Monday, September 14, 2009

Focus on the game rather than the score



When you watch a football game do you think that it is the points on the scoreboard that decide the game, or is it the teams on the field and the game play that dictates the score, which ultimately decides the game?

The answer, of course, is the latter.

Think of it this way: if an actual game had been played and the score were 20-7, but the scoreboard was broken, a game still took place with a real outcome. One team scored 20 points while the other scored only 7. One team won and one team lost. The scoreboard, therefore, is just a convenience; the game is what's of true importance.

Similarly, if there were no game, just two teams sitting on the sidelines, but the scorekeeper put up a score of 20-7 on the scoreboard, had there been a game? No. Was the outcome real? No.

This is the problem we get into in economics when we think about "the money" rather than the result or, "the output."

We tend to focus on the nominal price level (the money) as opposed to looking at whether or not we are using all of our resources and capital to the fullest. It gets us into trouble in many ways.

One way it gets us into trouble is by causing us to believe that national investments, such as health care or job creation, must be "paid for" in current dollars by some segment of the society. This merely redistributes wealth in some fashion; it doesn't create more. We are doing this now and it is unfortunate that we are, especially given how much spare capacity and idle capital we have.

Real "costs," however, often come from not utilizing all the productive capital (physical and human) that a nation has. This results in a lower standard of living to both current and future generations. That is the true legacy passed along to our kids and grandkids. It's also the reason why the debt that our grandparents ran up to fight WWII did not impoverish us. On the contrary, it made us rich.

Of course there is also a cost in pushing beyond the limits of what our productive capital is capable of yielding, but we are nowhere near that level. In fact, this country has not been anywhere near that level for 80 years. Therefore, one can say we have been living beneath our means for all that time.

Think of a business that has the ability to earn you $1 billion per year, but you run it to produce $500 million instead, because you do not want to "spend" the money to run it at full capacity even though your return would be greater if you did. That is not only bad management, it is irrational. If the business earns you $1 billion per year after expenses, then a good manager would run it to maximize its output or as they say, maximize its profit.

Same holds true for a nation.

8 comments:

Billy said...

I am assuming that Peter Schiffs run for the Senate is a joke but I do not know why Congressman Scarborough at MSNBC would get behind a joke - we shall see.

Billy

Matt Franko said...

I've been thinking about Mike's post here and may have come up with a recent example.

I always use the Drudge Report for my news-reader to keep up with headline news. Drudge will often group his headline links that are related in the same "box" on his page. A while back he had 2 California headlines linked up in a box; the one headline was like "Ca. Water Shortage, Schwarzenegger Considers Rationing" followed by "One in Ten in Cali. Out of Work"...See the irony?

Scoreboard watchers would say "They cant afford new water systems, they are broke" but Mikes point here is that the game on the field says otherwise; ie they have one in ten workers that could obviously be put to work in expanding and upgrading their water systems; and they CAN afford it.

RSG said...

California is not an issuer of it's own currency, but i get your point.

RSG said...

Mike, I was looking at your latest fiscal trend digest and was wondering why there would be a correlation between stocks daily deficit trends. I understand the relationship between deficits and aggregate demand but do stocks react to short term trends in deficits/surpluses?

GosuRuss said...

Why does Mike Norman even have a blog? He should have retired after this

http://www.youtube.com/watch?v=2I0QN-FYkpw&feature=related

3:25

1) the laughing, just stop.

2) didn't even have an argument

Mike Norman said...

RSG:

It's more empirical than anything else. There might not be any significance, but it seems to work. I am following it for now.

googleheim said...

MIKE

WHAT IS UP WITH THE BLOG ?

IS THERE A SMALL RESPITE BEFORE MORE ?

I'D LIKE TO NOTE ON PART OF YOUR ACTIVISM STANCE SINCE LAST YEAR.

WITH RESPECT TO THE SOUTHERN STATES WHO CLAMMORED AGAINST THE BAILOUT FOR DETROIT BUT SIMULTANEOUSLY GRAB FOR TAX MONEY FROM THE RICH NORTHEAST.

THE PAPERS NOW REPORT THAT PLACES LIKE MISSISSIPPI TOOK FEDERAL HURRICANE DISASTER AID MONEY TO THE TUNE OF 5 BILLION DOLLARS.

A LOT OF THE MONEY WAS SUPPOSED TO GO TO LOW INCOME HOUSING PROJECTS.

INSTEAD THERE ARE 70 YEAR OLD WHITE AND BLACK FOLKS WHO ARE SLEEPING ON FOAM MATTRESSES IN FEMA TRAILERS, WHILE $600 BILLION DOLLARS HAS BEEN REDIRECTED INTO PROJECTS WHICH EXPAND THE INDUSTRIAL SECTIONS LIKE THE PORT OF GULF PORT.

THAT MEANS MORE FOREIGN OWNED COMPANIES - EUROPEAN AUTO COMPANIES, INDIAN PIPE MILLS WHO UNDERCUT OUR STEEL UNION AND OUR NORTHERN STEEL INDUSTRIES, AS WELL AS OTHER EXAMPLES GET FREE SUBSIDIZED HELP NOT ONLY FROM NORTHEAST TAX MONIES, BUT THEY STEAL IT AWAY FROM COFFERS THAT WERE FOR REBUILDING HOMES FOR THE CITIZENS OF THE USA WHO LIVE THERE IN POVERTY.

WHAT A DOUBLE SHAM.

NO WONDER WHY YOU WILL NOT HEAR ABOUT THAT ON MSNBC FOX OR EVEN
THE MACLAUGLIN REPORT SINCE THEY ARE ALL SPONSORED BY THOSSE "INVENT IN MISSISSIPPI" COMMERCIALS.

googleheim said...

correction "$600 billion" should be "$600 million redirected" money to pet projects such as gulfport