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July 24, 2012

by DailyKenn.com

Or, The First Laws of Economics or Kenn's Laws of Basic Economics

Don't be disappointed.

I've linked to the popular article, How Mormon's Make Money, below for those who care to read it in its natural habitat. 

Suffice it to say that Mormons make money like everyone else: They apply fundamental economic principles.

The problem is that many people are unaware of these principles or, if they are familiar with them, fail to apply them.

The basic laws of economics apply to business regardless of form and forum, be it personal, institutional, or governmental.

Here are my economic laws:

Law No. 1 - Inflows must exceed outflows.

At the end of the day there are only two economic levers: Cash in and cash out. If you want to be solvent you must adjust those two levers so that the first cash in is greater than the second cash out.

Government seeks to balance the books by pulling the cash in income lever. With the exception of toll roads and the postal service, that translates into higher taxes, tariffs, etc. The problem is government seems unable to pull the income lever without simultaneously pulling the outflows lever. That is, government always spends more than it acquires. The government's deficit and, subsequently, debt will always be a problem.

A recent article in The Guardian lamented the fact that tax revenues lost on tax havens are sufficient to bail out Europe and Africa. Nonsense. If governments had access to trillions of addition dollars (or euros) they would spend that much more, and then some.

Here's an example.

In 1962 the presidential budget was $106.8 billion. The deficit that year was $7.1 billion. If the government could manage to bring in an additional $7.1 billion per year, the budget would be perennially balanced. At least that is the notion espoused by liberals.

But when government receipts increased $7.1 billion, did the deficit disappear? Of course not. As government receipts grew, the deficit grew exponentially.

In 2012, fifty years later, the official budget stands at $2,469 billion ($2.5 trillion). To put that in perspective, the budget for the entire year, 1962, would cover less than two weeks in 2012. The budget has increased far more than the $7.1 billion required to cover the annual short fall. In fact, the budget has increase by $7.1 billion about 332 times.

Federal tax receipts in 2011 were about $2,300 billion ($2.3 trillion).

So what happened? As the receipts increased, the deficit increased. It's grown to an estimated $1,100 billion ($1.1 trillion) in 2012 and promises to remain above $1 trillion per year in the foreseeable future.

In 1962 the deficit was equivalent to 6.64 percent of the budget. In 2012 the deficit is equivalent to about half of the budget, depending on whose numbers you believe. 

Adjusting for inflation does nothing to satiate the problem: As government revenues grow, the annual deficit (and national debt, currently at $15,881 billion, or $15.8 trillion) grows exponentially.

Conclusion: There will never be enough tax revenue to bridge the deficit gap because government always spends more than in acquires. Outflows exceed inflows.

Law No. 2 - Every economy is production based.

There's lots of dirt in sub-Saharan Africa and that causes me to wonder why the region languishes in poverty. While the American landscape shines with waves of grain from sea to shining sea, Africa's fertile land produces little or nothing. The truth is there is enough potential in Africa to feed itself with a bumper crop to be sold to the rest of the world at a hefty profit. And if the Africans are adverse to growing corps for corn syrup, maybe they could distill their produce into ethanol. I'm just guessing.

The problem with Africa's economy has nothing to do with lack of resources, nor does it fall on the evils of European colonialism. Africa's economy stinks because Africans won't produce.

China, by comparison, has bullied its way to the top of world market using the same strategy as post-war Japan: It makes lots of market-friendly stuff. When I travel to China I never buy souvenirs. There is nothing for sale in China that I can't buy at a Walmart in Seattle.

Try this. The next time you browse the isles at Hobby Lobby, flip over the merchandise and look at the manufacture labels. You will see "made in China," "made in Taiwan" and, rarely, "made in Mexico." You will never see "made in Kenya" or "made in Nigeria." And, by the way, The USA remains a top world producer.

Law No. 3 - Demand drives economies

When I was five years old I went into the lemonade business and earned reasonable profits after expenses. I then sought to increase my cash inflow by expanding into the dirt and sticks business. I discovered that paper cups with lemonade sold well while cups filled with dirt and sticks harvested from the back yard did not sell well. In fact, they didn't sell at all. There was a market for cold lemonade but none for dirt and sticks. Apparently consumers had sufficient dirt and sticks and didn't need more. I also learned there was no market for cups full of used-up match books.

This is where Keynesian economics fails. It attempts to stimulate economies by hiring people to collect cups of dirt, sticks, making over-priced solar collectors, and manufacturing electric vehicles.

Had I borrowed money from my brother to hire my friend, Hank, to collect sticks and dirt to sell to people who wanted lemonade, I would have been required to repay my brother from lemonade revenue -- with interest. The good news is, Hank now had income with which to buy lemonade and that, according to Keynesians, constitutes economic stimulus. According to me it constitutes a failed economic policy or, to use the less polite term, stupidity.

Reduced to the ridiculous, law no. 3 can be summarized by saying, "If there is no demand for it, don't make it."

Law No. 4 - Demand is either 'want' or 'need'

I have personal income because my business produces a product and service. People give me money in exchange for what I produce. As the demand for my product grows or diminishes, it will be reflected in my income.

The same principle applies to the Mormon church's enterprises. It also applies to Apple Computer and Betty's Hot Dog shack.

The Mormon's built a big mall in Salt Lake City near their church headquarters. It supplies the needs and wants for shopping and the church earns a chunk of change. Apple Computer supplies the needs and wants for innovative products and makes a ton of cash. Betty fills the lunch hour demand to satiate churning tummies and turns a profit after expenses. The government sinks billions into Chevy Volts and get nothing in return other than the union vote.

Here's the Mormon article...

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