Thursday, September 16, 2010

FedEx 1Q profit doubles; will cut 1,700 jobs

Is this good news or bad news? Yahoo story here.

This is probably a perfect example of how productivity increases can outpace general economic growth and result in more people being thrown out of their jobs, even though corporate results can be improving.

The ONLY way to manage against this trend at this point is through fiscal policy that leads to broad increases in incomes or direct hiring of the unemployed.

And instead we have the former Fed Chairman advocating for tax increases? Our leadership is indeed clueless.

12 comments:

Mike Norman said...

This is capitalism at its worst. The way it is being practiced here in the U.S. is a threat to democracy, I am beginning to think.

Mike Norman said...

I should say, it's the true nature of capitalism, which can both thrive amid high unemployment AND contribute to it.

Tom Hickey said...

Here again the fallacy of composition is at work. While one company can gain advantage through increasing productivity by cutting the labor force, all companies cannot do it without adversely affecting worker incomes and therefore consumer effective demand. Henry Ford and Thomas Edison got his. Contemporary CEO's haven't.

This situation affects the entire global economy, in which there is overcapacity owing to lagging demand due to wages being too low to purchase available supply. This reduces productive investment and turns the flow of funds into speculation instead, resulting in asset bubbles and instability.

The only ways to counter insufficient demand is either increasing consumer indebtedness, which was just shown to be unsustainable, or else greater participation by government to take up the slack.

We need to realize that money is just a medium of exchange (token) and there has to be enough flowing into transactions to support capacity and its growth proportionate to population growth.

There are two ways to do this. The first is to tax away non-productive uses of money, basically economic rent (land rent, monopoly rent, and financial rent). ("Economic rent" basically means unearned revenue or "windfall" profit.)

The second is for monetarily sovereign governments to run deficits large enough to sustain full employment.

However, we need to be looking at global economics as a separate field that complements micro (markets) and macro (national economies). With the advent of international finance and the clout of the multinationals, the game has changed drastically and we are still playing under old rules that are becoming obsolete.

Red Rock said...

Tom said, "We need to realize that money is just a medium of exchange (token)"

There are many that would argue that the primary function of money should be as a medium for the preservation of savings especially if you intend on eliminating or taxing away any investment opportunity you view as "rent seeking".

Are the two functions of money incompatible? Certainly a dollar bill generally does not have the same worth/value it did fifty years ago.

This is one of the fears (whether justified or not) that is driving the price of gold and silver higher. So can the two functions of money be combined in one unit of account or do we need multiple monies, one to serve as a medium of exchange and one that's primary function is to preserve value?

Tom Hickey said...

Red Rock: There are many that would argue that the primary function of money should be as a medium for the preservation of savings especially if you intend on eliminating or taxing away any investment opportunity you view as "rent seeking".

There are four functions that money plays: medium of exchange, unit of account, store of value, and credit instrument. Economists are generally agreed that the primary function of money is as a medium of exchange to facilitate transaction, obviating the need for barter.

The problems arise with the other three. Money as a unit of account make pricing possible, and also the changing real value of money in terms of purchasing power. Money as a store of value removes money from circulation. Debt draws demand forward and creates future obligations on revenue or assets.

There are no problems associated with money as a pure medium of exchange. If demand (income) and supply (items for sale) are the same, i.e., if consumers are able to purchase total output with their incomes, there are no problems. When this balance is disrupted, then there are economic imbalances that led eventually to problems.

If people wish to save, then there is not enough income committed to consumption to purchase total output. When that happens, then inventories rise and businesses cut back, resulting in an output gap and unemployment, the present and forward cost of which is huge. In a modern economy, governments step in with deficits to create space of the the propensity to save.

The real problem arises from rent-seeking, which draws funds away from productive investment, which is needed in order to grow the economy in proportion to population growth and also to provide income expansion to service debt created by borrowing.

What this means is that individuals acting together in their own self-interest often leads to problems for the economy as a whole, and what the individuals in one country do affects other countries in an open economy.

Tom Hickey said...

Red Rock:So can the two functions of money be combined in one unit of account or do we need multiple monies, one to serve as a medium of exchange and one that's primary function is to preserve value?

The "real" value of money lies in its purchasing power. It has no inherent value as token. The most economically beneficial way to to preserve and increase the value of one's stock of money is through productive (primary) investment, i.e., "venture" capital. Capitalism is about venturing capital (putting capital at risk commensurate with promise of reasonable reward), rather than saving (hoarding). speculating, or rent-seeking.

Saving plays a positive role by providing funds for investment, and speculation provides liquidity in secondary capital markets. Economic rent-seeking beyond reasonable financing of productive investment is parasitical on the system and should be eliminated as much as possible.

Generally speaking, if one wishes to protect oneself from monetary instability, the optimal route is through acquisition of real assets that have intrinsic value instead of financial assets whose value fluctuates with nominal value.

Red Rock said...

Tom said: "The most economically beneficial way to to preserve and increase the value of one's stock of money is through productive (primary) investment, i.e., "venture" capital."

So in order for someone to preserve their purchasing power over decades they either need to become a venture capitalist or purchase "real" assets? Perhaps you can elaborate on what you consider real assets since I suspect many of them fall under your rent-seeking prohibition (land and real estate?). Other real assets such as oil and food are perishable.

I'm trying to figure out here what you consider an ethical store of value for the product of years of labor. If an individual works until they are 60 years old and wishes to retire without the constant worry about the effects of long term inflation and expenses eating up all of their principal it's still not clear to me what you propose they do. Clearly everyone is not cut out to be a venture capitalist, and T-bills are not going to cut it.

Tom Hickey said...

So in order for someone to preserve their purchasing power over decades they either need to become a venture capitalist or purchase "real" assets? Perhaps you can elaborate on what you consider real assets since I suspect many of them fall under your rent-seeking prohibition (land and real estate?). Other real assets such as oil and food are perishable.


Economic rent is that which is unearned or windfall. Land rent is increase in asset value owing to government improvements, such as transportation, schools, etc. That is a windfall that is taxable under the concept of land rent. Improvement to land such residential, rental or commercial construction is not considered land rent but productive investment, which tax policy would incentivize. RE in this sense is a good "real" investment, but under the policy that those seeking to tax land rent advocate, the appreciation of land value, not the construction, owing to government improvement of the surroundings would be recaptured by government.

I would also prohibit commodity speculation that is not related to end use, so oil and food are out.

I would end the issuance of tsy's as an offset for deficits since a monetary sovereign government funds itself through currency issuance and does not finance itself by borrowing. Tsy issuance is a subsidy for those holding tsy's, mostly the wealthy and banks. I would instead have the government issue only savings bonds at the retail level, which it has done since WWII.

I'm trying to figure out here what you consider an ethical store of value for the product of years of labor. If an individual works until they are 60 years old and wishes to retire without the constant worry about the effects of long term inflation and expenses eating up all of their principal it's still not clear to me what you propose they do.

There should be a pension/benefit system built on SS and Medicare that enables retirement in dignity at about age 60 for those that desire to retire. There is no problem of government supporting this since this increases consumer income and provides demand to meet supply, encouraging productive investment if this is incentivized and leakage is shut off.

Clearly everyone is not cut out to be a venture capitalist, and T-bills are not going to cut it.

People should be able to do well investing in productive investment. There are ways to structure programs through which ordinary people could do this in a diversified way.

If we look at the US equities market, for example, people that invested in stocks for retirement did not keep pace with inflation and now pension funds that invested in the market are way short. The pension shortfall is now in the trillions, while the financiers have walked off with trillions, mostly untaxed or taxed as very low rates. This looks like a rotten deal for most people to me. We can do better.

Tom Hickey said...

So in order for someone to preserve their purchasing power over decades they either need to become a venture capitalist or purchase "real" assets? Perhaps you can elaborate on what you consider real assets since I suspect many of them fall under your rent-seeking prohibition (land and real estate?). Other real assets such as oil and food are perishable.


Economic rent is that which is unearned or windfall. Land rent is increase in asset value owing to government improvements, such as transportation, schools, etc. That is a windfall that is taxable under the concept of land rent. Improvement to land such residential, rental or commercial construction is not considered land rent but productive investment, which tax policy would incentivize. RE in this sense is a good "real" investment, but under the policy that those seeking to tax land rent advocate, the appreciation of land value, not the construction, owing to government improvement of the surroundings would be recaptured by government.

I would also prohibit commodity speculation that is not related to end use, so oil and food are out.

I would end the issuance of tsy's as an offset for deficits since a monetary sovereign government funds itself through currency issuance and does not finance itself by borrowing. Tsy issuance is a subsidy for those holding tsy's, mostly the wealthy and banks. I would instead have the government issue only savings bonds at the retail level, which it has done since WWII.
[continued]

Tom Hickey said...

I'm trying to figure out here what you consider an ethical store of value for the product of years of labor. If an individual works until they are 60 years old and wishes to retire without the constant worry about the effects of long term inflation and expenses eating up all of their principal it's still not clear to me what you propose they do.

There should be a pension/benefit system built on SS and Medicare that enables retirement in dignity at about age 60 for those that desire to retire. There is no problem of government supporting this since this increases consumer income and provides demand to meet supply, encouraging productive investment if this is incentivized and leakage is shut off.

Clearly everyone is not cut out to be a venture capitalist, and T-bills are not going to cut it.

People should be able to do well investing in productive investment. There are ways to structure programs through which ordinary people could do this in a diversified way.

If we look at the US equities market, for example, people that invested in stocks for retirement did not keep pace with inflation and now pension funds that invested in the market are way short. The pension shortfall is now in the trillions, while the financiers have walked off with trillions, mostly untaxed or taxed as very low rates. This looks like a rotten deal for most people to me. We can do better.

Red Rock said...

Interesting... In terms of commodities, end use is not so clear. If I own real estate and need #2 oil to heat the buildings, am I allowed to use the commodities market to hedge my exposure? Going further in addition to gas for our cars, virtually every product we purchase has a petroleum component to it. Is the average citizen banned from hedging their exposure? If I want to re-finance a mortgage two years from now and want to remove the interest rate risk between now and then, am I banned from hedging my exposure?

Tom Hickey said...

Interesting... In terms of commodities, end use is not so clear. If I own real estate and need #2 oil to heat the buildings, am I allowed to use the commodities market to hedge my exposure?

Yes, it is related to end use. You are an end user.

The problem in commodities today is that they are treated as assets and hoarded. Hedge funds and other fund managers are putting enormous amounts into commodities, not only futures. There is not an empty oil storage facility or ship that they not been rented and filled with oil in expectation of a price rise. Wheat is another easily storable "asset." This type of hoarding distorts energy and commodity markets. In the Third World, people were literally starving due to the run up in wheat prices.

Going further in addition to gas for our cars, virtually every product we purchase has a petroleum component to it. Is the average citizen banned from hedging their exposure?

No, but there need to be limits. For example, during the '70's oil shock when there was a gas crisis, everyone kept their tank topped up. The amount of fuel that this required was enormous and it put huge pressure on available supply. Again, a composition problem. What is good for individuals is bad for the system as a whole and can lead to systemic breakdowns that affect everyone negatively, requiring government intervention.

Going further in addition to gas for our cars, virtually every product we purchase has a petroleum component to it. Is the average citizen banned from hedging their exposure?

No problem. This is real hedging and does not involve financialization. But again, when everyone does it, the effect is like everyone standing up at a ball game. When everyone does it, there is no advantage and a big disadvantage.

I think you are needlessly concerned here. Almost all the economic rent that would be taxed away under such proposals does not affect ordinary people and would benefit them instead. Economic rent is parasitical and it benefits the top end town, not Main Street.