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First Principles

Capitalism with a Human Face: Economics for Voters

Unemployment, poverty, affordable housing, medical care, social security, minimum wages, illegal immigration, destruction of environment, global warming and climate change... Democrats blame republicans...  Republicans blame democrats...  Who is right? Who is wrong? This book explains the root causes of our economic problems in simple language, without economic jargon.
Most political issues - unemployment, poverty, lack of affordable housing, etc. - are essentially economic problems. In order to understand politics a voter must understand economics. This book explains the most important concepts of economics in a very simple language. A short history of the banking system will give you a good understanding of the most important part of our economy. Economic history is a history of economic instability caused by instability of bank credit. New money is created with new debt when commercial banks make loans. This expansion of credit and accumulation of debt causes the economy to boom. At some point there is too much debt in the economy, and the banking system starts to collect debt without making many new loans. Money is destroyed as debt is paid off. Tight bank credit causes an economic downturn, and millions of Americans suffer. Is there a way to eliminate the instability of our economy and to solve many other economic problems? You bet. We can do it without confiscating wealth from the rich. Yes, we can have a capitalist system with a human face.



   Coming Collapse of the United States and the Future of Democracy

      It was a long time ago, and I no longer remember where I was reading about this. Since antiquity, " great civilizations have been rising, illuminating the horizon." They conquered distant countries and people, and for sometime it seemed the sun would never set in their empires. And every time, without an exception, there was a collapse, inevitable and spectacular. What was it that caused the collapse  of those empires, and is there any lesson for the United States?

     Every empire was different, but two factors seem to be present in every case: internal weakness and external pressure. The Soviet Union was a seemingly unbreakable superpower, but it was practicing a defective version of Marxian socialism, and its history is instructive. The  Soviet Union strained to dominate the world by spreading the Communist ideology, overloaded its economy, and collapsed. The U.S. now is in a very similar position trying to spread  democracy all over the world. In addition, both factors -  internal weakness and external pressure -  are present.
   Growing up in the Soviet Union,  I have always been fascinated by economics. I was reading Marx and Lenin trying to understand the capitalist system. Why is there unemployment? Why do capitalists not hire the unemployed in order to exploit them? Why do exploited Americans live better than unexploited Cubans and North Koreans?
   After Ronald Reagan was elected on the platform to start the arm race in space, people in the Soviet Union were discussing the different aspects of confrontation. Very soon it became clear that the Soviet economy was not capable of continuing the arms race and to win the Cold War against the capitalist world. By the end of the decade the Cold War was over, but the arms race has never stopped.
   Now there are three gangs -  America, China, and Russia -  and each of them wants to control the world. The good thing is that China and Russia cannot easily form a military alliance against America. China needs raw materials and space for its population. A few centuries ago Russia annexed a huge territory from the Ural Mountains to the Pacific Ocean, which was populated by Asian ethnicities. It might take a few decades, but China will buy that territory from the weakened Russia. Unless Russia decides to merge with China in the hope the Russian language will replace  barbaric Chinese letters of which there are many thousands, they are ill suited for contemporary electronic communication.
If such a country is created -- by the end of the century there will be two billion Russian-speaking enemies of America. Out of those two billion people at least  a quarter will be scientists and engineers. In this scenario,  America has no chance to compete. Even without the creation of such a country,  America is in a long-term decline which is most likely irreversible. The signs are many, and they give a very clear reading.
   October 5th,2021. " Tesla Inc. lost a case  against a black former elevator operator and must pay an unprecedented $137 million in damages for having  turned a blind eye to racial taunts and offensive graffiti the man  endured at the electric carmaker's auto plant in Fremont, California." This case shows that California does not have a functioning criminal justice system. Racial taunts should be punishable by sometime in jail, and the victim should be compensated for psychological distress. Who should pay the damages? The offender. But in this case no one was arrested or jailed. No one was convicted even for misdemeanor. How is it possible to award $137 million for something that is not even punishable by criminal law? Now we can expect thousands of fraudsters, both black and white, to stage fake theatrics  of racial discrimination and abuse, incidents carefully recorded with smartphones,  and "evidence" used in civil trials  against all kind of American companies. If  there is no criminal punishment, then there is nothing to lose. Even if there is a light punishment like a few months in jail, but the reward is in millions of dollars, we can reasonably expect America to explode with thousands of fraudulent lawsuits.
   Will Tesla build another factory in America? Not likely. More likely, a decade from now, around 2030, when machinery and equipment have significantly depreciated, this Fremont factory will be closed, if not earlier. And what is the message to the world about American  values? The message is that you can build a successful business, but some loony federal judge will make you pay a hundred million dollars for a crime that is not  punishable even by a few months in jail, and the whole drama can be easily staged. This is a sign of a deeply rotten decadent empire. The result will be that American companies will continue to close manufacturing plants in America. By 2050 America will be  importing most of the manufacturing goods, and exporting only soybeans,  corn, and pork bellies. With manufacturing Industries mostly gone, America will officially become an agricultural colony of China.
   Military power? America is losing it everyday. With development of long-range drones armed with high-power missiles, swarms of Chinese drones can already destroy American Naval assets.  Submarines? China is churning them like sausages. The notion that America will be able to protect Taiwan is a fantasy. Worse, with America visibly rotting, Taiwan is very likely to vote democratically to merge with China.
   America still has more advantages. Now is the time to make an agreement with China that, say, 20 years from now  Taiwan will be under full control of the central government of China.  During these 20 years America and other Western countries should accept millions of highly educated scientists and engineers from Taiwan. It is time to start evacuating those people who don't want to live in communist  Taiwan. America can build modern new cities for refugees from Taiwan. High-tech factories that manufacture semiconductors should be dismantled and relocated to America. The technological desert can be left to China's communists. The simple fact is that China is becoming stronger economically and militarily every year, while America is in irreversible decline, and we should abandon the delusions about our ability to defend Taiwan. It is much better to surrender Taiwan to China in 2040 than to lose a war against China in 2030.
   The interesting question is, what caused such a rapid decline of the United States? The short answer is that  throughout world history, when empires achieve dominant position they become complacent, they don't pay attention, and the rot sets in. America is no  exception. Now, what exactly is wrong with America, and what should be done about it? There are at least a dozen of things, but one cancer is in epitome. 
1. At a time when the whole world is using electronic payments, America is still using copper pennies.  Millions of people waste their time in lines while other people are digging in their purses, or fishing those pennies out of their pockets. In addition, it is an extra cost for business owners, because time is money.  Pennies can be easily eliminated.  Instead of, say, $9.99 customers should have a right to pay an amount rounded down to the nearest 5 cents, which is $9.95.  Businesses will have an incentive to post prices in more rounded amounts -  either $9.95 or $10.  America is wasting many millions of dollars to mint nickels and dimes.  With pennies eliminated, 1- gram copper coin could be denominated as 5 cents; 2- grams copper coin as 10 cents; 5-grams copper coin as 25 cents.  Vending machines can easily handle copper coins. If the Congress does not do it in the near future, then in a few years it will become profitable to melt copper pennies ( they are one gram each) and sell the copper as scrap metal. If a 1-gram copper coin becomes $0.05, then for a long time  -  at least a few decades -  it will not be profitable to melt  copper coins. Some years ago Congress did consider eliminating pennies. But some experts  testified that businesses would increase prices, and it would hurt the poor. How many  lunatics live in America... Inability to remove pennies from circulation is laughable, but it will not cause collapse of the empire. Other issues are much more important.
2. China has very good universities, especially in science and engineering. Every year hundreds of thousands of students graduate to become scientists and engineers. In America, the brightest kids want to become lawyers because that is where the money can be made. Why study engineering when you can sue American corporations for racial discrimination, gender discrimination, etc. and make millions of dollars of easy money? Corporations will be terrorized into promoting people based on race and gender, and not necessarily on merit.
3. In American universities millions of students are being indoctrinated and brainwashed about economic inequality. While China and Russia have greatly improved their economies under capitalist systems, with very big gaps in incomes of the rich and the poor, America is inching backwards, to Marxist Socialism. The main topic of sociology and economics is inequality, with a socialist system advocated as a magic cure.
4.  Those who really want to help the poor --  they are searching for ways to improve the living standards of the poor. This website  advocates creation of the Central Bank of America; it should be owned by the federal government. Such an action is a step toward socialism, but it would greatly improve the American economy. But  communists  who advocate socialism in American  universities are not looking for ways to help the poor. They are looking for ways to  destabilize our economy, to create conditions for a revolution, and to grab power. Just visit 
5. Marxist socialist systems have never managed to improve living standards of the population in any country. Just look at Cuba or North Korea.  Communist lie through their teeth that in a socialist system workers own means of production -  land, factories, machinery, etc. In reality, workers own absolutely nothing. Government owns everything. EVERYTHING! 
6. Communist lie that in America the rich are getting richer, and the poor poorer. A poor American who owns zero amount of capital working for minimum wages is probably 10 times richer than an average Cuban who supposedly owns the whole economy of Cuba. Why? Because America has accumulated lots of productive capital. The poor do not own chicken farms, but because  chicken farms produce millions of chickens everyday the poor Americans can buy a chicken everyday. In other words, the poor Americans greatly benefit from capital they do not own. When the rich accumulate productive capital ( chicken farm, factories, machinery, etc.), the poor also get richer because accumulation of capital by the rich allows the poor to buy and consume more goods.  Communists who have occupied American universities never talked about it. They talk only about inequality and redistribution of wealth. This is of course just shameless communist propaganda. The purpose of communist brainwashing is to cause pain and anger. Envy is a very powerful emotion, and communists know how to use it. 
7. The authors of this website, both of us, came to America in 1987, when Ronald Reagan was the president. At that time the whole world knew about the "evil empire". Soviet propaganda was talking endlessly about inhumane capitalism: homelessness, poverty, oppression, exploitation, and inequality. The only hope for the proletariat was a Communist Revolution which would immediately bring equality and prosperity, even though there was no prosperity in the Soviet Union, and neither there was equality. Higher-level officials of the Communist Party enjoyed goods and services that were not available to the general population. There were special little stores for only members--  a Soviet version of country clubs. There were hospitals and medical clinics for members only -  the high-level officials. Just ask any immigrant from the Soviet Union the meaning of " The Kremlin Hospital".  It was The Kremlin Hospital, and it was  not for the unwashed public.
8. Now, in the United States,  we hear and read the same  communist propaganda in exactly the same language --  oppression, exploitation, inequality, etc. There is no doubt that the American version of capitalism has quite a few shortcomings, and we should work to improve this great country. But communists don't want to improve  anything. The only thing they want to do is to poison  the society with communist brainwashing, and to seize power. After that there will be a civil war, destruction of our economy, and a communist dictatorship, just like in Cuba and North Korea. Slowly but surely America is sliding into a civil war and destruction. And what will happen to socialists and those "useful idiots",  political liberals? Communists in the Soviet Union rounded up millions of people and put them in concentration camps, most of them socialists who were not sufficiently enthusiastic about building the Communist Society. In America, communists will  exterminate socialists and political liberals. Stalin killed tens of millions of people, even more than Hitler, in his own country. Stalin killed at least five times more citizens of the Soviet Union than Hitler killed Germans. Communists will destroy America.


    The Biden Administration is trying to make corporations pay their fair share, but this is an uphill battle. The reasons are many. The main problem is that corporations pay taxes on profits, but profits can be easily manipulated. Corporate income, or revenues, minus expenses equals profit. If a corporation  offers to its workers benefits like Health Care insurance, housing assistance, relocation expenses reimbursement, free food and beverages in the corporate cafeteria, on-site childcare and yoga studio, etc., then all these expenses can be counted as labor expenses, and the corporation will have lower profit and lower tax bill to pay. The best solution is simple:  do not  tax profits! Tax income, in five levels: 5%,10%, 15%, 20% and 25%. Venture Capital firms should pay zero taxes; they are our only hope to keep America technologically-advanced. Manufacturers of high-tech products  should pay 5% of income. At the other end,  law firms  should pay 25% of their income.  Why? Because in China the brightest people become scientists and engineers. In America, the brightest people become trial lawyers. In the contest between China and America to dominate the high-tech -- lawyers have no chance. The  American judicial system allows lawyers to earn millions of dollars for the kind of work that is very often  purely parasitic. At least a quarter of America's GDP should not be even counted: jails, prisons, lawsuits, psychiatric hospitals,  drug addiction services, etc., -- these services do not make America richer or stronger.  Of course, these services are needed, but we would be better off without so much crime and psychiatric illnesses. That is why only production of desirable goats and services should be counted as part of GDP, and they should pay only 5% of income, while less desirable businesses should pay a higher percentage of their income. For example, chicken farmers should pay only 10% of their income, while manufacturers of cookies, cakes, sugary drinks, etc. should pay 25% of their income. Why? Because there is an epidemic of obesity in America. Millions of children are obese because they are addicted to sugar.  That soda is a dessert after dinner, not something to drink five times a day. Sugar is as addictive as any other drug, and its production and consumption should be discouraged with higher taxes. Of  course, higher taxes means higher costs, and all costs are always passed on to the consumer. To avoid higher taxes, corporations will try to move their headquarters to countries with lower taxes.  Very good! Who cares? Just pay 25% of income in the United States.  Move your HQ to China.  The policy of corporate taxation cannot be separated from tariffs. In America, factory workers are paid at least $15 per hour. In China, they pay $3  per hour for the same work, which is 20% of our wages.  That is why our factories are moving to China. What is left behind?  Economic desert. The problem is NOT jobs. We can very easily create tens of millions of jobs to build  modern new cities with modern public transportation where most people will not even own any kind of cars, as explained on my website, global poverty The real problem is that without high-tech manufacturing America will become an agricultural colony of China, to produce grains, pork bellies, and yes, it means to go back to cotton plantations. There is only one solution -   high  tariffs, 100% minimum, to protect our manufacturing sector. Simple math, on the level of junior high school, can explain that with labor costs 5 times higher, our manufacturing sector can be completely destroyed by 2030.  Try to import Tesla cars from China  without 100%  tariffs. Our car manufacturing will cease to exist. In addition, whoever imports Tesla from China to the U.S. should pay 25% of income as federal tax. To  illustrate,  consider the following example.  Suppose, an importer bought 1 Tesla car in China for $10,000. When the car arrives in the U.S. the importer will pay $10,000 is that tariff which is a federal tax. The total cost to the importer is $20,000 so far. The importer sells the car for $32,000 and pays a quarter of it, which is $8,000, as a corporate income tax. The total expenses in this simplified example equal ( $10,000 + $10,000 + $8,000) $28,000. Profit equals  $4,000. But corporate taxation in this example is based on the sales price which is $32,000. The federal government will not care about profits and expenses, only about the price at which the car was sold. It will make corporate taxation a hundred times easier, and there will be practically no opportunities to play cat-and-mouse tax games. At first glance, the level of taxation in this example is too high, but in reality it is not, and here is why. When Americans work, they pay federal,  state and local taxes. Those taxes pay for all kinds of government services - education, Healthcare, police,  firefighters, jails, prisons, defense, infrastructure, etc. When a factory relocates to China, and workers lose their jobs, who will pay all those taxes for all those services? America used to be a rich country, but no longer is. In many countries of the world the standard of living is higher than in America. There are  many reasons why America is in decline. One of the main reasons is that an average American does not understand even the most simple ideas and concepts of economics. That is why the voters  allowed corrupt politicians to create the WTO, World Trade Organization, and to relocate the American manufacturing industry to China.  Unless we leave the WTO, the next two or three decades will be the last decades of America as a superpower.  Meanwhile, America needs to adopt corporate taxation based on income.

    Inflation: Illusions and Delusions

       Here is the thesis: the American economy is in grave danger not from inflation, but from illusions and delusions related to this subject, and the federal government should pay attention. This article explains: what is inflation; causes of different types of inflation; connection between inflation and standard of living; connection between standard of living and production; connection between production and employment; connection between bank credit and employment; and, finally, why we should pay more attention to better utilization of labor, increase of production and consumption, and pay less attention to nominal no prices and inflation.

   Inflation means simply a general rise in price levels. The opposite of inflation is deflation, the general fall in price levels. The ideal situation is when inflation equals around 2%. Higher inflation is not desirable, but deflation is much worse for the economy. How much worse? It is not an exact science, but it is reasonable to prefer 10% inflation to 1% deflation. In his classic Booms & Depressions (1932), Irving Fisher explained how liquidation of debt leads to lower money supply, lower aggregate demand, lower prices, lower profits, lower production, lower employment, and again lower prices, lower profits, and so on and so forth down the devastating debt- liquidation spiral. It was deflation of debt that caused the Great Depression. Inflation, on the other hand, does the opposite: it stimulates the economy. That is why an inflation level at 2% is desirable. The main concern about inflation is that prices will be rising faster than wages. In this case we have lower purchasing power of wages - and lower living standards. Now, how to increase the purchasing power of wages?

   Suppose, a total of 11 people live in the country: 10 poor and one rich. The country is raising only two chickens every week. The 10 poor people eat one chicken, and the rich person alone eats the other one. How much should we increase wages for the poor people, or confiscate as 'wealth taxis' from the rich, to allow 10 poor people to buy 10 chickens every week? This is the biggest problem in economics: you cannot eat 10 chickens if you raised only 2, no matter how much money you collectively extort as higher wages or as taxes from the rich. The only way to increase consumption is to increase production. If we want housing to be affordable, and " a chicken in every pot", we have to build more housing and raise more chickens.

   We have probably 10 million people doing worthless work of poverty research and community organizing in not-for-profit organizations. If we put five million of them to make bricks, and the other 5 million to lay bricks, then five years later 5 million poor families will own 5 million nice brick houses.

   We have millions of young men in criminal gangs selling drugs and shooting each other. Put them to work in construction. No high school diploma is required. They will learn everything on the job. The federal government owns around 50% of land in our Western States. Why not sell some of that land to big real estate developers with the condition to build modern new cities with modern public transportation? If we build 2 million apartments every year, then supply will go up, prices will be pushed down, real estate will become more affordable, and both poverty and inflation will be reduced.

   Now, how to finance construction of modern new cities? The optimal solution is to use Modified Keynesian Theory. The original Keynesian theory advocates increased borrowing and spending by the federal government in order to stimulate aggregate demand. The modified version advocates for the central bank to print currency, billions of dollars, and to make construction loans to big real estate developers to build modern new cities. In the long run, there will be an increase in supply of real estate, lower price of real estate, and lower inflation. In the short run, inflation will be elevated because any loan from the banking system increases money supply (amount of money in circulation). But after real estate is built and sold, the real estate developers will be paying back their construction loans, and this process will be reducing the money supply by the amount of the loan plus interest. The final result will be increased supply of real estate, lower prices, lower money supply, and lower inflation. Just as with chickens, if we want to own more apartments, we have to increase supply.

   When people work, they produce goods and services, which is called aggregate supply. Workers also earn wages and salaries, and they spend the earned money to buy goods and services. The amount of money the workers are willing to spend is called aggregate demand. When the economy creates new jobs, both aggregate supply and aggregate demand increase. In a sense, supply creates its own demand.

   The purchasing power depends on how much goods and services are offered for sale. Because factory wages in China are around 25% of wages in the United States, goods from China are sold at much lower prices than American-made. We enjoy low prices of goods and high purchasing power of the dollar, but most people do not understand the real price of the cheap goods: deindustrialization! America has already become an agricultural colony of China, buying manufactured goods and selling soybeans, corn, and pork bellies. In addition, we have a huge trade deficit with China. Every year we pay China hundreds of billions of dollars more than China pays us for our goods. America is selling itself for cheap goods. What America does is economic prostitution. China is using those hundreds of billions of dollars to buy economic assets all over the world and becoming stronger economically and militarily. A couple of decades more of economic prostitution - and the US will become a second-rate nation, while trade with China will keep prices of manufactured goods - and inflation- low. But what is more important - to keep inflation low or to save America from deindustrialization and economic collapse?

   There are two types of inflation: caused by either low supply or by higher demand, and very often by a combination of both. How can we keep inflation low? This is a wrong question. The right question is, "How to increase the purchasing power of wages?" We already know the answer: increase production. If 10 poor people want to eat one chicken every week, they must raise 10 chickens every week. If they produced only 2 chickens, and both prices and inflation are high because supply is low, how can we reduce the price of chickens? Again, the wrong question. Because the Federal Reserve has started to increase interest rates exactly with the aim to reduce prices and inflation. Now it is easy to predict the future. Higher interest rates will make the price of borrowing much higher. Because this cost of borrowing is always a part of business expenses, the total costs of production will go up. Businesses will increase prices. The Fed will increase interest rates to reduce inflation, again. And again, the total costs of production will go up, prices of goods will go up, and so on and so forth up the devastating spiral of interest rates and prices increase. At the same time, there will be yet another spiral, the inflationary "wages-prices spiral", where higher wages cause higher prices in an infinite loop. By 2030 the American economy will be in a deep economic depression, with higher interest rates and low prices of virtually all economic assets - stocks, bonds, real estate... everything. The Fed will deliver the final devastating blow "to control inflation". Wall Street will start buying all kinds of assets with pennies on the dollar. With the Glass-Steagall Act out-of-the-way, the financial class will enjoy the feast during the economic plague. We need to strictly control the Fed and Wall Street, not inflation.

    Economic prostitute

   These are the last decades of America as a superpower. First, we have a huge trade deficit with China, sending them hundreds of billions of dollars every year to make China stronger. Chinese keep their wages five times lower than factory wages in America, and that is why cheap imports from China will continue to choke and strangle our manufacturing sector. America has already become an agricultural colony of China, buying manufacturing goods and selling agricultural goods. There is only one solution: high tariffs starting from 100% on low-tech, and up to 500% on Hi-Tech. President Trump started increasing the tariffs, but the Biden Administration is either incompetent or totally under control of the China's lobby.

   The second reason is that China allows America's big banks to invest in China and to make good profits. The big banks lobby the Biden administration to keep the tariffs low and to continue strangling our manufacturing sector.

   Chinese have borrowed trillions of dollars by issuing bonds for international investors to invest in property development. The developers paid trillions of dollars to the local government for land at prices many times higher than fair market prices. Now the developers are bankrupt. The Chinese keep the money. The U.S. Senate must investigate how much money the big banks invested in China's property development, and how much money American investors lost on investments in property development in China, and how much money the big banks earned in fees and profit selling bonds of Chinese property developers. Also, at a time when supply of affordable housing is extremely low in the US, why is our financial system investing hundreds of billions of dollars in China? When Americans buy stocks and bonds of Chinese companies, Chinese do not pay wages in dollars. They use dollars to buy capital, both physical and intellectual. Accumulation of capital in China is fueled by American investments in stocks and bonds. Who gains? China and American financiers - banks, venture-capital and private-equity funds.

The US as a whole is losing a hundred times more than our financiers earn. Our financial Judas might earn $30 billion in China, but if we take into account the increase in Chinese competitiveness and lost opportunities to invest in America, the total cost is very likely to equal a hundred times more than the financial Judas earn in China. At the present time America is creating millions of jobs for Amazon and Walmart to sell mostly Chinese goods, but this is not production. This is the distribution and consumption of Chinese goods. This is economic prostitution. America is selling itself for cheap goods. Anyone with even only one half of his brain functioning, should understand that unless Donald Trump returns to the White House to increase tariffs, America will continue economic prostitution - for a few more decades - until final collapse and disintegration.

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