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Economics/Unemployment Rate: Obama vs. Reagan

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Question
QUESTION: I have observed the recent economy in the U.S.  Unemployment
is 7%.   When Reagan was president unemployment was less than
5%.
         If these facts are approximately correct-   what
do you think is going on?  Is there a simple answer.?
I am an amateur but have a theory.

    What's yours?

         Thanks       Dick

ANSWER: I'm sorry, Dick, but I don't understand your question. Current unemployment is 6.7%. In January 1981, when Mr. Reagan took office, the unemployment rate was 7.5%. It peaked at 10.8% in December 1982 and then began a steady decline that reached 5.3% when he left office in January 1989.

When you write, "If these facts are approximately correct"--and I think they are "approximately correct," as "facts" typically are--then you ask what I "think is going on?" Going on in terms of what, Dick? You also ask, "Is there a simple answer?" Simple answer to what?

Why don't you share your 'theory,' please, sir? That will probably help me understand what you're asking.

Thanks.

Warren

---------- FOLLOW-UP ----------

QUESTION: Warren-
         You asked me to share my theory,and so I will.
(You asked "terms of what"   "answer to what")

    Capitalism requires people and companies who are looking to
make a gain on their investments.  (Very few are driven by a
charitable incentive)
      They'll hire people if they can make a gain.  Make a gain.
Unfortunately capitalism isn't the best system, but the alternative
has proven to be a failure.
       That's my theory-   I was just asking for your theory.

Thanks          Dick

Answer
Thank you, Dick. That's extremely helpful.

Unfortunately, historical data do not support your 'theory'. Whatever its manifest shortcomings are, capitalism--in the form of free markets and free people--has brought a higher standard of living to more people in more countries than any other system in the history of the world. If you look back at a world map of countries in, say, 1959 that were relatively free vs. those that were not, you will see that the majority of countries in the world were not free; please click here for a visual. They were under the domination of a totalitarian government in one place or another. The most famous--infamous, actually--of these was the old Soviet Union, followed closely by its rival, China. The number of people executed by dictators in these two countries alone goes well into nine figures. The miracle of our time--in my view--is the collapse of the Soviet Union in 1991 without a shot being fired.

Now, in your comments about capitalism, you clearly evince a lack of understanding about that system. Capitalism does NOT "require people and companies who are looking to make a gain on their investments"; it requires people who want relatively more freedom and relatively less government. Now if you compare that 1965 map of free and not-free countries in the world with a similar map drawn in 2013--please click here--you will see that the number of not-free countries has sunk like a stone. And most of them became free without violence. It was simply the power of people taking to the streets and refusing to go away. In those not-free countries, either the governments threw in the towel, or the military switched sides from pro-government to anti-government. Either way, top-down governments went by the wayside. There are only a few such tyrannies left today: Cuba, North Korea, Zimbabwe, and many of the countries of Africa. But even Africa is now awakening, thanks to figures such as Nelson Mandela. He and his movement--combined with a courageous then-President of South Africa--ditched the apartheid system. Again, that happened with no violence.

Similarly, your assertion that "very few are driven by a charitable incentive" is unsupported by the data--so says HuffPo. In fact, on a per-capita basis, the United States gives far more money to charity than any other country in the history of the world. And I suspect you won't much like this comment, but I'm going to say it anyway: Republicans give much more than Democrats, not because the Repubs have more money to give--the majority of the so-called 1% are actually Democrats, believe it or not--but because they know that if they don't support charities, the government will become 'the' charity. And they know that that means less freedom, more bureaucrats, and fewer opportunities for all Americans . Even Left-leaning NYT columnist Nicholas Kristof says so in a great column entitled Bleeding Heart Tightwads.

Let me also say--with respect, Dick--that your 'theory' is no such thing. A theory is testable by data. You don't have that; you have a belief that resembles a religion because it relies on faith, not data, to believe. I respect that. But don't confuse it with a theory because it's nothing of the sort. Again, I say that respectfully.

To be sure, capitalism is not perfect. But I think it's worth repeating the words of Winston Churchill: "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries." We are seeing--and will see much more of--the latter as the rollout of the Affordable Care Act continues in 2014.

If you would read through the following monograph with an open mind, I think you will find much that surprises you. Please click here. That paper was written in Vienna in 1920.

In closing, let me circle back to your initial post and its reference to unemployment rates. If you compare both unemployment rates and economic growth in the developed countries of the world, you will see that those countries with more freedom have lower unemployment rates, greater social mobility, and higher economic growth than the 'social democracies' in Europe and elsewhere in the world.

Take care, and thank you for your thoughts.

Warren

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Warren D. Miller, CFA, CPA, ASA

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My expertise in economics is limited to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Questions dealing with macroeconomics and other sub-disciplines of the subject should be submitted to those who have the appropriate expertise. N.B.: I DO NOT ANSWER QUESTIONS MARKED 'PRIVATE' because I believe that knowledge should not be hoarded. I also believe that such questions are likely to come those trying to cheat. Also, as one who was a full-time academic for half a decade, I can recognize test/homework questions several time zones away. Do not demean yourself by submitting such questions to me. Those who do so are cheating; I WILL call you out publicly. I have a zero-tolerance policy for cheating and dishonesty. In addition, please don't emulate the businessman who posted a request for help in August 2008. He expressly denied that he was seeking "investment advice" and said that his query was for, and I quote, "educational and informational purposes." Later, he allowed as how his questions related to the possible purchase of a $500K piece of equipment. I said I thought he had misrepresented himself. Bottom line: high-end business consulting is how I make my living. I am the sole support for my family. Please respect that fact and don't try to get for free what our clients pay for. If your company is big enough to have a sophisticated problem, it can afford to pay for the expert advice we and others provide. Beckmill Research, LLC, is a 95-octane firm. We're small, but we've been at this for nearly 20 years. We know what we're doing. Segue: Early on, some asked me for career advice; I gave it. I now get many such requests. The demand for a valuable good that is free is unlimited, so I now charge for that advice. Email me: cfa2005@gmail.com. Finally, PLEASE DO NOT ASK FOR INVESTMENT ADVICE. I am not licensed to provide such advice. If you want such counsel, talk to your financial planner or other financial adviser.

Experience

I work with Austrian economics (which differs in major respects from the traditional economics), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) every day in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and solutions to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.

Organizations
CFA Institute, Strategic Management Society, American Society of Appraisers, Academy of Management, Culver Legion, National Association of Scholars.

Publications
CFA Magazine, Strategic Finance, Valuation Strategies, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, Business Valuation Review, among others

Education/Credentials
Chartered Financial Analyst designation (2006); Accredited Senior Appraiser in Business Valuation (2006); Certified Public Accountant (1992); MBA - Oklahoma State University (1991); Completed all of my Ph.D. coursework in strategic management - Oklahoma State University (1983-87); BBA in finance and accounting - U. of Oklahoma (1975)

Awards and Honors
Business Valuation Volunteer of the Year (2001) - American Institute of CPAs; Winner - Oklahoma Humorous-Speaking Contest - Toastmasters International (1971)

Past/Present Clients
Names are confidential. However, the "sweet spot" of our target market is companies that are too big to be small and too small to be big. Usually, those are companies with employees in the 15-to-100 range. At the low end of that range is where companies can first take advantage of the specialization of labor. However, having everyone do everything is a tough habit for many--most, I would argue--small enterprises. That is why they not only remain small, but also fail to survive beyond a second generation. Only 5% (one in twenty) companies make it to the third generation of ownership.

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