The Indiana legislature once nearly passed a bill that would have made the value of pi to be 3.2.* Now it would be nice if they could really change the ratio of circumference to diameter of a circle to something so simple. It would be much easier to work with than the actual irrational number whose digits extend indefinitely. School work would be easier as would many endeavors in science and engineering. The problem of course is that Nature pays no attention to laws decreed by mere humans.
We might pass laws about the value of pi, about what we will allow gravity to do, about how nasty germs are not allowed to infect us. We could print those laws in books and distribute the books widely. Nature, however, would ignore those laws and we have not the slightest ability to enforce them. The effect of such laws on Nature would be exactly zero.
However any such laws would have an effect on us. Buildings constructed with the incorrect value of pi would not be reliable. Anyone trusting gravity to obey human law might take a nasty fall. Those who trust human law instead of good health practices would get sick.
Human law cannot overrule Nature. However attempts to overrule Nature can harm us.
Now all that is too obvious. Why should you worry about such things when there are no proposals to pass such laws today?
Are you sure there are no attempts to legislate Nature today? Actually there are, though the laws to be changed are laws of economics and human behavior rather than of science. The most flagrant current example is in Greece but there are attempts all over the world to legislate Nature.
The Greek problem is that many voters and public employees seem to think that their government can just give them what they want, ignoring where that comes from. Over half of the Greeks employed are on the government payroll. Their contracts call for great pay, benefits, and retirement packages. Furthermore they cannot be fired. More and more of them are becoming eligible to retire, plus the number of government employees who must be paid has grown. Those “entitlements” now exceed what the government can afford. The results are predictable.
Greece is so deeply in trouble that the European Union has to bail it out. Of course the EU doesn't want an indefinite commitment to pay for Greek ineptitude so the bail-out comes with strings attached. Greece must get its financial house in order, cutting back expenses to match resources. That is quite a reasonable demand. Without such measures the Greek expenses will just continue to grow and consume more and more EU resources.
How are those people reacting? Are they facing the fact that somebody has to produce the compensation they claim they should receive? Of course not, they are rioting and demanding a continuation of their benefits. They are demanding a change to economic law quite as impossible as the Indiana legislature's change to the value of pi.
What the Greek rioters ignore is the fact that economics is not about money, it is about goods and services. Governments may be able to create money by decree but they cannot do the same with goods and services. No human law will cause wheat to grow faster, clothing or housing to magically appear, or medical facilities and personnel to become available without cost to somebody.
The fact is that neither Greece nor any other country can long spend beyond its means. Spending on credit can be fun for a while but when the bill comes due the fun ends.
Nor is Greece the only country guilty of such profligacy. In fact the US has been borrowing and spending for years, mortgaging our future to China and the oil sheiks. Our creditors loan us money only because they see the probability of a good return on their investment. In general they do not like us and will happily sink us if it appears to be to their benefit to do so. Is this the kind of people we want to trust with our future?
Sadly the U.S. is following the same path as did Greece, they are just a bit farther down that path than we are. We've funded everything that seems like a good idea, without regard to ability to pay the entire bill. What will happen when the chickens of our excessive spending come home to roost? Will we continue to demand that the government ignore the laws of economics?
Or is there a better way? What if we started now to recognize the laws of Nature? To realize that economic laws are just as immutable as the laws of physics? To live within our means, even when we cannot fund everything we want to do?
The choice is ours. So are the consequences.
*The actual bill is somewhat more complicated and in fact intended for a different end. However even the simplified version here described is adequate for my purpose.
Showing posts with label spending. Show all posts
Showing posts with label spending. Show all posts
Friday, May 7, 2010
Wednesday, September 16, 2009
Financial Relativity
“Filet Mignon Special: Our best filet mignon, perfectly grilled. Includes baked potato with sour cream and bacon bits. Choice of soup or salad, choice of vegetable and desert. $49.95 per person.”
Two fine restaurants, The Cattleman and The Stockman, offered that same special. Both were in similar locations and served primarily upper middle-income business people and their spouses. The chefs were equally talented and dedicated. Yet The Cattleman sold many more of that special than did The Stockman. Why?
The reason was that at The Stockman that special was the most expensive item on the menu while The Cattleman also offered a more expensive item. The Rancher's Special at $59.95 included a serving of lobster tail. Though The Cattleman only sold three or four Rancher's Specials per year, but they kept the item on the menu because it helped sell the less expensive Filet Mignon Special.
At The Stockman, customers would look at the Filet Mignon Special and notice that it was the highest priced item on the menu. Being cost conscious, most would order something less expensive. However at The Cattleman, the Filet Mignon Special was not the most expensive item on the menu. Cost conscious customers could feel virtuous by ordering the second most expensive item available. While few ever bought the more expensive Rancher's Special, it did serve a psychological function, It helped them justify indulging in the Filet Mignon Special.
This and many other human quirks are documented in Dan Ariely's book, Predictably Irrational. The lessons for our personal and collective decision-making are myriad. The most obvious is that we should beware of such marketing sleight of hand. Many business people know of that human tendency and they often use it to get us to buy something more expensive than we would otherwise. They will offer a high priced item even though they know that few customers will buy it. However they also know that the mere presence of that item makes other items look inexpensive by comparison so they sell more of those.
How can we avoid falling into that trap? How can we keep from spending our hard-earned money inappropriately? The only way is to consider prospective purchases on individual terms. We should concentrate on what our real needs or desires are, how much money we have available, and how that relates to the cost of what we might purchase. If we like the Filet Mignon Special enough to justify $49.95, we should buy it. Otherwise we should pick a different meal. That is true regardless of what else may or may not be on the menu.
The same is true of public expenditures. Politicians often pull the same sort of stunt to get us to think of their programs as really not that expensive. All they have to do is propose a more expensive program than what they really want. Then they scale it down and brag about how much money they are saving the taxpayers. That slight of hand distracts our attention from the fact that they are not saving money, they are only spending less than they first threatened to spend.
We don’t save money by purchasing a less expensive item (unless we were actually going to buy the more expensive option). We save money by not spending it at all.
In fact I fear that we are going to see a distraction along that line with “health care reform.” We've had a very expensive program proposed, one that has aroused the ire of voters and almost certainly will not pass. However even as I write this, some in congress are working on less expensive proposals. Those new ideas will seem inexpensive compared to the original proposal. They should not be evaluated in comparison to their more expensive predecessor. Instead they should be evaluated individually. Is each of them, or any of them, worth the cost to the country?
We must resist the tendency to think of the newer proposals as cheap just because they are less expensive than the original. In fact we should do that with all government programs and private purchases.
If you like my blog, please tell others.
If you don't like it, please tell me.
Two fine restaurants, The Cattleman and The Stockman, offered that same special. Both were in similar locations and served primarily upper middle-income business people and their spouses. The chefs were equally talented and dedicated. Yet The Cattleman sold many more of that special than did The Stockman. Why?
The reason was that at The Stockman that special was the most expensive item on the menu while The Cattleman also offered a more expensive item. The Rancher's Special at $59.95 included a serving of lobster tail. Though The Cattleman only sold three or four Rancher's Specials per year, but they kept the item on the menu because it helped sell the less expensive Filet Mignon Special.
At The Stockman, customers would look at the Filet Mignon Special and notice that it was the highest priced item on the menu. Being cost conscious, most would order something less expensive. However at The Cattleman, the Filet Mignon Special was not the most expensive item on the menu. Cost conscious customers could feel virtuous by ordering the second most expensive item available. While few ever bought the more expensive Rancher's Special, it did serve a psychological function, It helped them justify indulging in the Filet Mignon Special.
This and many other human quirks are documented in Dan Ariely's book, Predictably Irrational. The lessons for our personal and collective decision-making are myriad. The most obvious is that we should beware of such marketing sleight of hand. Many business people know of that human tendency and they often use it to get us to buy something more expensive than we would otherwise. They will offer a high priced item even though they know that few customers will buy it. However they also know that the mere presence of that item makes other items look inexpensive by comparison so they sell more of those.
How can we avoid falling into that trap? How can we keep from spending our hard-earned money inappropriately? The only way is to consider prospective purchases on individual terms. We should concentrate on what our real needs or desires are, how much money we have available, and how that relates to the cost of what we might purchase. If we like the Filet Mignon Special enough to justify $49.95, we should buy it. Otherwise we should pick a different meal. That is true regardless of what else may or may not be on the menu.
The same is true of public expenditures. Politicians often pull the same sort of stunt to get us to think of their programs as really not that expensive. All they have to do is propose a more expensive program than what they really want. Then they scale it down and brag about how much money they are saving the taxpayers. That slight of hand distracts our attention from the fact that they are not saving money, they are only spending less than they first threatened to spend.
We don’t save money by purchasing a less expensive item (unless we were actually going to buy the more expensive option). We save money by not spending it at all.
In fact I fear that we are going to see a distraction along that line with “health care reform.” We've had a very expensive program proposed, one that has aroused the ire of voters and almost certainly will not pass. However even as I write this, some in congress are working on less expensive proposals. Those new ideas will seem inexpensive compared to the original proposal. They should not be evaluated in comparison to their more expensive predecessor. Instead they should be evaluated individually. Is each of them, or any of them, worth the cost to the country?
We must resist the tendency to think of the newer proposals as cheap just because they are less expensive than the original. In fact we should do that with all government programs and private purchases.
If you like my blog, please tell others.
If you don't like it, please tell me.
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