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Letters by a modern St. Ferdinand III about cults

Gab@StFerdinandIII -

Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

Tempus Fugit Memento Mori - Time Flies Remember Death 

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Friday, February 8, 2008

The consumer is NOT 70% of the total economy.

Media dis-information. Blame the Russian economist Kuznets.

by StFerdIII

You hear it every day. More than 2/3 of the modern industrial economy is supposedly based on the economic health of the average consumer and consumer spending. This is of course a gigantic myth. No actually it is a massive lie. Corporate profits and business spending are more than 4 times as important than consumer spending. But the media and politicians, so concerned with being concerned, [no we mean being very very concerned], have every incentive to focus the world around the consumer, so they and their chattering populist friends can propose yet another program to 'save' us.

Lying politicians love the idea that the consumer is the center of the economic-universe. In this perversity, the average grinning consumer goes into a store, buys a loaf of bread and voila! 70% of the economy has been saved. If said consumer is not aided by government, by income redistribution, by government cheques, or by some welfare or 'rights' program, than the entire economic universe will collapse and all will be homeless and penniless.

This is about as backasswards a view of the world as one can implausibly invent.

The man who originated the idea of assessing a total economy's output was the Russian born economist Kuznets. The goal was to try to roughly calculate the worth of an entire country's output in order to measure performance and growth. Its concern is not [and should never be] with such stupidities as a 'happy index' [are we smiling more this year]; a quality of life index, or an index to measure such vague nonsense as leisure time value, or the value of more trees or birds. GDP by necessity is based on hard numbers.

There are some problems however with measuring GDP. Current calculations of GDP focus on the final output or retail price. That price is considered to have all of the input costs for a product or service included. It is a fair assumption. Thus GDP is the total dollar value of all goods and services produced over a specific time period in the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. From here one can make assumptions about job growth [for instance a GDP growth rate of 3% guarantees job creation]; and general economic health [if GDP contracts, probably income is lower, and we are getting poorer].

All of this is sensible, except when pundits and wonderfully coiffed TV presenters tell you that the entire economy rests on the shoulders of consumers.

This makes no sense.

Consider a normal purchase. You wander into Walmart to buy a size 44 jeans. Feeling large. The jeans today cost $10. Twenty five years ago the price in today's money was $30. You buy them. Suddenly you have supported 70% of the economy, or so the geniuses on TV tell you. But is it true?

First of all, the jeans are a deflationary-priced product as are many if not most consumer goods. You have saved $20 over 25 years thanks to trade and business practice improvements and a litany of pre-retail innovation in getting the jeans from manufacturing to the store's shelf at Walmart. You are now $20 richer. Who is responsible for that ? You? Hardly. Business competition and innovationns in manufacturing and servicing account for the consumer's $20 income gain. In other words 'business' just gave you a $20 cheque. GDP accounting misses this. It will mark GDP in this case as $10 and ignore the savings of $20 over 25 years or rougly a $1 a year. You are richer however by this amount.

Second, the GDP calculation makes little sense from a transaction standpoint. The pair of jeans is designed, produced, shipped, stored, shelved and then sold. The idea behind GDP is that the final price of the jeans must include all its associated costs. Or that all incomes earned in an economy must likeweise reflect, or be reflected in all goods and service costs. But is this sensible? Consider the lowly pair of 44 jeans just purchased and its various components:

-Raw materials purchased
-raw materials are shipped to manufacturing
-storage, pick and pack of materials
-line manufacturing processes including usage of all raw materials
-production and storage of end product
-distribution to shipping warehouse of end product
-jeans loaded onto truck, car, ship or plane
-sent to regional distribution center
-loaded and shipped again
-stored at retail location
-picked and shelved

In this simple chain of events, there are a lot more than $10 of economic activity and costs. There are costs for material, shipping, labor, rent, sales, production machinery, design etc. These costs far exceed $10 for the lowly pair of jeans even if you were to apportion their costs by single product items. The seller of the jeans [the producer] and the retailer [Walmart] make their money by mass production, sharing of costs across many products and applying a reasonable margin on these average costs.

Simply put all economic activity to produce a pair of jeans far exceeds the $10 sales price. This sales price is not all the value-added activity for those jeans, but an average cost, average margin calculation which does not accurately reflect all economic activity.

The other issue, is of course internationalisation. If the jeans are made in Malaysia, re-exported from China, stored in Vancouver, but sold in LA what then is the value to the US economy? Good question. Is the value to the LA economy really $10 if all the work happened elsewhere? Of course not.

We could in effect be counting these jeans as part of GDP four times through each stage of the sales process [Malaysia, China, Canada and the US]. In Canada the costs of receiving the jeans [transportation fees etc.] would be counted, as well as the costs of shipping it to LA. But the US economy captures these costs [supposedly] and counts the full $10 as part of its GDP. GDP is thus distorted.

GDP is therefore an imperfect but roughly accurate portrayal, of what is going on economically. The primary objection to GDP is not with the calculations or the purpose of measuring economic activity. It is the way in which smiling, smarmy politicians and the boneheads in the media present it.

In the simple example above one can easily see that a pair of jeans sold for $10 in LA, actually have a far greater economic stimulus than $10. It would be hard to measure the 'transactional-value' of the jeans, but it would be safe to say that $40 or more of real economic activity has been stimulated by its sale in LA. Designers, production machinery, warehousing, shipping firms, and retail outlets all depend on the sale of these jeans and other products. By association literally hundreds of jobs would be directly dependent in some way on the production and sale of these jeans.

It is thus business and not the consumer which drives GDP and drives the economy.

Without business and competition there are no products. Without trade and business innovation there would be no price declines and thus real income growth, in consumable products. Without corporate profit growth, there are no jobs for there is nothing to reinvest and thus no need to maintain wages. Without the supply chain of product distribution and creativity there is by extension, a real limitation on incomes, number of jobs, and product choice. Logically therefore it is business and the ability of businesses to get a product in front of a consumer which drives the economy.

It is a lie and an outrageous misrepresentation that the consumer is the economy. This can't logically be true. Consumers can only buy what they have to spend. If they don't have jobs, and don't have product-market choice, there is no economy. Soviet Communism and Nazi-era austerity prove that point. So does the government induced Great Depression of the 1930s. Business and corporations account for at least 2/3 of all economic transactional activity.

No business, no income, no jobs, no economy. It is a simple equation.

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