The fundamentals of our economy, part 1

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By Ari Rutenberg

The recent flap over John McCain's comments about the economy and the ensuing melee regarding who is responsible and who can fix it, I am going to describe the fundamentals of our economy and all the different meanings that might actually have, including John McCain's contrived argument that he was referring to the American workforce and their productivity. As a matter of fact, which I will demonstrate later on, even if Senator McCain is so daft that he truly believes that worker productivity is "the fundamentals of our economy" then by any actual economic measure, he is still wrong.  By all measures the American working class is in terrible shape, even if their corporate overlords have figured out how to get a few more units of productivity out of their employees.

The thing is that I am an economist by training.  I do not normally like to write about it as I believe it to be an arrogant and foolish profession that places far too much stock in the ability of numbers to predict human action.

I actually got the degree in order to dispute economist, rather than
to endorse their perspective. However there are a few things the
'dismal science' (really its social science, but anyway) does get
right, and there are some statistics and which, when properly
understood, can help to explain the basics of our economy.  There are
also many economists who do understand the limits of numbers and models
and who can offer many insights into our world, but they are not they
prophets so many believe themselves (and advertise themselves) to be.

First I want to make clear what economics is.  Economics is the
study of the way in which human society allocates scarce resources.  In
economics, all resources are scarce as none are infinite, its just that
some (like water) are vastly less scarce than others (like gold).
Fundamentally what matters is if we distribute our resources well and
relatively evenly with and eye towards increasing everyone's standard
of living.  Its not about money or profit or growth or even employment,
though all those things will be discussed as they are good indicators
of the efficiency of our distributive systems.  It is also not about
how much we consume.  A proper amount of consumption is good, but by
recklessly trashing our resource base due to over-consumption, we do
ourselves harm in the short- and long-terms.  Standard of living is
about how happy we are and if we believe the next generation will have
the same or better opportunities for happiness, not about how much crap
you buy at Wal-Mart or Costco.  So to be clear, economics is the study
of how well we distribute resources, and the measures of its success
are our happiness and standard of living.

Now the fundamentals of economics can refer to several things.  Each
of these topics will receive and entire post dedicated to it, but I
will briefly summarize the different possibilities here.

The fundamentals could refer to the basic macroeconomic statistics,
which are GDP, unemployment, real wage growth, inflation, long-term
interest rates, income inequality, and a few others that most people
are aware of.  These are the important numbers that are probably what
most people, and economists, think of when someone refers to the
fundamentals in a political sense.  There could be an argument made
that many of these statistics are not in such bad shape.   The odds are
vastly in favor of McCain really having meant these, as that would be
both the most common and least incorrect version of economic
‘fundamentals’.

They could also refer to the basic microeconomic functions like
supply and demand, market stability, corporate profitability and the
like.  I certainly hope that McCain was not referring to these as the
"fundamentals" because it really does not need saying that, from a
microeconomic perspective, our country is in serious trouble.
Microeconomic theory is also where Republicans get their free-market
ideology as they, and many economists, simply assume that free markets
function perfectly.  They have no evidence that this is the case.
Clearly this is a bankrupt and empty ideology, of which McCain'
economic guru Phil Gramm was one of the chief advocates, that has
collapsed with it's great temples on Wall Street.  The free marketers
got what they wanted, and we will all pay they price.  So I really
can't imagine he was referring to these "fundamentals".

"Fundamentals" might mean our physical economy.  That would include
things like the amount of energy production, our natural resource base
(how much coal, oil, iron, trees, livestock, etc. that we have), our
manufacturing base, and especially to the condition of our physical
infrastructure.  If McCain meant this, which is unlikely, than he is
once again out of his mind.  Though some of our physical economy is ok
like our energy base (it ain't clean, but we got a few hundred years
worth of coal), things like our rapidly deteriorating infrastructure
and the decimation of our skilled manufacturing base would seem to rule
this out as a possibility.

The fourth possibility, and they one he mentioned in his backpedal,
is that he was referring to the fundamentals of the labor market and
consumer health (the aspects of economics that a working class person
would be most associated with), which would seem out of character for a
free-marketer like McCain.  This would include measures like real wage
growth, cost of health insurance, vacation time (U.S. law does not
require that a single day be given), housing prices, cost of basic
goods like fuel and food, job security, and consumer confidence.  Even
if he was referring to this, the actual metrics do not bear his
statement out.  He seems to think that just saying “the American
worker” will get him off the hook.  But by every measure we use the
American worker is worse off than he was 8 years ago.  Of course there
is nothing wrong with the workers…its not like they all suddenly
started to become morons incapable of operating machines, and no one
has suggested it.  It means nothing to say that in the long term the
American worker will save us.  They have been the ones getting screwed
by this anti-regulatory climate and despite their increased
productivity they are worse off than they used to be.  They make less
real money, have fewer benefits, poor or no health insurance for
exorbitant rates, and have to cope with record food and fuel prices
Here ‘real wage means how much you can buy with your paycheck (‘cause
that’s what matters) rather than how many dollars (nominal wage) you
make (‘cause if you make a million bucks a day, but a pack of  gum is
250k , then your not really doing that well).

Finally, it could be a very academic reference to the fundamental
modeling assumptions of modern economic orthodoxy (which is referred to
as Neo-Classical economics).  They will argue that these assumptions in
some way reflect the real world, but that is a canard.  They do this so
that they can obscure how inaccurate their models are.  Though making
these assumptions makes it easier create models, they also make most
models proportionately less reflective of the real world.  The second
part will deal with these, as it will also give a good insight into how
economists think about the world.