Category Archives: Economics

Profit vs. Non-Profit

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David Boyd has this from Walter Williams:

One of the wonderful things about free markets is that the path to
greater wealth comes not from looting, plundering and enslaving one’s
fellow man, as it has throughout most of human history, but by serving
and pleasing him. Many of the wonderful achievements of the 20th
century were the result of the pursuit of profits. Unfortunately,
demagoguery has led to profits becoming a dirty word. Nonprofit is seen
as more righteous, particularly when people pompously stand before us
and declare, “We’re a nonprofit organization.”



Profit is cast in a poor light because people don’t understand the role
of profits. Profit is a payment to entrepreneurs just as wages are
payments to labor, interest to capital and rent to land. In order to
earn profits in free markets, entrepreneurs must identify and satisfy
human wants in a way that economizes on society’s scarce resources.


As you may know I do most of my work with non-profits and here is what I can tell you about them: the good ones behave just like well-run, for-profit companies.  If they think of themselves as existing for a “higher purpose” and justify their existence in that light then they are doomed.  If, on the other hand, they view their members or constituents as customers and view their existence as serving those customers then they are most likely going to succeed.

Being Young Ain’t All That Great

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According to this article in BusinessWeek the last decade hasn’t been particularly good for young adults at least in terms of household earning power.  From 1995-2004 the median net worth of young households (25-34 years old) rose only 1.3% adjusted for inflation, while at the same time the net worth of households 35-64 rose 40%. 

For some perspective it would be nice to know how much this varies from past decades.  I always assumed that peoples’ peak earning was in their 40s and 50s so you’d expect the household gains to be greater in older households. And as the article points out one of the reasons that older households have done some much better is because such a large percentage own their homes and the real estate market went nuts from 95-04.  So is the story that the gap between the two growth rates is much greater than in the past?

This just reaffirms what I’ve been thinking as I approach my 40th birthday; while being young was an awful lot of fun I don’t think I’d go back.  Being broke definitely sucked but here are a few other reasons:

  • It took me over ten years to figure out how to be a relatively decent, housebroken husband and father.  I don’t EVER want to repeat that process again.
  • While it was nice having a young body that seemed to bounce back from anything it tended to produce self-abusive behavior.  Toilets are not meant to be hugged.
  • Sleepless nights spent dealing with babies.
  • Mornings after sleepless nights spent dealing with babies when you didn’t wake up and now you’re dealing with one extremely pissed-off, overwraught wife.
  • Tolerating bosses who were basically sub-human because I needed the money and health insurance.
  • Not knowing that the terms "fine" and "dining" are not mutually exclusive.
  • Believing the tag line "made from the finest Bavarian hops."
  • Not knowing that Bavaria was not the last name of a NY Giants tight end…you know, Mark Bavaria.
  • Not knowing how to tell someone to f—off with a smile on my face and get away with it.

I could go on but you get my point: young = dumb + broke.

Bad Career Move: Becoming a Real Estate Agent

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The guys that wrote Freakonomics have an interesting article in the New York Times Magazine about real estate agents.  Not surprisingly they see real estate agents’ business being blown up by the internet much like stockbrokers and travel agents in the recent past.  What is surprising is that they think being a real estate agent in one of the hottest housing markets ever in the US was also a bad idea.  Here’s why:

As it turns out, however, most agents don’t make very much money during
a boom, because of one simple fact: the boom attracts way too many of
them. Over the past 10 years, membership in the N.A.R. has risen by
more than 75 percent. And why not? Compared with most professions,
becoming a real-estate agent is quick, cheap and relatively painless.
In economics, this phenomenon is known as free entry…

From 2002 to 2004, during one of the hottest real-estate markets in
American history, the median income for Realtors actually fell — to
$49,300 from $52,200. This is not to say that some agents haven’t
become rich. As in most sales professions, whether the product is
diamond rings or crack cocaine, the people at the top of the pyramid
make an awful lot more money than those down below. It’s just that the
base of the real-estate agent pyramid grows significantly during a boom.

So if you’re looking to get into real estate I’d suggest becoming a fixed-fee broker or some such thing.  But that’s just me and I don’t know much.

I’m Thinking I Need to Take Some Econ Courses

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When I was in high school I literally confused economics with ecology, and things didn’t get a lot better in college. That best explains why I’ve always felt hampered during any discussion of "the economy."  Of course ignorance has never stopped me from opening by big trap before so I do endure.

Evidence of the endurance of my ignorant discourse is my exchange with David Boyd in the comments of this post.  What this discussion drove home to me is that while I do have a rudimentary understanding of economics (and I think I have some pretty accurate instincts about the Bush Administration, but I digress) I don’t quite grasp the cause and effect of varying economic factors.  It occurs to me that I don’t like government deficits because:

  1. Debt is bad.  My wife tells me that whenever we run up a credit card bill and she knows about this stuff because she’s an ECON major!
  2. All the experts say that deficits are bad, but to be honest I don’t really know why they think it’s bad.  I’m taking their word for it.

Then I came across this on the BusinessWeek’s Economics Unbound blog:

Tyler Cowen has an item titled Do future generations pay for deficits?. He starts off this way:

Assume that government spends some money today on
consumption. That money could have been spent on a durable bridge, but
it wasn’t. Some current people benefit from the consumption and future
generations get nothing.

Above and beyond that effect, do future generations bear the burden of deficit spending? 

But of course, there’s a big problem with his scenario. The latest
budget pegs the FY 2006 deficit at $423 billion. But federal spending
on major physical capital, research and development, and education and
training–all long-lived investments–is estimated at $425 billion.

We are not borrowing to finance consumption, we are borrowing to finance long-lived investments.

So a better question might be: Do future generations benefit enough
from these investments to justify the cost of the borrowing?

Now I’m really confused.  It doesn’t help that I think maybe the blog’s author has engaged in an old debate trick here of changing the basis of the argument.  My question to him would be, "Aren’t we borrowing to finance consumption AND investments?" But what do I know?

I came of age during the era of Reaganomics, which I believe was also called supply-side economics, whatever that is.  I seem to remember there being a great deal of disagreement between the economists from varying schools of thought so I came to the conclusion that this might not be an exact science, which it turns out is an oxymoron since every day some scientific proof seems to be overturned, disproved or improved.  Whatever, it’s not exact.

So I know that there’s a lot that economists disagree on, but I’ll be damned if I understand it.  I feel like I’m listening to two people argue in Latin; I can tell by their body language that they disagree but I have no idea what they’re talking about.  Which leads me to the conclusion that I need to get at least a rudimentary understanding of the language of economics.  Maybe I’ll take a course at one of the local schools, but in the interim can someone recommend a book on economics that works on the kindergarten level?

It’s Not Race, It’s Economics

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This post was prompted by the discussion over in Greensboro about neighborhood schools vs. the forced integration of schools. The reality is that we, society, cannot force people to like each
other, want to live with each other, etc.  Human nature is such that we
want to be around people like us.  Unfortunately due to the history of
race relations in this country we tend to equate "people like us" with
race.  That’s simply not the case for many people.  "People like us"
has a heck of a lot more to do with economics than race.

Before we moved to Winston-Salem in 04 we lived in a very
economically homogenous neighborhood in Northern Virginia.  While there
was a fairly diverse population in terms of race you could safely
assume that the vast majority of the folks in our neighborhood fell
into the same tax bracket.  And since the population was racially
diverse there was never a discussion of the need to bus kids for some
sort of racial quota.

Another interesting stat about Northern Virginia: over 70% of
working adults have a bachelors degree, one of the highest rates in the
country.  Cost of living there is very expensive, so if you want to
live within 30 miles of Washington, DC you need to be able to afford a
$300,000+ house.  The farther you get away from the city the lower the
average household income and the lower the percentage of folks with a
college degree, and voila, the more kids on free lunch programs, etc.
And the closer you get to the city the more you see an urban atmosphere
with impoverished communities juxtaposed with affluent communities, and
not a lot in between.

Long story short, we moved from an area where people still paid
attention to race, but really the number one factor was money and
everyone knew it.  To put it bluntly, no one worried too much if a
black or Mexican or whatever-race family moved in, but they’d have a
conniption if a bunch of day-laborers moved into a house on the street.

When we moved here we spent the majority of our energy finding a
neighborhood in the school districts that were ranked well in terms of
test scores (as much as I hate standardized tests, that’s really the
only barometer you have when you’re from out of town).  Honestly the
pickings were fairly slim so it was easy to narrow our search to a
couple of neighborhoods.  Guess what?  Most of the neighborhoods we
looked at were economically homogenous and to a large extent were
racially homogenous as well.  Did we choose to exclude ourselves from a
racially diverse neighborhood?  Nope.  We picked the place that worked
best for us in terms of getting our kids into good schools. (We see most of our neighbors so infrequently I couldn’t tell you if I
had martians living down the street.)

But my sense is that around here it is still a big deal if a family of another race moves in next door.  That’s too bad because the reality is that a middle class white family is likely to have more in common with a middle class black family than a rich or poor white family.  We don’t like to talk about it, but we all know that there’s a certain level of stress when a "have" is talking to a "have not" or in the case of the rich a "have" is talking to a "has more." 

When we’re around people that lead the same kind of lives we lead it’s easier to know what to talk about.  If you’re middle class it might be the costs of car repairs, having to dip into savings to buy the new washer/dryer, the kids’ moronic baseball coaches, etc.  If you’re rich that’s a different conversation (comparing your new cars that you get every year or two, comparing housekeepers, etc.) and if you’re poor you might be lucky to have to the time to have a conversation at all.

I’m not denying that there are different experiences for folks based on race; I’ve seen black friends treated differently than me in stores, have a hard time getting a cab, etc., but the reality is that as people of the younger generations, those born after legal racial segragation, get older the import of race will begin to dwindle and the import of economics will be recognized for what it is.  When that happens I think we’ll face some very serious issues dealing with the poor (the truly disenfrachised) in this country.

Will My Parents and Their Ilk Bankrupt the Country?

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In a stunning outbreak of nuance the National Journal has an article that explores the ramifications of the impending "retirement" of the baby-boom generation.  I’m not sure if I found the article interesting because of the subject matter or because it does a good job at looking at the issue from multiple angles, or to put it more succinctly, because the article is nuanced.  Either way it’s fascinating and a good read.

Oh, and to be totally accurate I don’t think my parents technically qualify as boomers since they were born during WWII and not after.  I just missed the boomer designation since I was born in 1966 and apparently the boom ended in 1964.  Still, I’d rather blame them than myself for any impending doom as that’s truly the American way.  Anyone know a good psychiatrist that can reaffirm that none of us are responsible for our own failures/inadequacies since it’s all our parents’ fault?  Of course any success we have is due only to our own actions…but I digress.

Thinking About Corporate Welfare, er, Incentives and Subsidies

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This has been the "Year of Dell" here in Forsyth County, North Carolina.  The state of North Carolina gave Dell hundreds of millions of dollars worth of incentives to build their newest plant in the state and then Forsyth County/Winston-Salem chipped in tens of millions of their own to attract the company to our fair confines.  Obviously this caused much debate within the community, and although my gut tells me that these corporate incentives stink in principle my head also tells me that if that is the playing field we’re on then we must compete aggressively.

Personally I think the jury is out on whether the deal is good for the county/city/state.  I honestly think that Dell will come through with the jobs they promised, but if the deal was made simply on the merits of Dell’s direct employment numbers then the folks who made the deal on behalf of the governments are fools.  They aren’t fools; they’re counting on the Dell deal to attract other companies as suppliers (that is happening) and even more importantly they are sending a signal to other tech companies that this is a great region to open for business.  I hope they’re right; I hope that Dell leads to more tech companies moving here to replace the emaciated textile, furniture and tobacco industries.  We’ll have to wait and see.

My biggest worry, though, is that if something doesn’t change this will be just the beginning of a corporate welfare trend that can be quite harmful in the long-term.  Our neighbors to the west in Tennessee are already seeing an increase in companies looking for incentive deals similar to one it gave Nissan to move it’s headquarters there from California, and I’m sure NC is getting similar inquiries now as well.  Let’s not beat around the bush here; what the states are doing is bribing companies to open shop there.  They aren’t saying "Look at our great business environment with an educated workforce, a safe place for your employees to live and a progressive tax structure."  They’re saying "Look at our great business environment and the $200 million we’ll hand you to move here."  That’s bribery and you or I would be put in jail if we did the same thing.

Unfortunately all the state economic development folks think they have to do this in order to compete.  But do they really?  Dr. Jeffrey Cornwall of The Entrepreneurial Mind has this to say:

Since most of our economic growth and new job creation are a result of
entrepreneurial development, spending so much trying to attract
corporations to move their operations may be misguided. If there are
enough slack resources in state funding to offer rich incentive
packages, let’s cut tax rates instead and let the market generate jobs
and growth, as lower taxes and less government spur entrepreneurial
activity.

I agree with him.  What if NC and Winston-Salem/Forsyth County had used that same $200+ million dollars in incentives to create incentives for local entrepreneurs to build businesses based on the skills and infrastructure being left behind by the collapsing textile and furniture industries?  Yes those industries are getting their asses handed to them by the Chinese, but there are some smart people out there who can figure out a way to create new market niches that our own people can fill.

That leads me to an article I read in Business 2.0 the other day about the US cotton industry, which is the recipient of lots of subsidies from the Federal government.  Let’s just say that the system makes it hard for the US to claim a free-market environment with a straight face.  And even worse, since some of the subsidies are paid to foreign-owned multi-national companies some of these subsidies benefit other countries. 

The cotton people make the claims you always hear in stories like this: without the subsidies the average farmer will go under, whole farming communities will be devastated, etc.  Of course most of the subsidies go to large corporate operations as there aren’t many family farmers left, and it ignores the fact that the subsidies artificially suppress cotton prices.  That means that most cotton sells below cost, which on the surface means that without subsidies the industry would crash.  But without the subsidies prices would go up and growers could actually make an honest profit on their operations.

In fact some farmers are already planning for the end of subsidies by growing specialized cotton that sells at high prices and is in great demand due to it’s limited quantity.  That’s true free-market innovation.

So what’s my point?  My point is that by using incentives and subsidies we are engaging in corporate welfare.  We are incentivizing our businesses negatively and we’re instilling in them the habit of looking for a handout.  And we have to remember that prices always go up, so it’s only going to get more expensive to bribe these companies in the future.

And what about the hard-working entrepreneurs who get no handouts?  What message are we sending them?  Do you think that they feel the same level of resentment that the average hard-working individual feels when they hear about folks who abuse the welfare system?  Do you think they feel that the Dells and Nissans of the world are a 21st century version of carpetbaggers?  Wouldn’t you?

To my way of thinking these incentives and subsidies are literally un-American.  We need to get back to competing on true merit. Yes, I understand that other countries tilt the playing field in certain ways (dumping, unfair tariffs, etc.) but until we clean our own house we don’t really have a leg to stand on when we ask them to do the same.  I say we clean up our own act and then act quickly and aggressively to make sure others do the same.

Reading List September 2, 2005

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  • Destroying FEMA (The Washington Post) – The Post looks at what the Department of Homeland Security is doing to FEMA.
  • Book Publishing and Management: Still Working Out the Kinks (The Post Money Value) – Book publishers are dinosaurs.
  • Katrina Heroes (Reveries.com) – What some people are doing to help Katrina relief cause.  Notable number: as of noon on Aug. 31 about $100 million had been raised from the private sector, and $70 million of that was raised by the Red Cross.

Reading List August 29, 2005

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  • The Betting Site for Big Thinkers (Freakonomics) – A couple of surprises here: one that a noted economist enjoys gambling and two that there are some very nerdy gambling opportunities at places like LongBets.com.
  • Dell Calling (BuzzMachine) – Jeff Jarvis finally got a call from a Dell PR person and she just continued spouting the company line.  Jeff’s given up on them.
  • Eye to Eye: A Talk With the CBS Blogger (BuzzMachine) – Jarvis meets with the new official CBS blogger and finds him nice enough that he offers some friendly words of advice.
  • You ARE a Marketer. Deal with It (Creating Passionate Users via BuzzMachine) – Hugh MacLeod explains why we’re all marketers, whether we like it or not.
  • Ups and Downs (Hogg’s Blog) – Jinni Hoggard has been fighting cancer for a long time and the experience has been a roller coaster for her entire family.  Her husband, David, has been writing about it on his blog and yesterday he wrote a post about the roller coaster ride they had in just one week.  It’s a must read.

Reading List August 24, 2005

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