Thursday, December 27, 2012

Economists on Sesame Street ??

In 1946, Dr. Benjamin Spock published his classic book on child-rearing and raised my generation.  In 1969, Jim Henson came on the television with his classic show Sesame Street and raised my daughter's generation.  One of the most annoying characters on that show was Count von Count, who insisted on counting everything and then telling everybody about it.  Examples would be bricks in a wall or clouds in a sky . . . like, who cares?  Count von Count is the role model for almost every economist, who start with counting everything and then feel compelled to explain it . . . like, who cares?

One example would be Opportunity Cost of an aircraft carrier.  Count von Count would count the dollars and tell you what it cost, say, $2 billion.  An economist might say the aircraft carrier cost 2.1 hospitals and 3.7 nursing homes.  Or, which would you choose:  another war machine or a college education for ten thousand kids?  Of course, opportunity cost choices have to be made at the personal level as well.  Suppose you can send your kid to college and retire at age 67 or you can retire at 62 but your kid won't have a college education.  Count von Count cannot make those decisions, because he only counts.  But, economists insist we try to understand what we won't have . . . when we choose what we will have.

Now consider the idea of Capacity Utilization.  It measures how fully the existing factories are being used to produce things.  It got down to 67% during the recession and is now about 78%.  It is commonly used as an advance indicator of inflation.  When it approaches 85%, say hello to inflation.

I just finished reading a report on our manufacturing industrial capacity, which is only 63% of what it was five years ago!  Now, think  about that -- we have reduced the capacity by at least a third, while increasing utilization of the remaining only ten or eleven percent!  While there has been much media coverage about the rebirth of the manufacturing sector since the recession, it has flattened since the first quarter of 2012.  Businesses are sitting on almost $2 TRILLION in cash, waiting for the smoke to clear and they know how to invest it.

Lastly, think about the Output Gap.  Not even Count von Count could give you the size of the Output Gap, which measures the difference between what we do actually produce and what we could produce.  Economists might estimate the average income for a family of four would increase from $47,000 annually to $60,000.  Average education would increase.  Retirement age for the non-self-employed might drop.  Think about it -- how would our world be different, if Congress would get out of the way and we could produce all we are capable of doing?

So, what is the Opportunity Cost of our system of government?

And, by the way, who is raising the current generation anyway . . . ???