Whiting column: Economic principles without partisanship
Understanding economics can be difficult.
Sadly, most of our exposure is through partisan politics. Consequently, economic concepts are tainted and tilted toward the point the political party, candidate or politician wishes to make.
The precepts of the American economic system are the reason we continue to progress at a faster rate than any other country. It is our responsibility to understand these concepts in order to encourage strategies that promote our economy. If we are to be successful in our roles as employees or employers we must understand our economic environment.
If we take partisan bias out of the equation, economics is quite simple and somewhat logical. It’s implementation that’s difficult.
Economics is the movement of money. The more the money moves, the better. Anything increasing this movement improves our economy; anything slowing or stopping the movement is harmful.
Supply, demand and their effect on price are dominant forces, but their influence has changed. Demand is a direct function. If demand goes up, so will price. Supply is an inverse function. If supply goes up, price will go down. Any situation has both demand and supply, but the best way to understand them is to view them in isolation.
Traditionally, demand was viewed as downward sloping; as price increased, demand decreased. Price was the dominant force. The last 20 years, our society has changed. Demand has become a function of our perception of “need” to the point it controls price. If we think we need it, we are willing to pay for it now, which generates demand and a movement of money. We all have “wants,” which do not have economic significance until transformed into need. That occurs when we are willing to use our scarce resource, money, to acquire it.
Today’s market works harder to prove we “need” a product or service than in convincing us through price. When we “need” something, price, within reason, becomes not only irrelevant but isn’t going to decrease. Price drops only if demand decreases or by an increase in supply.
It also applies to careers. Want to make more money? Reduce supply and increase need. Have a career that others don’t want to do or where “need” exceeds supply. One can also decrease supply by being better than others at your career. Simplistically, that’s why Peyton Manning made millions. If your job is easy, doesn’t require unique knowledge/skills and anyone can do it, you won’t have to worry about being in a higher income tax bracket.
Employment is a function of economic activity: movement of money. Something has to be purchased.
One of reasons our economic system functions better is it facilitates a multiplier effect. Transactions use the same money over and over. We get paid and spend $300 at the grocery store. The store spends that money on employees and bills. This occurs over and over, creating profit and new capital. The key is the money is moving.
If you have $500, economically it is better to spend it on food than a painting on the wall. We consume the food and have to buy more, which creates more transactions. The money is stuck in the painting until we choose to resell it. The food creates far more transactions, more new capital.
If you have $5,000, it’s better to spend $500 on 10 things than $5,000 on one thing; the more transactions the better. If we want to improve the economy, increase the money people have to spend and facilitate their creating multiple transactions.
Obviously it takes money to create this transaction-based multiplier. This is why economists get concerned about a negative balance of payments; imports exceeding exports. The money we spend in a foreign country cannot be multiplied here. Economists believe the multiplier effect is 3-5 times, so every dollar leaving the country is actually $3-5. The converse is also true. Every dollar we get coming into our country through exports or tourists becomes $3-5.
The same concept applies in our local economy. A tourist creates transactions by spending $500. We can multiply it. If we buy a $500 television in Denver, we lose the economic effect of $1,500-$2,500 locally.
One must use good sense, however. Do your kids a favor and teach them the economic concept of opportunity cost. Everything we do has both an out-of-pocket cost and opportunity cost. A concert in Denver out-of-pocket cost might be $50 ticket, $50 for gas, $100 motel room, $50 meals, $30 concert T-shirt, for a total of $280. The opportunity cost: Two days of not earning money and what could have been made by investing the $280. Even at $200 daily wages, the opportunity cost exceeds $700.
Of course life is for living, but understanding opportunity cost enables us to make an informed decision.
Taxes: never a pleasant subject. Economically, taxes are always a negative. The more money taken from a person or business the less they can spend meaning fewer transactions. Taxes are needed for necessary activities, but all taxes are negative economically.
Economic principles are simple when we look past partisan interpretation. The difficulty comes in deciding what strategy best accomplishes them.
Bryan Whiting believes most of our issues are best solved by personal responsibility and an understanding of nonpartisan economics rather than by government intervention. He taught marketing, entrepreneurship and economics for 40 years. His column appears on the first Wednesday of the month.
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Sticks in the mud. Overly cautious. Obstacles to progress.