Economic Analysis Guide

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For a comparison of Republicans and Democrats economically, see Economic Comparison

The following is a straightforward guide to analyzing economies, not just domestically but internationally. Several solutions are proposed for improving the validity of measures such as real GDP, median household income, and imports/exports.

Understanding Inflation and Currency

See also Great Recession

What is Currency?

Currency does not necessarily have any inherent value. The U.S. no longer maintains a gold standard, and hasn't since 1971-73.[1] But even if the U.S. was still on the gold standard, gold does not have all that much inherent value either (as a practical matter it is useful for conductive electronic purposes, but is certainly not as valuable as rare earths-which China largely controls[2]). Paper bills and metal coins essentially just represent an I.O.U. from the issuing government, and only maintain as much value as lenders consider them to have.

Thus if an international credit agency downgrades the U.S. credit rating, losing faith in the U.S. economy and the ability of the U.S. government to repay its debts, governments may refuse to lend to the U.S., banks and businesses may require more U.S. currency to make purchases (both domestically and internationally), and the U.S. will have to pay ever more money in interest to attract investors. Utility companies may refuse to work for the U.S. government. At some point the U.S. dollar may become worthless to the extent that businesses require payment in other currencies or through barter of commodities they consider valuable (e.g. homes, cars, weapons, electric generators, livestock, etc.)

In effect, currency only has the value that lenders consider it to have. Governments to an extent can print more money but then the value of that money declines per supply and demand. Currency essentially represents a government's/economy's international and domestic reputation. If it becomes bankrupt and fails to pay off its debts, or suffers widespread business collapse, either through businesses going overseas or going out of business, then its currency will become worthless (see Venezuela e.g.[3]).

Treasury and Federal Reserve, Currency Printing

Inflation, or an increase in cost of goods and services, can result from changes in the value of a currency. When government increases the minimum wage, this artificially changes the value of currency, and the result is inflation. Since workers nationwide get paid more the cost of everything increases (gas station workers make more so the cost of gas increases, grocery store workers get paid more so the cost of groceries increases, etc.). This increased demand for currency forces the U.S. Treasury to print more dollar bills. Per the law of supply and demand, with more currency in circulation the value of that currency declines, so that it costs more dollar bills to buy the same products. This is why so much inflation has occurred over the past century, because so many minimum wage hikes have occurred.

Problems with Inflation

The primary problem with inflation and the minimum wage hikes that cause inflation is the resulting instability. Suppose you were a small business which had $100/hour to hire 10 workers at $10/hour. Now the minimum wage is hiked to $15/hour, and you can only afford to hire 6 employees. Unfortunately, you need to hire 8 employees at a bare minimum to make your business run. Now you have to go out of business as the result of the minimum wage hike.

Now eventually, inflation would have kicked in and the small business would have made more money. But this does nothing to help the small business in the short-term. Similarly with millions of poor Americans who are on fixed budgets. That rapid increase in costs may be the difference between an elderly person living on a fixed income having a roof over their heads and being out in the streets. By creating massive income inequality, destroying the poorest businesses and people in the short-term, inflation can set economies up to fall like a house of cards.

Such short-term instability immediately following minimum wage hikes is extremely dangerous to economies.

Debt and Deficits

Modern Monetary Theory and Keynesian Economics

Not All Spending is Created Equal

Democrats have always liked the idea of spending irresponsibly per Keynesian Economics, which proposes that governments can and should run huge deficits during economic downturns, and that more government spending will create jobs. In actuality, economics is not so straightforward. Not all government spending is created equal; some creates more jobs per dollar spent, some creates less. Furthermore, government job creation can be less effective than private sector job creation, so simply taxing less money and letting the private sector create jobs with it may be more effective; particularly if the money would have been in the hands of small business owners (which account for 64% of new private-sector job creation[5]). Government-funded small business loans have been extremely effective at creating jobs, unlike the bank bailouts (which resulted in CEOs firing workers and boosting their own pay).[6] More labor-intensive public works programs create more jobs per dollar spent.

As seen from a 2007 report by the University of Massachusetts’ Institute for Policy Studies (Pollin and Garrett-Peltier) the following numbers of jobs and total wages/benefits were created in each government sector per $1 billion of federal spending:

  • Tax Cuts for Personal Consumption: 10, 779 jobs, $504.6 million total wages
  • Defense: 8,555 jobs, $564.5 million total wages
  • Construction/Infrastructure: 12,804 jobs, $693.7 million total wages
  • Health Care: 12,883 jobs, $730.1 million total wages
  • Mass Transit: 19,795 jobs, $880.1 million
  • Education: 17,687 jobs, $1,309.3 million

As Garrett and Peltier conclude,

Democrat Corruption in the Stimulus

This logical corollary to Keynes' economics has thus far escaped Democrats, perhaps intentionally, in the process of their Stimulus bills. Instead they have used Keynesian Economics to justify any and all wasteful spending, much of which of course has benefited liberal special interests, at the expense of American taxpayers and millions of unemployed Americans.

Obama's Stimulus and related Democratic spending was designed to enrich a few corrupt Democrats, not create jobs for working Americans. In the words of the Wall Street Journal, the Stimulus was "a 40-year wish list... that manages to spend money on just about every pent-up Democratic proposal of the last 40 years. We've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons."[8]

Modern Monetary Theory

Democrat radicals like Alexandria Ocasio-Cortez and Elizabeth Warren are increasingly pushing Modern Monetary Theory, which posits that government can spend as much as it wants without any consequence. Since government can print currency, the theory says, it can spend as much as it wants so long as it avoids inflation.[9] This ridiculous theory is of course ignorant of how currency and inflation works.

  1. First of all, inflation will naturally result from the minimum wage hikes that Democrats constantly push to get votes, pretending that they are helping the poor when in actuality by doing so they are harming the poor.
  2. Secondly, "debt" measures your indebtedness to others, and is essentially a risk. A risk that other countries who are lending to you may call in your ever-growing debts; while increasingly placing you in slavery to them. Where do you think the financial backing is coming from? China for example controls $1.17 trillion of U.S. debt, and has bought up Treasury securities. This increasingly puts us in China's power, which can call in their debts if we don't do what they want, and/or refuse to lend us more money.[10] In the same way, those who have lent to us can call in their debts and demand faster payment. The U.S. already spends over $230 billion in the U.S. Budget each year just on debt interest payments.[11] Debt essentially places us in the power of those we are indebted to. For this reason, China is increasingly able to demand that the U.S. and Europe take steps to remain financially solvent, and has.[12]
  3. Thirdly, this debt cycle will only be successful to the extent that external entities continue to allow it. In bankrupt liberal states like Illinois and California for example, the government faces a serious problem finding utility providers who will work for it. With $14.8 billion in unpaid bills, the state of Illinois has seen utility providers shutter, and new providers unwilling to work for it as the result of its unpaid bills.[13] This may result in credit rating downgrades by credit agencies, affecting the ability of the U.S. to borrow money in the future. In 2011 for example, S&P downgraded the U.S. credit rating for the first time in history, and in 2013 a major Chinese credit rating agency downgraded the U.S. credit rating as well.[14]

According to this Democrat narrative, debt-spending is fine and causes no problems. Obviously Democrat states like Illinois and California tell a very different story, as jobs flow from these bankrupt, high-minimum-wage states to fiscally conservative neighboring states. Debt spending is unsustainable and will result in lenders eventually refusing to lend and utilities eventually refusing to work for entities that hand them I.O.U.s. As a short-term Keynesian tactic for getting out of debt and creating revenue it can work in the short-term, but not as a long-term tactic.

Employment

Employment-Population Ratio

The best measure of employment is the employment-population ratio, which measures the percentage of working age persons that are employed.[17]

Problems with the Unemployment Rate

This is preferable over the unemployment rate because the unemployment rate does not measure employment within the entire U.S. working-age population but within the labor force; and the labor force does not include long-term unemployed or those who have given up looking for work (see the labor force participation rate).[19] The unemployment rate can fall just because labor force participation declines if fewer people are looking for work.[20]

Economic Productivity

Adjusting GDP for Inflation, Real GDP

A decent measure of economic productivity is Real GDP (Gross Domestic Product). Gross Domestic Product measures the overall value of goods and services produced in an economy. However, the value of currency changes over time as the result of inflation or deflation (increase or decrease in the value of currency). For that reason, GDP should be adjusted to account for inflation, or you can't reliably compare GDP at different points in time.[22]

Problems with the DOW and S&P 500

Although the Dow and S&P 500 are regularly used as barometers for U.S. economic success, they actually have nothing to do with how the U.S. economy is doing as a whole. Rather, they measure the stock market success of a few big, publicly-traded companies. The Dow Jones Industrial Average measures the success of 30 big companies whereas the S&P 500 measures the success of America's 500 biggest companies. Furthermore, the selection of these companies constantly changes, with poorer-performing ones removed and stronger-performing ones added. For example, in June 2018 General Electric, the last remaining original member of the Dow Jones Industrial Average when the Dow was created in 1907, was removed and replaced with Walgreens.[23]

First of all, the Dow and S&P 500 measure stock market success specifically, which simply reflects how confident investors are. They do not actually measure economic output (like GDP does).

Secondly, they only measure the success of a few big publicly-traded companies. Since small businesses make up over 60% of U.S. employment, this does not accurately reflect how the U.S. economy as a whole is doing. Furthermore, the success of big companies can come at the expense of both small businesses and American workers, by outsourcing jobs overseas or using predatory pricing to destroy small local businesses and competition. In other words, big business can (and does) do well by actively destroying U.S. jobs and the U.S. economy. This is why, even though the Dow and S&P 500 were breaking records in 2013, worker pay stagnated. Big business did well but this did not translate to an increase in worker pay because the reason big business did well was by shortchanging workers.[25]

CRSP U.S. Total Market Index

If one is looking to measure U.S. stock market success as a whole, or in other words how confident investors are, a better measure is the CRSP U.S. Total Market Index, which comprehensively measures virtually all stocks, not just those of big business.

Trade

Imports and Exports

Purchasing Power Parity and International Dollars

Trade is measured in terms of imports and exports which are, at a basic level, how much a given country buys and sells respectively. Nonetheless, to compare them across multiple countries and their currencies, they must be objectively quantified, which is where puchasing power parity (PPP) and international dollars come in. Purchasing power parity essentially compares currencies by how much it costs to buy equivalent goods or services in different countries (e.g. a hamburger in New York dollars as opposed to London pounds).[27]

International dollars provide a standard by which to compare different countries, on issues such as minimum wages, for example.

Weighting Problems

Average hourly compensation costs of manufacturing employees, selected economies and regions, 2002-2009. Source: U.S. Bureau of Labor Statistics, International Labor Comparisons.

A major problem with imports and exports is that they do not actually reflect the VOLUME of product being purchased or sold. They really ought to be weighted by minimum wage, but are not. For example, Chinese manufacturing workers are paid roughly 1/10th to 1/20th of what U.S. manufacturing workers are paid. A 2013 report by the U.S. Bureau of Labor Statistics showed that the average hourly compensation costs of manufacturing workers in China was $1.74.[29] By comparison, 2011 hourly manufacturing costs for U.S. employees were calculated at $35.53.[30]

In 2018, the U.S. imported $539.5 billion from China but exported only $120.3 billion.[32] Thus the U.S. bought 4.5 times as much from China as it sold in terms of price. However, that is not an accurate reflection of how much product volume actually changed hands. Because Chinese workers are paid so much less, even when accounting for the cost of shipping product to and from both countries, the amount of product volume is far greater. One has only to look on store shelves to see just how much more product is made in China than is made in the U.S.

Trade Deficits and a Global Income Disparity

In the case of China-U.S. trade, there is a serious trade deficit. In 2018 alone, the U.S. had a $419 billion trade deficit with China.[32] China, unlike our other major trading partners, refuses to introduce a national minimum wage. By rejecting the use of a minimum wage, China is able to attract foreign business investment. With its vast population, China serves as an endless source of cheap slave labor for foreign investors, cranking out an endless supply of cheap manufactured product, driving down the prices of manufacturing product worldwide with a glut of excess product.

The flow of manufacturing jobs from the U.S. to China has resulted in the U.S. increasingly becoming a service sector economy, because so many of the crucial, high-paying manufacturing jobs have gone overseas. Furthermore, the end result is that companies are able to pay workers less and less as the result of outsourcing, automation, and conversion from full-time to part-time jobs. This is driving a global income disparity and the concentration of wealth in the hands of a few, not just in America but worldwide.

In the meantime, the U.S. and westernized democracies (e.g. France) have been incurring recessions. With fewer and fewer manufacturing jobs (and jobs in general due to automation), the sources of economic revenue for the U.S. are drying up and moving overseas. In the process, China is growing in strength economically whereas westernized democracies like the U.S. are stagnating if not outright declining, as the result of minimum wage impacts on international trade.

Are Deficits Bad?

At a global level, free trade is a good thing, to a degree. Everyone is selling resources and products that others need, allowing them to improve labor efficiency by concentrating on production of goods or services best suited to their regions or specialties (as noted by Adam Smith in 'The Wealth of Nations'). So long as other countries are operating fairly, it's in the best interests of each nation to pursue global free trade.

Trade deficits work the same way a personal or company budget works. Overall, you do not want to buy too much more than you sell, or the economy is basically hemorrhaging its previously built-up wealth and prosperity. The problem with China is that it does not operate fairly with other countries, and this is evident from its refusal to enforce a national minimum wage, its widespread copyright theft from countries like the U.S., its tyrannical censorship, its crackdown on unionization efforts, and its well-chronicled human rights abuses.

In trading with China, the U.S. might as well trade with a pirate thief. China is enriching itself by stealing U.S. military secrets, technology, jobs, and economic revenue. It has achieved this by enriching a few wealthy traitors who have gotten rich by betraying the United States. By conspiring with China to create jobs there, they have personally grown in wealth while destroying jobs and prosperity in the United States. Because the U.S. has increasingly become run by these few wealthy people, they conspire to destroy the United States to benefit China in exchange for their own increased wealth. The end result will be destruction of democracy and capitalism to benefit communism and tyranny, so that a few wealthy, immoral tyrants can live at the expense of everyone else.

In short, trade deficits can be sustained to some degree, but not to the degree seen with China.

Income

Median Household Income

Drawbacks, Appropriate Weighting

Median household income is a widely accepted and uncontroversial statistic for gauging how households in the United States are doing. Nonetheless it also has its drawbacks. Because is is typically measured by household, it is subject to variance over time just based on how household size changes. As the conventional nuclear family has broken down, largely due to the adoption of no-fault divorce in the 1960's, household size has drastically declined over time.[33]

As such, median household income really ought to be weighted, not only by inflation, but also by number of working-age adults in the household for a given year, but to my knowledge no such weighting is actually done. Barring such weighting, it is impossible to perform a truly accurate historical analysis of median income.

Basis for Median Instead of Mean

So why is household income measured by median, first of all, as opposed to mean/average? This is because income is heavily concentrated in the hands of a few households. The top 1% controls over 40% of U.S. wealth, more than the bottom 90% combined.[34]

As such, if you have a few people with ridiculous amounts of income (tens of billions of dollars) and everyone else with very little (tens of thousands) any average will not accurately represent how much money the typical American household has. Therefore, median is used, or ranking all households in terms of wealth and taking the middle value in that range.

Minimum Wages

See also Minimum Wage

Harming the Poor

Minimum wage hikes do not actually cause the poor to get a greater share of wealth, they simply change the value of currency. This can be easily shown by just two facts:

  1. The minimum wage more than doubled from 1983 to 2009, from $3.35 an hour to $7.25 an hour. The minimum wage has increased substantially over the last century, from $0.25 an hour in 1938 to $1.25 in 1963, $1.60 in 1968, $2.30 in 1976, $3.35 in 1981, $4.25 in 1991, $5.15 in 1997, and $7.25 in 2009.[35]
  2. The rich got richer during that time period and the poor got poorer. According to a report by the Economic Policy Institute evaluating the share of total wealth gain during that time, the richest 5% of Americans received 81.7% of all wealth gain from 1983-2009, while the poorest 60% of Americans actually got poorer and lost 7.5% of the wealth they had.[36]

If raising the minimum wage helped the poor, why have the poor gotten so much poorer at the same time that we doubled the minimum wage? Clearly raising the minimum wage is not the solution, but Democrats hypocritically use it to disingenuously gain votes by pretending to care about the poor.

Correlation with Recessions

Minimum wage hikes detrimentally impact economies and have repeatedly led to recessions:[37]

  • The 2007 minimum wage hike from $5.15 to $7.25/hour was quickly followed by the Great Recession. Jeb Hensarling even warned Democrats on the House floor in January 2007 that they were about to cause a recession with passage of the Fair Minimum Wage Hike (Democrats ran Congress from 2007-10).[38]
  • The 1997 minimum wage hike from $4.25 to $5.15/hour was followed several years later by the Early 2000s Recession.
  • The 1990 minimum wage hike from $3.35 to $4.25/hour coincided with the Early 1990s Recession.
  • The 1978 minimum wage hike from $2.30 to $3.25/hour preceded the Early 1980s Recession.
  • The 1967 minimum wage hike from $1.25 to $1.60/hour immediately preceded the Recession of 1969-70.

Doesn't Guarantee a Higher Percentage of Wealth for the Poor

What many people don't realize is that raising the minimum wage does not mean a higher percentage of wealth will go to workers, because employers can simply increase their own pay as well. When the minimum wage is increased, the result is inflation, or increasing cost of goods and services. Grocery store workers get paid more per hour so the cost of groceries goes up. Gas station workers get paid more so the cost of gas goes up. And CEOs of course pay themselves more to compensate. As a result, the Treasury prints more currency, more dollar bills, to meet the increased demand. Supply and demand. If there's more currency in circulation, the value of that currency will decline, with more dollar bills being printed they will be worth less. Thus the poor do not get more money, the value of money simply changes.

If Democrats really cared about the poor, they would seek to stop runaway CEO pay from historical norms with caps on executive pay at publicly traded companies in relation to company earnings, such as those I've proposed.

Destruction of Small Businesses

The main reason that people are poor is from not working or not working enough. The major expense for your typical company is payroll, so when the minimum wage is raised, what do you think a company will do to increase profits and reward shareholders? They will send jobs to states and countries with lower minimum wages, replace workers with machines, or convert full-time jobs to part-time ones. And that's if it's a big company which can afford to do those things. If it's a small business, which has for example only $100/hour to hire 10 workers at $10/hour each, if the minimum wage goes up to $15 an hour, now they can only hire 6 workers, not enough to run their business, in which case they go out of business.

Creation of a Global Income Disparity

Given a global free trade environment, companies are not just encouraged to send jobs where labor is cheapest, they are required to do so. If a company does not send jobs to low minimum wage countries like China to increase profits and keep their companies competitive then they run the risk their competitors will. In the process their company will go bankrupt. Their shareholders/investors will lose money. Their employees will lose their jobs. The global free trade environment forces companies to constantly seek newer ways to pay employees less to keep their companies competitive, whether by outsourcing (sending jobs overseas where labor is cheaper), automation (replacing workers with machines), hiring illegal immigrants, or converting full-time jobs to part-time to pay less on overtime and benefits.

The result is that Communist dictatorships like China and Venezuela profited for decades by using low minimum wages to attract foreign investment. China refuses to create a national minimum wage and uses censorship and oppression to stamp out public calls for higher wages, all so that it will reap global investment. Thus China has grown in wealth and power even as western democracies such as the U.S. and European countries have grown weaker, incurring recessions-China is essentially stealing U.S. jobs and money, parasiting off of us through use of a low minimum wage.

Furthermore, all of this creates a race to the bottom in terms of worker wages. Globally workers get less and less money, and a few elite CEOs of top companies make ever more money. The S&P 500 measures the success of the top 500 companies, whereas the DOW Jones Industrial Average measures the success of just 30 top companies. These megacorps have been breaking record after record for decades, even as worker pay has stagnated, precisely because they do so through by destroying small businesses and reducing worker pay to increase company profits and CEO pay. To summarize, at a global level the rich get richer and the poor get poorer.

The only way for this vicious cycle to end is for Congress to step in to address outsourcing and stop trade with China and perhaps other low minimum wage countries as well. Automation can be confronted by providing tax breaks to companies who hire more U.S. workers in relation to company earnings. These and other solutions I have proposed as a way to increase hiring and really help the poor, with real solutions, not fake ones.

Income Inequality

GINI Index

The GINI Index is overwhelmingly used for evaluating the prevalence of inequality in a given area. Per the CIA World Factbook, the "Gini index measures the degree of inequality in the distribution of family income in a country. The more nearly equal a country's income distribution, the lower its Gini index."[40]

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