Straight Talk

STRAIGHT TALK by Ballard Cassady KBA President & CEO bcassady@kybanks.com

Just Stuff I Think I Know

If this article was being narrated, the Beverly Hillbillies theme would be a fitting backdrop. “Come and listen to my story ‘bout a man named Jed…” Let that be fair warning that you’re about to get a load of pure Eastern Kentucky Appalachian economics, barely adulterated by an BA in Business from Transylvania University and an MBA from Vanderbilt University.

Supply and Demand

Economics is pretty simple. It’s rooted in a few truths that never change in a capitalist society, even one in which everybody gets to choose their own truth. The Big Dog of economic truths is supply and demand. Left alone, it solves just about any problem. Any economist who can get away with being honest -- not to include the 17 Nobel laureates who said inflation was transitory -- will tell you that our capitalist economy, if left alone, will heal itself every time. When we screw it up bad enough, there will be some pain. Sometimes it’s a bloody nose; sometimes a chigger bite. But, it will heal itself through the basic principles of supply and demand.

To over-simplify, if the demand for bananas goes up and the supply is not there to meet that demand the price of bananas will go up. However, since you can make more money now selling bananas you will produce more bananas thus matching and exceeding the demand and the price of bananas will come down. The cycle will repeat itself until Market Equilibrium is reached (the niche where supply equals demand). At that point, the banana farmers and the consuming public have reached a “fair market price” between themselves, with no help from anyone -- especially anyone in Washington.

But, therein lies the problem. Once the government interferes in supply and demand with things like price supports for the banana farmer, then the natural cure doesn’t stand a chance. The banana farmer has no reason to regulate his crops to meet demand. Heck, the government is going to pay them a high price no matter what, thereby destroying the organic nature of supply and demand. A list of the things government has royally mucked up with such interference would go on for pages, things like tobacco, oil, grain. To be fair, the reason is their constituents don’t like pain. We lobby Congress for quick fixes for even short-term pain, and then we reward the folks who bring home that bacon with re-election. So, we give Congress plenty of incentives to repeatedly ignore the most fundamental principle of economics (at least as understood by Milton Friedman, one of my personal heroes). Profits

Profits are the “mother’s milk” of Capitalism, stock market prices and higher wages. I had to throw in a no-brainer here.

Politicians are Human

Human nature doesn’t change much, if at all. A founding father once wrote, “If men were angels, no government would be necessary.” There were many words of such wisdom handed down to us from that generation marked by vast learning, character, courage and faith. Today, few of us have read them. Maybe that made it easier for the worst of our human natures to corrupt our institutions with the hunger for power and wealth. If asked to name a true statesman, how long would it take you?

Benjamin Franklin was famously asked by a lady waiting outside of Independence Hall in Philadelphia, “Doctor what do we have, a Republic or a Monarchy?” Franklin responded, “A Republic, if you can keep it!” I think his use of the pronoun “you” instead of “we” was telling. Franklin knew the hearts of the people he’d just left in Independence Hall. They had risked everything for this republic. What he didn’t know was whether his countrymen would have the wisdom and courage to preserve it. Currently, it appears we’re trying our best not to.

Unions

Well, this is a doozy. Most of us agree that unions were desperately needed in the era of their founding. Some workplace conditions were inhumane and unsafe, wages were intolerably low, children were being abused in the labor force. Congress responded with enough laws and regulations to fill a library, ensuring safety and fair wages as much as anyone can (OSHA, EEOC, FMLA and a myriad of others). We formed a Department of Labor to oversee and enforce all these laws.

More About Incentives

My ole granny had a saying that, “money goes where it is invited.” If you want someone to put their money somewhere, you give them a reason. For example, if I want you to invest in electric cars, I give you incentive to invest in EC’s. I give you a tax discount or lower the price OR make it so expensive not to have an EC that you buy one. Sound familiar?

On the other hand, if I want you to stop investing in something, I make it unbearably expensive to make a profit. Say for example, a gas well. I may give you a permit to lease land to drill but refuse to give you a permit to drill. So, the net effect is you wasted your leasing money. Tough to make a profit that way.

Where did that leave unions? In search of reasons to exist, which has too often led them to create barriers to progress, innovation, self-reliance, and the pursuit of our national interests. They’ve had a big role in increasing the cost of production to the point of driving manufacturing into foreign countries.