Monday, June 17, 2013

Why Stimulus Fails


Entropy is the tendency for ordered systems to become disordered over time.  The second law of thermodynamics says that entropy affects all closed systems over time.  Clocks wind down.  Batteries go dead.  Fires eventually burn themselves out.  The amount of useful work that can be performed is always less than the stored energy available at the starting state.

What is true in physics is also true in economics.  In economic terms, wealth functions as a kind of stored energy.  As wealth is deployed, some of it is continually lost to entropic effects.  This sounds more complicated than it really is. 

Consider your weekly grocery shopping.  When you buy food, you are converting wealth from one form (money), into a different form (groceries).  At the end of the week, however, you have less wealth, since you no longer have either the money or the groceries.  Where did that wealth go?  You ate it, of course, and the food was burned off in your metabolism.

I think entropy has a lot to do with why unemployment is still so high, and the economy so fragile, even though we have had massive government stimulus through transfer payments during this recession.  Government programs like food stamps, extended unemployment benefits, Medicaid expansion and the like have all gone straight into consumption.  No new wealth is being created by any of these programs.

Once the stimulus is removed, economic activity drops off again.  In order to have lasting effects at growing the economy, the government should be focusing on creating wealth, instead of merely propping up consumption.

Not a lot of votes in that, though.

Wednesday, June 5, 2013

Graduation Speeches


The last couple of weeks have been the season of college graduations, and we all know what that means: commencement speeches.  A number of schools will score high profile speakers from the worlds of entertainment, media, and business.  Sometimes the speaker has mastered all three (see Winfrey, Oprah).  Many of these high profile speakers will provide career advice along the lines of “follow your dreams” or “do what you love to do, and the money will follow.”

What a load of malarkey.

If we all followed advice like that, the job market would collapse, and society would soon follow.  Nobody grows up dreaming of the day they’ll be able to go to work washing dishes in a restaurant.  Yet every restaurant needs somebody to wash dishes.  Conversely, the number of video game testers is ludicrously small.  Yet there are legions of youngsters whose passions are sleeping late, playing video games, and drinking beer.  Plenty of those individuals are doing what they love, having moved back in with their parents after college.  We don’t need to be advising the most recent set of graduates to join them.

The job market exists to match what people are both willing and able to do, with what employers need, and are able to pay.  The idea that we are going to be a nation of entrepreneurs ignores the fact that the vast majority of new businesses fail, leaving behind nothing but the debts incurred to raise start up capital.

Here’s my advice to graduates:
Get a job.  Any job.  It is easier to get hired for a new position if you already have a paying gig.  Work hard, and focus on making your boss happy.  If you consider that “selling out,” too bad for you.  I consider it smart.  After a couple of years, start looking around for a new position that suits you better, either inside or outside of your current employer.

While you are paying your dues, learn as much as you can in as many areas as you can.  For the remainder of your career, continue to increase and update your skills.  That is your stock in trade to sell in the job market.  Meanwhile, take advantage of your 401K, and save, save, save.

For most of us. It’s hard to indulge your dreams without a ready supply of cash.