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.