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Why Do the Philosophies of the Mixed Economy Matter to You? Part 3

Friday, June 26th, 2009

Building a Team for the Mixed Economy

When you understand the general nature of the mixed economy, it should help you with your financial decisions, including the kind of advisors and financial representatives you choose. In structuring your financial strategies, you want to work with people who understand both aspects of the mixed economy. You want entrepreneurial mentors who understand the dynamics of wealth creation in the competitive free market. And you want advisors who have the technical expertise to navigate the oceans or rules and regulations as well.

This is true even for those who perhaps don’t see themselves as capitalists, but simply wage-earners who are trying to save for retirement. The people who said they “didn’t worry about the daily ups and downs, because the market always goes up,” were not paying attention to the free-market forces that overwhelmed the supposed “controls.” A little free-market perspective might have changed some decisions and minimized some losses. And for the people now forced to borrow or take early withdrawals from retirement accounts because of these financial losses, it might have helped if someone had offered some alternative accumulation programs with freer access to funds and lesser tax consequences.

• DO YOU UNDERSTAND THE MIXED ECONOMY?
• DO YOUR FINANCIAL DECISIONS INCLUDE THE ABILITY TO PURSUE PROFITABLE FREE-MARKET OPPORTUNITIES?
• AS YOU ACCUMULATE WEALTH, ARE YOU TAKING THE APPROPRIATE “LEGAL” STEPS TO PRESERVE IT?

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Why Do the Philosophies of the Mixed Economy Matter to You? Part 2

Tuesday, June 23rd, 2009

A Realistic Response to the Mixed Economy: Be Productive, Know the Rules

Ardent supporters of the free-market might have good arguments for abolishing most government regulations because they believe the same effects (fair business practices, safety, etc.) can be accomplished through competitive incentives. On the flip side, there are many economic thinkers who believe that better regulation and centralized control over the economy can yield the same levels of prosperity that the free-market generates - without the risks. It’s a great topic for discussion, but the reality is we operate in a mixed economy. And that reality requires a mixed response.

If you are truly interested in accumulating significant wealth, you must consider free-market opportunities - and you must structure your financial decisions accordingly. For example, most free-market endeavors will require capital at various stages - there will be start-up costs, down payments etc. This knowledge should affect your decisions on where and how you will save, and what assets you will choose to protect. In this context, you might find that a highly-regulated, tax-favored retirement account like a 401(k) is not well-suited for your financial objectives.

On the other hand, you cannot simply plan to make a lot of money and ignore the possible impacts of the “controlled” parts of the mixed economy. Investors, lenders and builders who over-committed their resources to government-sponsored home ownership incentives have been whip-sawed by the declining property values and mortgage defaults. And most people know of someone who lost much of their wealth because of legal or tax issues - in the real world, higher productivity doesn’t resolve all financial problems.

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Why Do the Philosophies of the Mixed Economy Matter to You? Part 1

Thursday, June 18th, 2009

Wealth Creation through free-market opportunity, Wealth Preservation through regulation

This is perhaps an oversimplification, but free-market competition favors both the creation and destruction of wealth, while regulation often tends to stifle new wealth creation in order to preserve existing prosperity. For both individuals and businesses, there is a tendency to change philosophical horses depending on where one is the race.

When you’re just starting out, you want as much economic freedom and opportunity as possible. Taxes and regulations are a drag on your efforts to get going. But when you’ve reached an acceptable level of financial prosperity, you want as much financial security as possible, even if that means more regulation.

The American automobile industry provides great illustrations of these shifting perspectives. In the early part of the 20th century, scores of entrepreneurs made and lost fortunes building automobiles. In the middle of the century, unionization and government regulation (safety devices, pollution standards) injected a high level of regulatory control. By the end of the period, when some companies faltered in competitive market because of foreign competition, automakers sought controlled-economy assistance; they asked for tariff protection on imports, and finally, direct financial assistance.

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Two Modes of Prosperity in Mixed Economies

Monday, June 15th, 2009

The paths to success in the mixed economy can be distilled to two categories. While most people don’t follow one mode exclusively, their actions reflect one of two perspectives.

Mode #1. Become an expert in the controlled-economy game

One of the ways to make financial progress is to recognize the controlled economy format and embrace it. Be diligent to know the rules and regulations of the controlled economy in which you operate. Make sure to stay within the rules, but remember that the rules will often be contradictory, and change constantly. Hire an attorney, as well as a tax pro, to help you navigate the regulatory mazes. This will allow you to find loopholes, receive government subsidies, and qualify for tax credits.

Because so much of controlled economy revolves around rules (such as taxes and industry regulations), you must always be aware of the financial opportunities and risks from litigation. Expect to be sued and/or audited at least once.

If you can achieve a financial advantage through legal recourse, do it. The general public may attach a stigma to some of these behaviors, but those who are playing the game can’t worry about the perception of the masses. For example, the general public might see bankruptcy or other legally permissible methods of financial maneuvering as an “easy out” for people of questionable character who make bad financial decisions. But in controlled economy environment, you almost never win by following the social rules of “good behavior.” You win by knowing the legal rules and using them to your advantage.

Mode #2. Become a capitalist and focus on productivity

The ambitious capitalist figures the best way to overcome any financial challenge is to out-produce it - just make more money, build a bigger company, create more value. As long as you keep producing at a high level, all the other issues will take care of themselves.

Because the goal is increasing productivity, a capitalist seeks to operate in areas that afford the greatest economic freedom. The more regulated your activity, either to earn money or put it to use, the less control you have over profit, and the more “control” issues you must deal with. This is why capitalists often gravitate to new technologies or new products because the government hasn’t yet figured out how to regulate or tax them.

In a free-market format, liquidity, flexibility and financial control are priorities. Be wary of financial transactions that seem heavily reliant on government subsidies for their profitability (like the solar and alternative energy industry in the 1980s), or where tax laws are prone to change (qualified retirement plans, 529s college savings plans and the like). You not only want to be in charge, you want to be able to change, to pursue the next free-market alternative.

Both modes work - and affect each other

As you read the above options, you might be inclined to make some value judgments about the means to achieving financial prosperity. (Pick up two newspapers and flip to the editorial pages. One blames politicians and government control for the current economic mess, the other faults the greedy capitalists.) But setting aside what you may see as moral issues, understand

both approaches are absolutely legal - and successful - even in countries where the economy is most free or most controlled.

In America, we know many stories of entrepreneurs who build their wealth through business, but some very wealthy Americans have made a career out of working the system to their benefit as well. Maybe they used government programs to buy distressed properties, started a business with grant money, or invested in tax-favored financial programs. Whether they worked in the competitive market or the worked the system, the common denominator for financial success is work - focused, consistent effort.

Besides the common denominator of work, both parts of the mixed economy have similar goals: trying to prevail without destroying the other side.

People who understand the power of regulation and control also know that if there’s no productivity there’s nothing to control - if nobody’s making money, there’s nothing to tax, if no one’s working, there’s nothing to regulate. Regulators need successful capitalists.

Likewise, most free-market producers will acknowledge that some government-enforced controls (like prosecution of theft and enforcement of contracts) make free-market competition easier because everyone plays by the same rules. And an astute producer can often find new free-market opportunities as a result of some government regulations - even in an America where “we are all Socialists now.”

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Free-Market Competition vs. Government Regulation

Friday, June 12th, 2009

The last post about DIA Businesses illustrates the basic tensions in a mixed economy, i.e., one where both competitive market demands and government regulations impact business decisions. In real life, similar tensions weigh on every individual’s financial decisions.

Think of the imaginary Do-It-All machine as your human capital. You have unlimited productive potential, but your financial productivity is also subject to external controls. Like the DIA producer in the example above, you have to ask: Should I pay more attention to tax laws and special programs, or simply focus on making more money?

While all economies are mixed to a certain extent, the ratio of laissez-faire capitalism to government control varies from country to country. Depending where this ratio falls on the spectrum (from completely free-market to completely government-controlled), we may declare a country’s economy as “capitalist” if it favors market-driven production, or “communist” if it typically feature a high level of government control. In theory, “socialist” economies fall somewhere in between, blending free-market production and government protection/regulation.

In the United States, the financial turmoil of the past 18 months, coupled with a new political administration, has prompted many observers to see a significant change in the free-market/government-control relationship. Where America once saw itself as the prime example of free-market competition and minimal government oversight, automobile companies and financial institutions are now either government-subsidized or government-owned. With government assistance comes government control - from the products that will be made to the salaries that will be paid. Instead of America being a predominantly capitalist economy, the February 16, 2009 cover of Newsweek declared, “We Are All Socialists Now.”

If the economic paradigm is changing, how should individuals respond? What will be the likely impact of greater governmental control and/or less free-market opportunities?

The specific answers to those questions are yet to be determined. But regardless of the changes that may be coming to the nation’s economic landscape, there are some general guidelines to consider - in every mixed economy.

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The Do-It-All Business

Tuesday, June 9th, 2009

The Do-It-All (DIA) is a multi-purpose product that can be manufactured by an individual using a hand-powered machine. Because DIAs have an almost infinite number of possible applications, there is an unlimited demand for DIAs - if you make ‘em, you can sell ‘em. Consequently, just about everyone has a DIA machine, and tries to produce as many DIAs as possible.

This ambition to produce as many DIAs as possible has spurred two subsequent reactions: innovation and regulation.

Some people have tried to improve the DIA process, using different materials or improving the machines. Others have experimented with cooperative projects, trying to find ways where several people working together can produce more collectively than they could separately.

These innovative attempts to produce more DIAs haven’t always worked out. People have been injured trying to run their machines 24 hours a day. Substandard materials have been used in an attempt to cut production costs. Some individual DIA operators have been swindled by fraudlent DIA organizations. And small DIA producers and government officials have expressed concerns that the larger DIA organizations have too much influence on the market.

As a result of these incidents and concerns, laws have been enacted. Production standards for DIAs have been established: all DIA operators are licensed, and the number of hours per day a machine can be used is strictly monitored, as are the materials that can be used. In addition, if one’s DIA production exceeds a specified threshold, making additional DIAs will result in progressive taxation - the more you make over the limit, the higher the tax.

Over time, these basic regulations and tax laws have been modified, reflecting the circumstances of different regions or specialized uses. Some states have granted exemptions to the 24-hour operation restriction because demand is high. And DIAs sold to government entities do not affect one’s threshold for taxation.

This mix of market competition and government regulation has led more than one DIA producer to ponder: What’s the best way to run my DIA business? Is there a point where it doesn’t make sense to produce more DIAs? Should I pay more attention to the regulations or simply focus on improving my output?

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Financial Strategies For A Mixed (Up) Economy

Wednesday, June 3rd, 2009

Q: Why did God create economists?
A: In order to make weather forecasters look good.

Economics has long been referred to as the “dismal science.” While the economy might be a frequent topic of general discussion, the people who discuss economics are often perceived as fuzzy thinkers whose commentaries and predictions are unintelligible or irrelevant to the average citizen. After all…

Economists have forecasted nine out of the last five recessions!

Joking aside…a better understanding of economic perspectives could make a significant difference in the way you make financial decisions. Underneath the statistics and unfamiliar terms used by economists are some powerful ideas about how wealth and prosperity are created. In upcoming posts we will illustrate some of these basic economic ideas.

Posted in Economics, Financial Planning, mixed economy | No Comments »