for Nasa to put out a contract(s) for hydrogen and oxygen delivered to LEO. Then let the market sort out how it can be done most effectively.

Along with the development of the HILO space craft, there would be concurrent development of a reusable HLO to lunar surface, and back, landing craft. The Lander could be carried back to Earth orbit for fueling and back on the HILO, or, if it is more efficient, it could be left in high Lunar Orbit and fueled there.

The base would have to be in a commercially viable location, like the rim of a crater, on the Moon’s south pole. There has been proven to be water in the form of ice there. Providing a potential fuel source that is not subject to Earth’s gravity well. There is constant access to sunlight in some locations, facilitating solar arrays to power such a settlement. The location would also lend itself to astronomy.

The lunar base would be the construction facility for the next step… Building a reusable space ship capable of, safely getting people and equipment from Earth to Mars and or Venus and back. We could call it ERMA. The first trip would land people on Demos and or Phobos using the tried and tested reusable Lander. Samples could be taken regarding commercially valuable minerals.

If the trip were successful, the next step would be to develop a Mars Lander/ ascent craft, that would get people to the surface and back to orbit, on the second trip. This in itself is a giant technical feat, that would yield up gems of technology, for the economy and personal comfort. Once people have landed on Mars, studies should be undertaken into the feasibility of terraforming Mars, and the viability of colonization and commercialization.

Some of the economic effects would include… Demand for technicians and skilled labor in developed countries would denude the workforce. This would compel companies, to look to undeveloped countries, for labor and engineers. The lot of the World’s people would be greatly enhanced from the demand for all sorts of people. All we have to do is avoid a war, and get rid of a nuclear program or two to fund it, the World’s people could live safer, better and happier lives. With the security that humanity could avoid a catastrophic event such as a meteor strike.

If we actually had a Leader in the World then this could be a possibility. Unfortunately, our “leaders” have always liked war… far better than they like actual progress in the lot of Man.


John Pepin

Supply Side / Demand Side Economic Theory.

Sunday, October 16th, 2011

Dear Friends,

It seems to me that there is great confusion about what supply side economics and demand side economics mean. I will try to explain the difference in this blog, why our understanding the difference is important, and how it pertains to the economic times we find ourselves in. Everyone who is involved with the economy of any country should take heed and understand the difference.

The media are full of possible solutions to the lack of jobs and growth in the American economy. They opine how, if only this or that program would just get the US citizen to spend a bit more, then the job situation would get better and the unemployment rate would drop. This is all sophistry, because it is based on demand side economics, an economic model that empowers the Elite but does little to create jobs. Demand side was talked about in the nineteenth century but it was John Maynard Keynes who quantified it.

Demand side is best described in the context of the aggregate demand/aggregate supply model. In this model, if aggregate demand drops below aggregate supply, then the economy dips into recession. But, as long as demand is “kept” higher than supply, the economy grows. This model suggests that if demand is kept high then the economy will grow and jobs will be added.

Supply side is best described with the Schumpeterian model of entrepreneurial based model of economic cycles of expansion and contraction. In this model, the growth cycle is started, when a new entrepreneur invents a new product, process or industry. This starts a cascade of events, new firms must be created to service the entrepreneurs’ new idea, economic efficiency improves, new workers must be trained, and old inefficient firms are destroyed. Initially the economic growth generated is fast but as the entrepreneurs’ idea matures the process slows until it stalls, and the destruction of old inefficient industries cause a recession. The lowered cost of doing business, (due to the recession), enables a new entrepreneur to bring his or her new idea into the marketplace. The process starts anew.

In demand side economic theory, as demand is increased, jobs are not necessarily created. This is due to the fact that there is always some slack in any supply chain. If there was not prices would be high. As demand goes up, firms can ramp up production without hiring new labor, but by adding overtime. If the firm believes that the new increase in demand is a short term phenomenon, due to short term government stimulus, they will shop out excess demand to firms that still have slack.

Supply side is a form of Say’s Law. An example Say’s Law would be, we know as a self evident fact, that there is a demand for a robot, call it Rosy, that is capable of performing all the tasks that a live in maid could, for $4.55 a day in electricity costs, the only holdup is the lack of supply of such a robot. That is the essence of Say’s Law; supply drives demand.

In the supply side model jobs are necessarily created when new firms are created. These new jobs are generally better paid and have better working conditions then the ones that are destroyed. In this way, the employment conditions of the working man and woman have improved, throughout the time capitalism has been in use in the Western World.

Demand side is usually implemented by government deficit spending, ala Keynesian economic theory, (but even Keynes, on his most progressive day, never believed, or propounded, that governments run perpetual deficits). The spending is seen as a way to artificially prop up demand, temporarily, so economic demand can catch up with supply. As we saw with FDR’s deficit spending and with Obama’s deficit spending, it doesn’t lead to more jobs, it leads to fewer jobs, as firms lay off in anticipation of the inevitable ending of the temporary stimulus.

Supply side is implemented by helping people start businesses. Lowering the costs of starting businesses is one of the primary ways recession leads to a fast increase in economic output. As the cost of commercial/industrial real estate become cheaper the entrepreneur has increased access to the means of fulfilling his or her ideas. Government can lower regulation opening new possible business models to the entrepreneur. The fundamental point to make about supply side is that… jobs are NESSESARILLY CREATED, when this model is implemented.

Demand side empowers government to enact oligarchal legislation and practices, (crony capitalism). The Elite are empowered to engage their rapine. Passing laws that redistribute the goods of society, ostensibly to prop up demand, but are nothing but the distribution of the goods of society through political favor. That is what redistribution is; the distribution of the goods of society-through political favor. Does anyone actually think that political favor is the most human hearted or equitable means of distribution? Honestly?

The Schumpeterian model sets up a tension in society however. With this model there is an animosity set up between the now wealthy and the soon to be wealthy. The old money seeks to stop the new money from competing with their established firms. The old money, or the present Elite, don’t want to be supplanted by people who are more virtuous. The workers in the old industries also resent the entrepreneur. They missed out on the new jobs even while there jobs are “creatively destroyed“. So the laid off worker is also part of a voting bloc, that thinks it is in their best interests, (egoists), to use the demand model and eschew the Schumpeterian model. Class warfare is simply a means to inculcate the people to demand side ideology against our own best interests.

The difference is stark and the results are even more dramatic. We have shown the supply side model necessarily creates jobs while the demand side enhances the Elite’s power. Now that you know the difference it is your responsibility to propagate the truth. To your friends, your associates and your peers. Jobs will be created and the economy improved but the Elite may loose some power over us… Oh well at least people will have work.