How do we know if new programs will make the economy better…or worse?
Here’s a simple formula:
W = rv (w-w – w-l)
That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges.
Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off that there is nothing left of it…except the essential heartwood.
And now we can use it to see how Trump’s changes will affect the economy.
We’re down here in the southern tip of Florida showing a group of eager colleagues from Brazil how we do business.
‘I’ve been reading your Diary,’ said one. ‘But I’ve noticed you seem to make a lot of your readers mad.
‘Is that really a good idea? Aren’t you driving away potential customers?’
‘Uh…who knows?’ we replied, taking the high road. ‘The Diary is free. But readers pay in something more important than money: time. We try to make it worth their time by looking at what might go wrong.’
What could go wrong?
Our bubbly stew of observations over the last few weeks has cooled and congealed into an extended hypothesis:
- The fake-money system was set up by the feds in 1971… Even free-market economist Milton Friedman was in favour of it.
- It turned out to be the best thing that ever happened to Friedman’s nemesis: Big Government. It provided almost unlimited funding to the insiders. They used it to build a ‘Deep State’ — an unholy alliance of money and power, a ‘shadow government’ that runs the country no matter who you vote for.
- These insiders used the fake-money system to transfer trillions of dollars from the mostly middle-class Main Street economy to themselves and their cronies.
- And now they control the government and its money.
- Donald J Trump says he aims to ‘drain the swamp’. Perhaps he is sincere. If so, he has a hard row to hoe.
- Bear markets in stocks or bonds are both overdue. And after the longest expansion since the ‘30s, a recession must be headed our way, too.
- Even if these things don’t happen, the swamp critters could still prevail.
The new president did take a step in the right direction when he pulled out of the Trans-Pacific Partnership (TPP) trade deal.
He took another step when he suspended further implementation of Obamacare. According to a report in The Wall Street Journal, he has frozen any measure that would ‘burden individuals, families, and insurers.’
Draining the swamp is shorthand for eliminating those burdens. It is the only way to Make America Great Again, at least economically.
Today, we hear that he is planning to cut funding to the UN. Another good move.
If the power and wealth of average Americans is to increase, the power and wealth of the swamp critters must decrease.
You’ll recall: There are only two ways to get what you want.
Your first option is to make a win-win deal with others, where you give something in exchange for something you want.
You have a cow. Your neighbour has a chicken. You give milk. Your neighbour gives you eggs.
‘Capitalism’ is just an elaboration of that exchange. And all government policies — QE, Dodd-Frank, trade tariffs, tax rates…everything — can be measured by it.
Do they make these win-win exchanges easier…or harder?
The other way to get what you want is to take it without giving anything in return. You shoot your neighbour’s cow and roast it for dinner. The neighbour complains; you shoot him, too.
That is a win-lose deal. You win. He loses.
Win-lose deals do not create wealth; they merely transfer it.
The maths is easy…
A win is a plus. A loss is a minus. A plus added to a minus equals zero (1 + -1 = 0). The world’s wealth doesn’t increase. It can’t. Because the gain came at someone else’s expense.
Of course, there are transaction costs and perverse incentives involved.
The neighbour, fearing you may kill his cow, doesn’t bother to raise it. Or he may erect a high wall to keep you away from his livestock. Or he may kill his cow, just to avoid having it stolen from him. Or kill you.
All of these things destroy wealth because people get less of what they really want.
To be continued…including some pretty nasty win-lose deals…
For Markets and Money, Australia