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Tag Archives: Economy

The Economic Literacy Of The GOP Presidential Primary Candidates

As mentioned previously (It’s Just A Systems Thing: An Engineering Thinking Review Of Government As A System), there are compelling scientific reasons to minimize the size and functions of the federal government. Which of the GOP presidential primary candidates best seem to appreciate this?

(Quotes paraphrased):

Newt Gingrich: “I’m a really fascinating and smart and brilliant guy.” Newt thinks he can dream up unique ways to make the federal government run better.

Mitt Romney: “I’m a really fantastic business manager.” Mitt thinks he can manage the federal government better.

Rick Santorum: “I know how to work with Congress to get things done.” Rick thinks he can get congressional representatives to work together to better run the federal government.

Jon Huntsman: ” — おれや分からないスよ.” (Jon likes to speak Mandarin; not sure what he thinks about the economic role of the federal government.)

Rick Perry: “My goal is to make the federal government as inconsequential in your lives as I possibly can.” Rick wants to shrink the size and power of the federal government.

Ron Paul: “The federal government is out of control and we must cut its budget by a trillion dollars.” Ron wants to shrink the size and power of the federal government.

There are many issues to consider when electing a president, but if the economy were the only one, then Rick Perry and Ron Paul are the only candidates who have clearly expressed an understanding of the inherent limitations of government. The other candidates, typical of those with over-sized egos and/or a lack of understanding of basic economics, suffer from the delusion that — if only they were in charge — the federal government would finally be able to do grand things.

-Ed Walker

 

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More Thoughts On Forcing The Rich To Pay “Their Fair Share”

As mentioned previously, the quality of our decisions is largely dependent upon their underlying assumptions (see “Why Can’t We All Just Get Along“). If our assumptions are wrong, then any subsequent analysis will very likely be incorrect. This post examines assumptions about wealth, and suggests how popular notions based on incorrect assumptions can yield grossly incorrect conclusions.

A lot of folks today (based on sensational news reporting of the Occupy Wall Street “movement”) seem to think that it is morally wrong and unjust for some of our fellow citizens to have more income (or more wealth) than we average folks do. So let’s apply some engineering thinking and see just how upset we should be at the rich, and whether or not we should make them our slaves. You can do your own analysis, but here are some things for the Wall Street Occupiers to consider:

1. Do you understand the difference between income and wealth? Income is the flow of money to an individual based on their work (or from investments, which flow from prior work effort, or perhaps due to inheritance or luck). Income does not stay resident in a rich person’s home (assuming they don’t burn their money or stuff it under a mattress), it largely flows through them to other folks who provide goods and services. This is why average folks like to be located near wealthier folks; so they can be closer to the flow of money.

Income, if not squandered, can also accumulate through savings and investment in wealth (real estate, money in the bank, autos, jewelry, etc.). Wealth can also be inherited, or obtained by luck (Wow! I won the lottery!), but wealth is much more likely to be obtained by many years of sacrifice and hard work.

Okay, so if you want life to be “fair,” what would be a fair way of taking the extra wealth or income from those folks who have more than you or me? How do you account for the effort and risks they have applied to their lives? What if they were just lucky? (If you won the lottery, would you like the government to redistribute it to everyone else who was not as lucky as you?) If you have a student loan, should wealthy folks who paid for their loans also pay for yours?

2. Do you understand that rich and poor people, for the majority of cases, are not stuck in those positions? Rich people frequently lose their wealth through bad business decisions or bad luck, while poor people frequently obtain great wealth due to hard work or luck. The important point is that “rich” and “poor” are typically not static; they change dramatically with time. Someone rich (or poor ) today is often poor (or rich) tomorrow. So how do you define “rich”? Is it someone who today has more than you or me, or should we take into consideration how long they’ve had their wealth? After all, we should be careful to be completely fair before we make someone our slave.

3. With regard to forcibly taking money from the rich to give to ourselves (via the federal government), how do we justify this? As described previously (“Why PIzzanomics Is Immoral“), government services are no different than any other service. But if we decide that rich people should pay more than you and me, then why shouldn’t they always pay more? When a wealthy person hires a plumber, shouldn’t they pay two or three or more times as much for having their leak fixed? But if so, who should determine the added amount, and how much should it be?

The decision to make someone our slave should be carefully considered, because — at least for now — they aren’t completely our slave, because they can leave. And (although the government doesn’t publicize it) this is happening: millions of Americans are leaving, fed up with being slaves, and they’re taking their money, talent, and job-creating abilities with them.

So who do we get to make our slaves, once they have all gone?

-Ed Walker

 

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The Government’s Policies And Our Economic Crisis

Engineers review past evidence and build from there; they try not to reinvent the wheel. As mentioned previously, there is ample historical evidence that indicates recessions/depressions — although they can be severe — typically last no longer than about a year, provided the government does not implement anti-business legislation and regulations.

Image: Dali’s “The Average Bureaucrat”

This last statement above is considered by some to be controversial, but to the best of my knowledge it really isn’t: the data are there for everyone to review. The doubters point to the Great Depression (the last one, not this one) and claim that President Roosevelt helped guide the country through the extraordinarily long 10-year downturn. The evidence, however, says that President Roosevelt’s “New Deal” was actually the villain in the story, because his anti-business policies helped extend what would have been a typical downturn of a year or so into ten long years of economic agony.

For an example of this thesis, see “FDR’s policies prolonged Depression by 7 years, UCLA economists calculate,” by Meg Sullivan, 10 Aug 2004. Excerpt: “The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

So what’s the prognosis? Based on the historical record — and also on analysis that strongly indicates that governmental attempts to manage the economy are destined to be highly ineffective or even counterproductive — we can expect a lousy economy (high unemployment, sluggish or no growth, an erratic stock market) until the Obama administration reverses its anti-business policies, or until we have a new pro-business administration in 2012, whichever comes first.

The good news is that, once new policies are in place, the economy can recover quickly. If we persist with the present policies, however, be prepared for many more years of economic turmoil.

-Ed Walker

 

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A Practical Alternative to Government Regulations

An Engineering Thinking Solution For Protecting The Public

Let’s challenge the assumption that we need the government to protect us, by regulating commerce at all levels.

Why Regulations Are Not Effective (proof by counterexamples):

a. The Food & Drug Administration is supposed to protect us from tainted foods and harmful drugs. It does neither, by its own admission (“FDA Science and Mission at Risk“).

b. The Security and Exchange Commission is supposed to protect us from financial crooks. It doesn’t (remember Bernie Madoff?).

c. Restaurant inspections are supposed to protect us from food poisoning. They don’t (you’ve seen the newspaper reports of folks getting ill at restaurants, all of which are regularly inspected).

Here’s the basic underlying reason why regulations are ineffective: Although the government is never shy about dipping into the pockets of the taxpayer, there will never be enough money to pay for enough inspectors to inspect businesses often enough to eliminate the problems that the inspectors are supposed to find and stop. Why? Because there is no financial incentive built into this open-ended regulatory system. Regulators are not able to make a profit at regulating, unless they are corrupt and take bribes. Unfortunately, such corruption is not uncommon.

A second reason is that the public says, “Yeah, but we have to at least try to stop the problems or they would get completely out of hand. So even though regulations are not completely effective, we’re still better off having the regulations.” This reasoning, however, will not stand up to analysis.

One, it assumes that other factors, such as loss of business and potential lawsuits, are not significant. To the contrary, these free market incentives are very powerful motives for keeping businesses honest, even in the absence of regulations. In fact, for the great majority of honest and competent businesses, government regulations amount to a useless added burden that drives up costs. And these costs are ultimately paid by you, the consumer.

Second, it assumes that there is no better alternative. To answer this, Engineering Thinking offers the following plan:

The ET Plan For Eliminating Costly Regulations

Replace them with the following single requirement:

Each business shall be required to prominently post an easily readable  certificate at the entry to their place of business (or on their web portal, or on their products, etc.)

-A red certificate if they have no liability insurance

-A green certificate if they have liability insurance (as certified by the applicable government accounting agency, with the insurance carrier and amount of coverage noted on the certificate).

Failure to post a certificate, or posting a false green certificate, will be punishable by a minimum jail term and fine.

That’s it. You buy products or services from a “red certificate” business, you’re largely on your own. Its prices might be lower because they carry no insurance, but your risk will be higher if you have a problem. If so, you will still be able to sue, but you will have had fair notice that the business will likely not have enough assets to cover any damages.

The red certificate also allows small start-up entrepreneurs such as taxi drivers or hair stylists to get a foot in the door with clients who are willing to accept lower prices at increased risk. Presently, licensing and regulations often amount to a corrupt system where established wealthier businesses, through contributions to public officials who pass restrictive licensing/regulation laws, effectively block competition by making it too expensive for potential competitors to start a business. This limits consumer choice and drives up costs.

On the other hand, you may prefer to buy products or services from a “green” business. The prices might be somewhat higher, but you will have financial recourse if something goes wrong. Plus, you will be assured of obtaining safer products or services. Why? Because insurance companies do not like to pay for losses. An insurance company will not provide liability insurance to an unqualified person, so if someone claims to be, for example, a medical doctor, they will need to convince the insurance company that they are qualified to practice medicine. Plus, the insurance companies will provide their own ongoing inspections and monitoring to ensure that their clients maintain safety standards.

The new role of the government? To certify/monitor the financial health of insurance companies, to decertify/prosecute those companies that exhibit unethical behavior regarding claims, and to prosecute businesses who operate without an appropriate certificate. All of the licensing and regulatory nonsense simply drops away, because it is no longer relevant. Insurance companies will now provide the regulatory function in a cost-effective fashion.

The advantages of the above red/green plan are numerous: Lowers the cost to the consumer; eliminates the governmental regulatory bureaucracy and related inept  micromanagement; increases consumer choice; offers entrepreneurs a chance to get a business started; eliminates corrupt artificial barriers to competition; and last but not least, enhances consumer safety.

-Ed Walker

 

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ET EXTRA: Do Economists Use Engineering Thinking? Not Nobel Prize-Winner Paul Krugman

From prior Engineering Thinking posts we’ve learned that opinions should not be accepted at face value. Unfortunately, most of us are too busy to fact-check everything we read, so we tend to allow our opinions to be swayed by the writings of well-known columnists for the major newspapers. We are even more swayed if the columnist holds major credentials, such as being the recipient of a Nobel prize.

Consider Nobel prize-winner Paul Krugman, who is also a columnist on economic matters for the New York Times, and a major advocate of the Obama administration’s policy of massive “stimulus” spending. If you were to follow Mr. Krugman’s more recent writings, you might be swayed to think that massive government spending is good and necessary.

One of the traits of those who employ engineering thinking is consistency. Therefore, a trait to be wary of is inconsistency. Mr. Krugman is not consistent. For numerous examples please check “Paul Krugman, the Self-Contradicting Economist” by Arvind Kumar, 23 June 2010 American Thinker.

The bottom line: Based on his record of contradictory statements, Mr. Krugman is not a reliable source, and therefore his writings can be safely ignored.

-Ed Walker

 

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Why Pizzanomics Is Immoral

In prior posts (“The Economy Is Not A Pizza Pie,” Part1 and Part2) we discussed why Pizzanomics is an economic fallacy. In this post we’ll examine why Pizzanomics is also immoral.

At first glance it may appear to be an appealing idea (if we are not wealthy) that we allow our government to forcibly take money from the rich and give it to those who are less fortunate. Let’s apply a little engineering thinking to see if this idea is valid.

First, why should our government treat one class of citizens differently than another class? In private business this issue does not exist. If anyone — rich, poor, or in between — goes to a store to purchase a loaf of bread, they are all charged the same price. We don’t even think about it, fair is fair. Everyone pays the same amount for the same item.

However, when it comes to federal income taxes (which in essence are payments for services that the federal government provides) somewhere along the line we have succumbed to the thesis that it is perfectly acceptable for wealthy folks to be forced to pay more tax than regular folks.

But why? Bill Gates, chairman of Microsoft and one of the wealthiest men on the planet, gets the same government services as anyone else. Although one of the essential services of the federal government is protection of the homeland, one does not find extra squadrons of fighter jets defensively circling Mr. Gates’ neighborhood, nor are there any Navy Seals assigned for his personal protection when he goes sailing. In other words, Mr. Gates gets (in general) the same benefits from the government as the average citizen, yet he pays enormously more taxes.

Therefore, why is it acceptable to charge rich folks more than average folks, when rich folks receive the same service? Perhaps the ten commandments are today considered quaint by some, but nestled amongst them is the admonishment for us to not covet our neighbor’s goods. Aren’t we displaying poor moral judgment when we allow our illogical envy of the wealthy to justify taking from them to give to ourselves?

If you were fortunate as a child, your parents bestowed upon you some of the pearls of humanity’s hard-earned wisdom in the form of children’s fables. These bedtime guides to good moral behavior, particularly a good work ethic (e.g. “The Little Red Hen,” “The Three Little Pigs”), provide a solid and essential foundation to ensure that a child grows up to be a mature, responsible, and happy adult. The reasons that such tales are essential is that they are what engineers call a calibration reference; that is, they provide a set of highly accurate rules about human nature that can be relied on to successfully guide personal, as well as societal, behavior.

Have Your Morals Been Calibrated?

Without a moral foundation, folks tend to become obsessive about material things. It has been firmly established, however, that material acquisitions — beyond having food to eat and a roof over one’s head — do not make one happy. On the contrary, an obsession with possession leads to deep unhappiness.

Some children, with nothing yet to show of great accomplishment, resort to distinguishing themselves by calling attention to their designer clothing or by “look at me” show-off behavior. Adults who flaunt their three hundred dollar sneakers, or who make it a habit to be conspicuously seated at fine dining establishments, are likewise exhibiting childish behavior.

Although most of us enjoy material things, the more mature among us do not use them as a proxy for our self-worth. To the contrary, true grown-ups feel a dash of pity (in addition to a dollop of annoyance) toward status-flashers, knowing that such antics are a sign that the flashers have likely accomplished little of real value in their lives. If they had, there would be no need to bring out the bling. They would instead frame a diploma, display pictures of their well-adjusted children, or discuss current events, art, science, and (quietly) their charitable endeavors.

Those folks who champion Pizzanomics, therefore, may be unwittingly exhibiting not only their lack of understanding of basic economics, but also giving us a glimpse into their immature and envy-riddled world view.

Next post:

A Summary of Engineering Thinking Principles

-Ed Walker

 

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The Economy Is Not A Pizza Pie (Part 2)

In “The Economy Is Not A Pizza Pie (Part 1)” we discussed why being envious of the honestly-acquired wealth of others is not logical. This is an important concept to grasp, because once we cut loose the emotional anchor of envy, we are free to expend our energies on more productive pursuits. Among those pursuits would be the celebration of the success and wealth of others. Why? Because not only do we benefit from the products and services that are born from such success, the related boost to the economy gives us a better chance of finding and keeping a good job.

At the gut level, though, we already know this. Let’s try another thought experiment to prove the point.

Consider a man who has been out of work for some time and is traveling to seek a new job. He comes to a fork in the road, and sees by a sign that he can take the right road to Richville, or the left road to Poorville. He has heard that Richville has quite a few wealthy folks, where Poorville has very few.

Now, if it were true that money was a pizza pie and wealthy folks were mean, why would the job-seeker go to Richville? Why waste the time? Since all of the money in Richville would already have been consumed by those rotten rich people, why not try to find a job with the nice friendly folks in Poorville?

The answer is obvious: the man would take the road to Richvile because he instinctively knows Pizzanomics to be false. He knows that traveling to Richville gives him a much better chance to get a job. He knows that wealthy folks do not eat their money, they spend and invest it, and his chance of getting some of it is much better when he gets closer to the flow.

(If you care to debate the above, contrary viewpoints are welcome.)

Next post:

We’ve discussed why Pizzanomics doesn’t make economic sense. Next we’ll discuss why Pizzanomics is immoral.

Also, in upcoming posts we’ll summarize the Engineering Thinking principles learned to date, and show how to apply them to various everyday challenges. Because it’s a major pocketbook issue, we’ve been using the government’s effect on the economy for several examples, but the principles can be applied to any problem; in the past we’ve touched on relationships, psychics, scams, etc. If you have a particular topic that you think would benefit from Engineering Thinking, please let me know.

-Ed Walker

 

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The Economy Is Not A Pizza Pie (Part 1)

To properly analyze an issue, one must start with a foundation of well-established facts. This sounds obvious, but a major pitfall in any analysis is that we tend to begin with unquestioned assumptions. If those assumptions are wrong, then our analysis will also be wrong. Therefore in this post we’ll review some economic basics to be sure that we don’t harbor faulty assumptions.

President Obama promised that he would provide a tax reduction to ninety-five percent of us by increasing taxes on “the wealthy.” This promise means that the president believes in Pizzanomics. That is, he believes if someone gets a big slice of income then the rest of us have to settle for a small slice, and this injustice must be corrected by “spreading the wealth,” i.e. taxing those who have more and giving the proceeds to those who have less. But a little engineering analysis will demonstrate, in plain talk, just how wacky the pizza pie theory is.

We engineers love to see test data; i.e. empirical or historical evidence that supports or refutes a theory. Is it necessary to “spread the wealth” to compensate for unfairness in our economic system? Despite what you may have heard otherwise, there is abundant and substantial evidence that supports the fact that money is not a pizza pie, and wealthy people do not prevent less fortunate folks from getting their fair share.

But let’s ignore all of that economic history for the moment, and instead use a simple mental analysis. Engineers and scientists call such analyses “thought experiments,” where logic is used to determine reasonable expectations. These experiments do not require advanced degrees or high IQs, they only require a methodical mind and the avoidance of emotional blockages. Let’s apply such a thought experiment to Pizzanomics.

If a person has a big slice (a lot of money), the Theory of Pizzanomics (espoused by believers in big government) implies that the slice is lost forever. The greedy wealthy person will eat the slice and that’s that: done, finis, adios amigo, burp; nothing left for you and me.

In reality, however, money is not gobbled up; i.e. rich folks do not hide their money under the mattress. Nor do they have big parties on the weekend at their mansions, where they and their rich friends get together and sip champagne and throw their cash into a big pile and roll around in it, cackling at how superior they are to average folks. No, they don’t use their money for such idle and frivolous pursuits, because then it would be of no use to them. They have to spend their money to get mansions and champagne.

When a wealthy person spends money, it flows from them to carpenters, mechanics, chefs, gardeners, servers, importers, distributors, truck drivers, sales assistants, and on and on. As a kicker, wealthy people also invest, which increases the flow, leading to more jobs for everyone.

The bottom line is this: money is not a pizza pie; money is a river. Because government is inherently highly inefficient (as we have discussed previously), the river flows best when government is not in the middle, splashing around and muddying things up.

Now, it’s true that some wealthy folks may be greedy and direct the money flow illegally. When the rich engage in fraud, price-fixing, or other crimes to feather their nests, the government should step in and prosecute such crooks. Likewise, government officials should be fired, impeached, or prosecuted for funneling taxpayer funds (“earmarks”) to their wealthy patrons to buy votes and favors.

However, assuming no criminal behavior, why don’t rich folks have the right to choose the direction of the money flow? It’s their money, after all, not the government’s. Plus it is only theirs temporarily, until it flows through them to others. In other words, being wealthy does not stop a single dollar from flowing to a less fortunate person. In fact, the more wealthy people there are, the better; the river gets deeper and wider. This is why it is illogical for regular folks to be envious of wealthy folks, and also why it is illogical for wealthy folks to feel guilty about being wealthy.

Envy And Guilt About Honestly Acquired Wealth Are Illogical

(If you care to debate the above, contrary viewpoints are welcome.)

Next post:

The Economy Is Not A Pizza Pie (Part 2)

-Ed Walker

 

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A Trip To The Government Store

Our federal government has gone to a lot of trouble to build up an image of indispensable value to protect the “little guy.” But this false mystique can be punctured by simply viewing how the government actually operates.

When we purchase products or services from the private sector (cell phones, TVs, autos, lawn maintenance, accounting service, air conditioner repairs, etc.) we have a huge variety of price and quality options. When we go to the government “store,” however, the situation is very different, because its motto is “One Size Fits All.”

Imagine that you needed some underwear and went to the government-run department store. You walk inside and notice that the interior is a dull gray color and dimly lit. Many of the shelves are empty. Since it’s your first visit and you don’t know where the underwear section is, you look for a salesperson. After a few minutes, you realize that there are no salespeople, so you walk up to the checkout area.

You count approximately twenty checkout aisles in this government store, but see only one cashier, and there are about fifteen people in her queue. Some of them are reading magazines or books, some of them are staring into space, some of them give you a look of pity.

You walk up to the cashier. “Where can I find underwear?” you ask. She waves a hand in a general direction. “Look over there,” she says curtly.

You go in that direction and, after some searching, find a table scattered with underwear, socks, and gardening tools. After you pick through the underwear you realize that all of the items are the same size, extra large, with a label that says, “Made by the USSA.” You walk back to the cashier.

“Where can I find some underwear in medium?” you ask. “And perhaps some that aren’t gray in color.”

“Whatever’s there is all we’ve got,” she says, annoyed that you’ve now twice distracted her from her work. You walk away sheepishly, thinking: okay, if that’s all that’s available, then I can alter them. You go back to the table and pick up a pair, looking for a price sticker. Finding none, you sigh. But you need the underwear and they shouldn’t cost too much, so you grab three and go stand at the back of the line.

Forty-five minutes later it’s finally your turn. The cashier glances down and then picks up two of the pairs and drops them into a large container.

“Hey,” you exclaim. “I wanted three pairs.”

“Only one to a customer per month,” she says, as she picks up the remaining package and pencils something into a large notebook. You look vainly for a scanner; apparently things are done manually here.

She pauses, waiting, and then finally says with annoyance, “Let me see your identity card.”

“Excuse me?” you respond. “Identity card?”

She rolls her eyes. “You new to the U.S.S.?” she asks. Without waiting for a reply she continues, “The price of everything here depends on how much you make each year, which is on your I.D. card. If you make more than $200,000 you’re charged the max rate for being too successful. Otherwise you get the standard rate.”

“What’s the standard rate?” you ask.

She glances down at her notebook. “Thirty dollar a pair,” she says.

“Wow!” you exclaim. “That’s expensive. What’s the max rate?”

“One hundred dollars a pair.”

“Wow!” you exclaim again, “that’s really expensive. Uh, what if I make $199,000 a year?”

“Then you’re not too successful and you get the standard rate. But I gotta see your I.D.” She holds out her hand.

“Forget it,” you mutter and walk away, deciding that going bare isn’t a bad idea.

On your way out you notice a door ajar at the far side of the building. A uniformed man is standing beside the entry. “What’s in there?” you inquire, taking a peek. You see a room that appears similar to the one you just left, except it’s larger, brightly lit with cheery colors, and the shelves are stuffed with merchandise. Although there are only four checkout aisles, there’s a cashier posted at each one. Three lanes are idle; only one aisle has a single customer. You witness the customer flash the cashier an I.D. card and then walk off with a large bag, having paid nothing.

The guard stands up straight and puffs out his chest. “This is for government employees only,” he growls. “Can I see some I.D.?”

“Forget it,” you mutter a second time, and leave.

This little vignette may sound extreme, even ridiculous, but remember the example of the old Soviet Union in a recent post? The dingy and inefficient store with limited choices and long lines as described above is, without too much exaggeration, a pretty good description of what life was like for the average Soviet citizen living in a big city (life was much worse in rural areas).

If the U.S. continues on it present path toward ever larger government, the gross reduction in the quality and variety of goods and services will not be restricted to underwear. Everything will be affected, including critical services like health care. Consider the story above a peek into our collectivist future, if we continue to ignore the lessons of history.

Next post:

The Economy Is Not A Pizza Pie

-Ed Walker

 

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The Government’s Policies And Our Economic Crisis (Part 1)

An important engineering principle is empirical validation, or proving that something is correct by test and measurement. Theories are great, but a theory isn’t worth two cents if it doesn’t match the real world.

Let’s see how the principle of empirical validation affects an engineering team’s deliberations, as they investigate the root cause of economic downturns.

Charlie (team leader): The purpose of today’s meeting is to review the results of our research on the causes of economic meltdowns in the United States. Nigel, we’ll start with you.

Nigel: In reviewing over a dozen recessions and depressions in the U.S. economy that occurred during the last hundred years, I found that most of them were normal business cycles that lasted about one year on average. The Great Depression that started in 1929 was an exception, because it persisted for several years.

Charlie: Why was the Great Depression so much longer than the other downturns?

Nigel: By doing a sensitivity analysis of major variables, I found that the length of the downturns was strongly correlated with the degree of governmental involvement in the economy. For example, a severe depression occurred in 1920 during which the government did very little, yet the depression only lasted about eighteen months. By comparison, the government intervened massively during the ten years of the Great Depression.

Charlie: Okay, but we all know that correlation is not proof of causation; maybe the government was coincidentally involved when the economy got worse. Any other thoughts? Marcy?

Marcy: Based on Nigel’s results I searched for a prototypical experiment that would support or refute his hypothesis. Fortunately, such an experiment was conducted over several decades wherein massive governmental control of an economy was performed. The experiment was carried out by the Soviet Union during the years 1922 to 1991.

Charlie: Good; there’s nothing better than empirical evidence. And the results?

Marcy: Economic performance was persistently poor. One could easily conclude that the experiment was a striking failure.

Charlie: Could the failure be explained by some variables other than the government’s involvement?

Marcy: In my view, no. The Soviet citizens were of high intelligence, and despite the single-minded — even brutal —  management of the economy by the government, the results were dismal. In fact, considering the intensity and duration of the experiment, had it been a success the Soviet Union today would likely be the world’s dominant economic superpower.

Sam: Some economists today are saying the opposite of what Nigel and Marcy report. They’re saying that the Great Depression lasted so long because the government didn’t intervene enough; that the government should have spent even more money than it did.

Charlie: Do those economists have any empirical data to support their claims?

Sam: Um, well, they cite the fact that the depression ended following World War Two, during which the government spent a lot more money.

Charlie: A correlation, yes, but not necessarily a cause. How do they explain all of the instances where the government did little, and yet, as Nigel found, the economy quickly recovered? How do they explain the fact that the economy worsened when government spending was massively increased prior to the world war? How do they discount the very convincing experiment performed by the Soviet Union? It seems that their theory does not match the empirical evidence.

Sam: Um, well, I guess I don’t have the answer to that.

Charlie: Okay, if those economists have no empirical data to back up their theory, then we should discount it. It appears then that the best hypothesis for the root cause of extended economic meltdowns is governmental interference. All agreed? Good; meeting adjourned.

Next Post:

A Trip To The Government Store

-Ed Walker

 

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