Sometimes the obvious isn’t so obvious. Example: If someone is selling 10 apples a week for a dime, and he raises his price one cent, how much more money will he bring in? The obvious answer would be ten more cents. But to conclude such one must hold a static view of the world. In other words, one must assume that the number of apples sold is a static number and that a higher price would have no impact on that number.
So let’s try again. How much more will the vendor bring in if he raises the price per apple to, say, $10.00? Here it is obvious that he would most likely sell no apples. That would be 100% less, obviously.
But if the world actually were static, imagine the problems that could be solved. Rather than file for bankruptcy companies could simply raise their prices to meet expenses. Moreover, the companies could become the golden goose for government to solve its fiscal problems as well. Higher taxes? No problem. We’ll raise prices.
One problem overwhelming the West these days is runaway debts. But in a static world this would be no problem at all. The geniuses in government could simply raise taxes until deficits were gone. If 10% produced $10 billion, then 20% would produce $20 billion. Problem solved.
But we all know that the world is not static. We know it because it’s obvious. One change over here will have ramifications over there, and over there… and even way over there where we never imagined that it would; and in ways that we had never considered or intended. But knowing this ought to make us think about such things when someone suggests embarking on a new direction. Yes, we should not only think about it, but we also ought to be willing to stop it when that direction proves insane.
The title comes from an old joke. A truck driver in a job interview is given a scenario. “You’re headed down a long grade and your brakes fail. At the bottom is a one-lane bridge across a ravine with a bus stalled on it. Quick, what would you do?”
The driver answers slowly, “Well… what I’d do, is Id wake up old Joe.”
Surprised, the interviewer asks “What!? Why in the world would you do that?”
“Cause old Joe… he hain’t never seen a wreck like we fixin t’have.”
A friend asked me to explain the so called “fiscal cliff”. This story works as good as any I suppose. The American voter just cut the brake lines on runaway spending and OK’ed economy-suffocating tax increases, ostensibly on the rich. We’ll see yet how that works out for the voter.
Here’s the break down. January will bring scheduled tax increases. These increases are coupled with unassociated spending cuts agreed to in the last debt-ceiling
show debacle. The spending cuts are the real cliff according to many because the economy is largely dependent on Government spending. For others it’s the tax increases that have them worried. For still others it’s the cuts and taxes both because more people will have less money due to confiscation while less will have jobs due to cut-backs.
My guess is that it will probably get “fixed”. The fix however will be focused on stopping the spending cuts; and the Republicans can be expected to fold like cheap lawn chairs of course.
Regardless of what happens we can take one thing to the bank. Whatever is done to avert the “cliff”, the root problem of being fiscally irresponsible will not be “fixed”. Why not you ask? America, it seems, just told its government to keep the gravy flowing, responsibility be damned.
Today we learn a new word. Moral-hazard. Well really it’s two words but don’t get distracted. Listen up! You already owe the nanny-state about $200K, and you ain’t got no co-signer.
The term, “moral hazard”, is an insurance term. It works like this. Suppose every time someone asks you to borrow ten bucks you say, “sure, no prob”. You’d be broke all the time, sure, but hey, let’s face it, you’d never have a shortage of friends, right?
Then a couple of patsies come along willing to insure your loans cheap! Their names are Fred and Fan; but that’s not important right now. They make a deal with you. They sell you a policy on your loans that pays you $20 if one of your friends defaults on a $10 loan. Who could pass on a deal like that? You only go around once in this life, right? Why not do it with gusto… or something like that.
In the insurance business, deals like this are appropriately known as moral hazards. It entices me, the insured, to be careless, even unethical maybe, because I will actually be better off if my friends don’t pay me back. Insurance companies who must meet payroll and pay the rent shy away from such foolishness. But there are some insurance companies that don’t have to worry about such pesky problems because they have their own patsies. That would be you, the tax payer.
So, if you’ve ever wondered how bankers could loan out money to anyone who could fog a mirror and still be around today to pour money into leftist political campaigns, now you know. They really never were in jeopardy of losing the money they loaned. You were. And that, for those making bad loans, was no prob.
The last half-century has been marked by a shift in the meaning of the word morality in Western Civilizations. It has been slowly transitioning from an objective to a subjectively based word. What is considered to be good and evil has increasingly become dependent on one’s on opinion and less on objective and absolute standards. One may now feel justified in defaulting on a contract simply because, in his judgement, the other person or entity is rich and doesn’t really need the money. This mindset, when predominate, does not foster a robust economy.
Consequently, this shift has increasingly hindered economic activity over time because economics is based on millions of transactions. Contracts are signed. Trust is placed in others. It is agreed that if you do this then I will do that. As trust erodes so does the ability for the life-blood of an economy, commerce, to happen freely. Rather contracts are broken, defaults abound and lawyers celebrate. In the end, the economy suffers, and so do the people.
Unfortunately for society, the drag that immorality places on commerce doesn’t stop with the individual participant. The immorality of corruption leaches upward from an immoral society into the governing authorities. This also impedes an economy as unreasonable demands are made on the participants in commerce by those authorities. Resources are then squandered on excessive taxation, bribes, excessive regulation and delays.
This adds up to the siphoning of resources which would have otherwise led to higher standards of living for the population. If you’ve ever wondered why the people of some nations struggle to eat while living their lives on ground that is abounding with resources, one need to look no further than endemic corruption.
So what does morality have to do with economics? In a word, everything.