TEST: Keynsian and Friedman Economics

Supply and demand side economics differ in several small ways. Supply side believes in international trade (free trade). Demand side has a nationalistic sense. Supply side says the economy will regulate itself. Demand side says the economy needs some help. These differences really boil down to the same thing. Supply side economics, with Milton Friedman at the helm, fly under the banner of unrestricted and uninhibited economy; the government should not interfere with the economy or else you have a false economy which tells you nothing. Kensyian economics, which supply side economics were created in response to, profess that the government needs to occasionally preform tasks to stimulate the economy.

"My policies are based not on some economics theory, but on things I and millions like
me were brought up with: an honest day's work for an honest day's pay; live within
your means; put by a nest egg for a rainy day; pay your bills on time; support the police."
--Margaret Thatcher

From 1979 to 1990 the Prime Minister of the United Kingdom was Margaret Thatcher. Thatcher (photograph below) was one of the major proponents of a free market, entrepreneurship, and supply-side economics. As an incoming Prime Minister, she had to deal with a poor economy due largely to a high unemployment rate (1.4 million, according to BBC News.) This was a deciding factor in the election of Thatcher, as it largely concerned the population of the time. Having been elected, Thatcher wasted little time in imposing her reforms to the economic system. These reforms included privatizing, deregulating, and Trade Union reforms. Like most supply-side economists, Margaret wanted to reduce the governments interference in the economy. Supply-siders think falsifying an economy will eventually come back to haunt the society it bolstered. Thatcher believed that if everyone did their job, spent the money they made, and saved a little money away than an economy would regulate itself without outside interference. This is not a society without taxes; taxes must still be paid for people who work not for a company, but for the public (i.e. police in her quote at the top of this page.) Franklin D. Roosevelt is a prime example of demand-side economics, which favors government influence in a countries economy; his New Deal falsified many jobs as the government attempted to lower the unemployment. Reagan, a contemporary to Margaret Thatcher, was a supply-side economist, and also worked to lessen the government's influence in the economy.

Supply-side economics makes more sense. Should the government, or anyone, interfere in the natural ups and downs of an economy, a false idea of economic health is created. The key to a healthy economy is self-reliance. The only things a government can do make the economy look better on paper, but really don't help. If an economy is bad it is on the shoulders of consumers to change their habits, or else to adjust to the change. However, demand side economics might make a country feel better and unfortunately a lot of people opt for this safe feeling than the reality. I don't think the economy ever really recovered from the Depression. FDR just hid the problems and they're only now starting to reemerge.

TEST: Genomics

Genomics is the study of genomes. DNA research and genetic mapping are a few of the main features. The study the individual structures of genomes are not part of this, however. The man who discovered Genomics was named Fred Sanger. He mapped the first genomes. Genomics is also about sequencing genomes, which means discovering the original structure. Sanger did this with a mitochondrion and a virus. People have begun to try to manipulate the genome which is a technolgy before anything else.

"Countries, businesses, governments that seek to protect, to maintain the status quo are bound to get poorer quickly as technology flourishes in other regions." (page 182) In economics a country is just a business. It is only as good as what it produces, what it can make. If a country wants to stay ahead then they must stay on top of the latest trends, especially involving technology. Technologies take less stress off people, and therefore more technologies free up more people for other things. While we have more and more people involved in technology development the actual technologies themselves are meant to save time, improve quality of life, and increase production. With everything getting bigger and bigger countries need to master new technology and be inventive to keep themselves from falling behind. Genomics is the next big trend, and if a country can't master it than they are done.

The consequences of this situation can be economical. Investments are discussed; early technologies are invested in too quickly and are then replaced with similar, improved technologies. Xerox stocks, for example, plunged from $65 a share in 1998 to $5 a share in 2000. The fast-paced progression of technology and the volume of revolutionary companies are a consideration and a possible future danger to investors. Genomics patents increased 25% between 1999 and 2000 Also, companies have to make some very difficult financial decisions. Investing in technology is very expensive, and very risky. Your companies pharmaceutical investment of $500,000,000 could turn into a revolutionary drug which makes you more money than you ever dreamed. It could also amount to nothing, and you can lose a third of your company. Not making these decisions for fear of making the wrong ones will just leave you behind as everyone else progresses. Economic results have become unpredictable- there is not any equation that can tell the future. And the future will just catch you anyway.

Product & Market Value

There comes a time in every ones life when they must distinguish between wants and needs. Many people (especially in America) are fortunate to, after prioritizing, afford all of the former and at least some of the latter. Most of these wants and needs are met by products; good provided by producers to consumers who provide monetary compensation to a vendor (a middle man!). The components of product value are on a mainly personal level, although shared values and cultural similarities make your desires fairly predictable. Product value is what you'll give up for what you'll receive. In life, you will need a phone for your job, social and emergency communication. If you go to Wal*Mart you'll see several styles, but you have certain criteria; quality, design, good performance, reliability and durability. You pick up a pink one and it meets your design taste perfectly, but you see it's $80 and it's from a company you've heard bad things about. You think it's cute, but to you the cuteness isn't worth the extra $30.00. However, you see a very excited 12 year old picking the phone out and running away with it; that was her product value. You find another, and it's a good brand. You know it will have longevity and will stand up to your clumsiness. It's white, which is a little boring and it's only $40.00. But you're in luck! Directly beside this phone is a neon green one with little red lady bugs- so stylish! It's only $10.00 more than the plain one. This is the phone for you.

Market Value is more an average of what all consumers will pay for a particular item. "The average of the highest price that a buyer, willing but not compelled to buy, would pay and the lowest price a seller, willing but not compelled to sell, would accept." This is really an average product value. Making a lot of a phone that only 12-year-olds would buy is not a sound investment for a company, so other people must have liked the phone to make it worth $80. If there was only one group of people willing to buy that phone for $80 the business wouldn't even cover the production and shipping costs with their income. Therefore, when you go back to the store in a month the phone will probably cost less or will be discontinued. The phone was priced over market value- more than most people valued it at.

In order to understand market value properly you need to do a fair amount of research. This can include shopping around for the best deal. Of course most people don't, and then end up paying more than they need to. People often buy name brands or fad items without even looking at the competition, which might have a much fairer price. This impacts market value; people are paying out and so they are proving they are willing to pay more for less or for the same. Research on market value is very important to companies in pricing. If something is priced above market value people won't buy it. If something is priced under market value you don't make the maximum profit.

Sometimes people will have drastic changes in opinion about a product; for example something like Beanie Babies. For years when I was a child people were collecting them like crazy. We would buy them for $10.00 and play with them. However, the phase died out. A few days ago I saw some Ty animals for $3.50. This is an example of price volatility. Research and careful consideration should go into major purchases and investments to avoid these type of pitfalls, although price volatility is much greater in fads (wants) than in needs. Needs are constant and so do not go in and out of style. This keeps their volatility down to cost-of-living increases and so on.

Chapter 12: Sleepless (and angry) in Seattle

As the Future Catches You is quite a fitting title for this book; in Chapter 12 (of 15 total) Juan Enriquez opens by saying that people are squirming in Seattle, a representative city, because they feel as if they are on a treadmill that is going rather too fast. The rate of change keeps increasing, and people hardly have time to adjust before something new is presented to them. Large companies fall; small companies blossom. The New York Times, established in 1851 with 13,400 employees is worth 6.8 billion dollars, contrasted with the 100 billion dollar Internet news site Yahoo! who have a fraction of the employees (1/7). IBM had to make way for Microsoft when it became apparent that the operating system is much more important than the machine it runs on. Genomics patents increased 25% between 1999 and 2000. This rate of change has become overwhelming for many employees in any company. Companies merge to keep themselves alive rather than to make themselves as big as possible. They need to evolve with the market, which is quickly becoming impossible.

"Countries, businesses, governments that seek to protect, to maintain the status quo are bound to get poorer quickly as technology flourishes in other regions." (page 182) This is quite true; in economics a country is just a business. It is only as good as what it produces, what it can make. If a country wants to stay ahead then they must stay on top of the latest trends, especially involving technology. Technologies take less stress off people, and therefore more technology frees up more people for other things. While we have more and more people involved in technology development the actual technologies themselves are meant to save time, improve quality of life, and increase production. With everything getting bigger and bigger countries need to master new technology and be inventive to keep themselves from falling behind.

I think this chapter is a bit unfair. I do think that technologies are evolving more and more quickly. I think changes are happening faster than people can cope with them. However, I don't think that some of these assertions are quite truthful and actually I believe them to be somewhat misleading. New companies should be more successful; old companies have reputation on their side, but that also means they have certain expectations of them. The New York Times can't rapidly change. Yahoo, however, could assess the situation, the basic needs of a modern consumer and meet them fully. This would account for their rapid growth and their instant success. Technology and the fact that the Internet is free has made it much easier for people to communicate and word-of-mouth (so to speak) goes much faster which can also attribute to the fast-paced change. I think these are some lurking variables (a lurking variable is a variable that has an important effect on the relationship among the variables in a study but is not included among the variables.) Also, I think that in the case of IBM and Microsoft, or Xerox and Microsoft, Apple and others are misinterpreted. While these events really happened, it is more predictable than it is made out to be. There will always be revolutionary companies, and they probably won't last. Other people will take their ideas, change them, perfect them and then make money off of them, stealing all of the first companies business. In this way it's an unfair comparison and a misleading conclusion.

The consequences of this situation can be economical. Investments are discussed; early technologies are invested in too quickly and are then replaced with similar, improved technologies. Xerox stocks, for example, plunged from $65 a share in 1998 to $5 a share in 2000. The fast-paced progression of technology and the volume of revolutionary companies are a consideration and a possible future danger to investors. Also, companies have to make some very difficult financial decisions. Investing in technology is very expensive, and very risky. Your companies pharmaceutical investment of $500,000,000 (pg 177) could turn into a revolutionary drug which makes you more money than you ever dreamed. It could also amount to nothing, and you can lose a third of your company. Not making these decisions for fear of making the wrong ones will just leave you behind as everyone else progresses. Economic results have become unpredictable- there is not any equation that can tell the future. And the future will just catch you anyway.

What do we need to cut?

The chart to the right, taken from Molly's "Welfare in America" wiki, breaks down federal spending. The most money spent is for Social Security.

When Franklin Delano Rosevelt came into presidency in 1933, he was in for one of the most economically stressful periods of America's history; World War II and the Depression. In response to these events FDR proposed his famous "New Deal" one part of which was the Old Age Pension Act, or what is now commonly refered to as Social Security. "The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer." This unprecedented lack of jobs inspired the Act; Roosevelts economic advisors claimed this Act would allow and ecourage older people to retire earlier. Look at all the jobs this would open up! Go President Roosevelt. What actually happend was that America was, once again, given a false idea of it's economic health and growth. We have grown on a lie.
Social Security is not only the biggest slice of pie, it's also the least practical. While money from other pieces like defense may be reduceable by a few percent, or at least redisributed within themselves, Social Security is the only piece that can be demolished completely.
In order to solve America's debt problems Social Security needs to, initially, take major cuts. The babyboomers were promised Social Security from President Roosevelt. I don't think that it is ethical to take this away from them completely; what needs to happen is the selection of a date, anyone born after which will not recieve Social Security. Some sort of compensation can be provided, as some people planned their lives and retirement based on Social Security. This is the determining factor of the cut-off date. The date needs to be somewhere between the people who depend on it (babyboomers) and the people who never expected to get it (current generation). In order to be most effective this date needs to be as early as possible, with one-time severance (of a sort) payments.
If we choose not this road, for moral or fiscal reasons, it is also feasable to phase out Social Security by reducing the amounts paid out by year of birth until it is completely gone. These desicions may seem arbitrary but it is necessary to create harsh lines in the face of such an overwhelming and blurred subject. The comic on the right shows how the people in the Social Security system are currently getting their money. In this second plan, the amount taken from each pocket would decrease from left to right until the fastfood kid was taking nothign from the paperboy.

Consumer Credit Report

The Consumer Credit Report (abreviated as CCR in my explaination) is issued by the Federal Reserve Board from places such as banks, finance companies, retails sales outfits and credit unions. The report is a survey which tracks an individuals debt and loans. This does not include real-estate loans, but is limited to revolving* and non-revolving** credit. It is issued about 5 weeks after the end of the month. The CCR details outstanding balances, average intrest rates on consumer loans and also illustrates the areas of highest growth.

The CCR is used to predict upcoming spending levels. Spikes in debt cause panic and lower spending, while dips relax the white-knuckled hands of consumers from their wallets.The CCR is also used to predict recisions, as high debts mean low spending and a slower economy. This isn't proof, but it's a good alert because consumers make up 2/3 of GDP consumption. The CCR is reviewed in the long-term, so that trends can be more easily seen. The CCR is considered a lagging indicator***.

Strengths of the CCR include that it shows what kind of debt that people are in, intrest rates, which leads to how much money that consumers will have to spend. This is a good tool for comparison on a month to month or year to year basis.

Weaknesses of the CCR are that home-equity loans aren't included which leaves a gap in the info. The month-by-month is overstudied when paired with the consumer confidence report. Also, the CCR only shows growth in outstanding debt.

I think that the CCR is probably a good indicator, when used correctly. As long as you take the lag into account and you use the correct month to support what you're looking into the Consumer Credit Report will give you an accurate view of long-term credit trends.


*Revolving Credit is money that can be spent without contacting the creditor up to a limit. (Example: credit cards)
**Non-Revolving Credit is a loan that has all details fixed at the start (Example: car loan)
***Lagging Indicators are reports that take longer to show change than the economy is actually changing.