# Macroeconomics explained

## Macroeconomics

Macroeconomics is difficult to track. Political events can break and redefine economies, and each country or corporation tends to operate as a separate group among others, with larger ones defining new elements that redefine the economic ecosystem. [Game theoretical models](math-gametheory.md) often capture these distinctions, but only in a broad sense, and with many degrees of uncertainty because countries often *know* other countries are using game theoretical models on them (thus fulfilling [Goodhart's Law](lawsaxioms.md)).

Broadly, macroeconomic activity of any entity is measured as "gross domestic product" (GDP), which adds together several major categories:

- Consuming (C) - resources spent on needs and wants.
- Investing (I) - resources spent to meet future needs and wants.
- Government (G) - administrative "maintenance" costs to keep things going (e.g., [police](legal-safety.md), [tax collectors](money-accounting.md)).
- Net Exports (NX) - the quantity of goods and services sent out to other groups.

Like any other measurable thing, people can play [math](math.md) games to [distort](image-distortion.md) GDP compared to a group's actual wealth (e.g., extra government spending), and it doesn't account for human [welfare](goodlife.md).

There are five major ways macroeconomists track movement:

- Taxation - how much does the government take, and how much does it adversely affect who is taxed?
- Spending - how much does the government spend, and on what?
- Monetary policy - how does the government manage its currency?
- Regulatory policy - how does the government make [laws](rules-methods.md)?
- Trade - how does a government and its people interact with [other governments](politics-systems.md) and their people?

It's worth noting that the entire realm of macroeconomics becomes a matter of controlling individual [decision-making](people-decisions.md). The motivation for this is either for [power](power.md) or [love](people-love.md) of humanity, depending on your opinion.

APPLICATION: Markets are chaotic, so economists make statistical correlations, which [don't necessarily tie to causation](math.md). They'd be out of a job [if they didn't explain cause-and-effect](science.md), even if they're utterly wrong.

Authorities can directly control supply, but can't *fully* [influence](influence.md) demand. This is because it's impossible to fully manage others' desires without removing [free will](humanity.md). The closest thing they can do is provoke [fear](mind-feelings-fear.md) to deter [purposes](purpose.md).

One popular form of [social engineering](rules-methods.md) in the world of economics is to employ large-scale [design patterns](engineering-design.md) to steer people toward decisions that they "ought" to do ("libertarian paternalism") to influence behavior and send wealth from whoever a government deems unworthy to whoever is deemed worthy.

### Taxes

Generally, people will try to avoid a government's taxes, and often hire exceptional [accountants](money-accounting.md) for the job:

- Lie about it and not pay it ("tax evasion").
- Avoid certain taxable activities.
- Shift how they get their income (e.g., start a corporation or trust, use [cryptocurrency](computers-blockchain.md)).
- Move the income somewhere else (e.g., move to another country).

There are several unfortunate realities of taxation that combine themselves into a paradox for *every* government:

- People from *all* [social classes](classes.md) would rather not pay taxes.
- If there were no taxes above a certain level of wealth, but an even tax below a certain threshold, people would work *really* hard to earn above that threshold.
- Poor people can barely afford to *live*, so it's unethical to tax them as much as wealthy people.
- The wealthy *can* afford taxes, but they can also afford *many* tools to migrate their taxes elsewhere, and can afford to hire many [creative](mind-creativity.md) and brilliant [accountants](money-accounting.md) and [lawyers](legal-safety.md) to manage their wealth while avoiding taxes.
- If a country closes off *all* the tricks to successfully tax the wealthiest of society, they'll move to another country where they can take advantage of *other* tax benefits.

Generally, a good stopping point for raising taxes is when the benefits of the government money spent are *barely* higher than the financial damages caused by taxing people ("Laffer curve"). If taxes are too low, the government won't make enough money, and if the taxes are too high, people will find ways to avoid paying them (including not working or acting illegally). [Conservatives and liberals](politics-conservativeliberal.md) argue where that line draws (somewhere between 27% and 78%), but they'll *all* agree that above that specific mark, a 5% tax increase might become a 1% government revenue increase and significantly more unemployment and poverty.

Governments can focus their taxation on certain domains, which creates a type of [social engineering](people-rules.md):

- Tariffs, which levy against foreign goods and services, which can prevent a country from competing fairly with other countries if set too high.
- "Sin tax", which levies against vice-based goods and services (e.g., smoking, alcohol, prostitution), which can create a perverse incentive to *motivate* people to overconsume their vices to pay for essential public services.
- Luxury tax, levied against high-quality goods and services, which can motivate wealthy people (and their money) to move to other countries.
- Progressive income tax, levied proportionally higher against wealthy people, which can motivate them to play international [accounting](money-accounting.md) games.

One of the most common reductionist myths is that taxpayers "pay" for government programs. Since governments manage the money supply as well, they have more dimensions of control than initial appearances.

Many governments try to create costs for unrelated third parties who suffer from a [decision](people-decisions.md) ("negative externalities"):

- Pollution
- Damaging public goods
- Speeding on a highway
- Publicly consuming a [substance](addiction-substances.md) (e.g., drugs or alcohol)

[Authorities](groups-large.md) often attempt to prevent negative externalities with [rules](people-rules.md) that come with fines and penalties, but they'll also frequently [make things worse](mgmt-badsystems.md):

- [Innovators](trends.md) often create [brilliant](mind-creativity.md), [better](results.md) solutions that violate the spirit of the [regulations](people-rules.md) even worse.
- Many times, delays from controlling measures will force waste from non-consumption.
- Undesirable [social trends](trends.md) can often exploit a well-intended thing for bad purposes.

Even when they don't outright ban things, governments often set price limits on goods and services to alter everyone's consumption. If prices are too high, suppliers will waste the product because nobody will buy it. If prices are too low, the product will be unprofitable and nobody will make it, which will create a shortage.

APPLICATION: By hiking the price on something, consumers won't change up to where they start [changing](people-changes.md) their [motivation](purpose.md) about buying that thing. In fact, extra income for a business often gives more opportunities to make risky and potentially value-adding [risks](socialrisk.md) elsewhere, so increased prices are a net benefit to society if that group hasn't become [dysfunctional](mgmt-badsystems.md).

### Spending

While the public sector (e.g., government, [academia](education.md)) creates various public goods, they're often [trend](trends.md)-resistant, and often poorly made.

The private sector, on the other hand, *requires* [risk](socialrisk.md) to function, which means they'll make [decisions](people-decisions.md) that'll often yield more rewards. All the [value](values-quality.md) and [innovation](mind-creativity.md) of society comes through private [creations](creations.md), even when public money funded it (e.g., [intellectual properties](legal-ip.md)).

APPLICATION: Building wealth is valuable to advancing [the good life](goodlife.md) in a society, but only as far as the middle class. Beyond that, any further wealth only runs the risk of [corrupting](morality-evil.md) unless it's used for a [virtuous](morality.md) end.

Often, governments can provide "stimulus spending" to provoke more people to spend more money in private markets. This creates a distortion of the market (and the risks from [corruption](mgmt-badsystems.md)) because that money comes strictly from taxation.

A government can tweak its monetary policy to offset the timing of the taxation from their stimulus spending, but governments only redistribute things and don't really make them.

### Monetary policy

Whatever form of money a government takes, it must be 5 things:

1. Divisible - has easily divided denominations that can break apart for easy trade and [negotiations](people-conflicts-negotiation.md) (e.g., *not* bars of gold).
2. Durable - can withstand many trades without breaking apart (e.g., *not* bread).
3. Recognizable - can't be counterfeited and, therefore, severely drop in value (e.g., *not* car wash tokens).
4. Portable - can allow people to bring it around with them to trade (e.g., *not* paper towels).
5. Scarce - there's a limited amount of it so that people would find it has value (e.g., *not* [computer storage space](computers-memory.md)).

The "standard" for paying back was once gold or silver, but most nations' notes for the past century or so have been "fiat" (faith) currency. There are several reasons for this:

- Asset-backed currencies are limited by the size of the asset. Economies grow from population, and there eventually won't be enough of that asset available relative to the currency without *severely* devaluing that asset.
- Typically, fiat currency is held together with debts for future repayment (i.e., government bonds). This means that the promises of the future determine the people trusting money today (instead of a barter for a valuable object). This is infinitely scalable if the monetary policy manager (e.g., the US Federal Reserve) does a decent job tracking it.

From a government's perspective, money is an issued [debt](money-2_debt.md) that people don't collect. In other words, $1 US is a promissory note that the United States government will give $1 worth of...something...in exchange.

To avoid inflation, a government has a unique trick with reserve currency:

1. Issue bonds, which are how large organizations [borrow money](money-2_debt.md) from smaller parties but don't actually *do* anything with the money.
2. Set the bond interest rate at a low rate relative to inflation (e.g., 0.25%).
3. Since it's a government, investors will like the bond because it's a proven institution that's incredibly [safe](safety.md).
4. Hold on to that money, meaning it's not in circulation as long as the bond hasn't been redeemed before its "maturity" (i.e., 5-30 years).
5. If inflation ever happens, ratchet up the interest rate (e.g., 4%) to get more money off the market. Within a few months, it'll prevent the value of a currency from dropping too severely, but overshooting it can create *de*flation (where every unit of currency is worth *more* than it was).

As of the early 21st century, the exchange currency for the *entire world* is the US dollar, which is from them running a trade deficit for a long time (see below) and other countries pinning their currency's value to a stable comparison. Before this point, other countries like Spain and Portugal held the world reserve currency.

The only problem, however, is that [debt](money-2_debt.md) has inherent risks because it's [slavery](slavery.md) for institutions as well as individuals. If the debt gets too high compared to the total wealth of an organization, it can make an economy very fragile. There has been a time where the debt was canceled, [but it was disastrous](https://en.wikipedia.org/wiki/Stop_of_the_Exchequer).

When looking at the [accounting](money-accounting.md) of a country, make sure the balance sheet and income statement numbers aren't crossed for projections. The total debt is a balance sheet item (as well as a nation's wealth), while GDP is an income statement item (as well as debt payments).

### Regulatory policy

Individual motivations magnified to a massive body can blow vast sums of money on niche needs ("concentrated benefits" and "dispersed costs").

- A multi-million dollar subsidy to a small community is significant but doesn't feel like much when it's a few cents across a few hundred million people.
- However, a few cents at a time for several thousand programs can become a tremendous tax burden.

In a free society where private individuals have [power](power.md), governments aren't free of company [influence](influence.md). While free markets may regulate [evil](morality-evil.md) somewhat, [large companies](groups-large.md) can [influence](influence.md) governments to make [bad decisions](mgmt-badsystems.md):

- Governments can give benefits to large companies while harming smaller companies without those connections ("crony capitalism").
- Large companies can influence [rules](people-rules.md) to carve out markets for themselves and squash competition ("regulatory capture").

APPLICATION: Economic growth is only partly connected to [well-being](goodlife.md). It *can* give more things people need, but true [meaning](meaning.md) comes through [wealth-building](creations.md) *far* more than having it. Any attempt to [measure](math.md) well-being in a society or between [cultures](people-culture.md) is impossible because we can't put numbers on satisfaction about *anything*, and it's a relative concept.

Companies can solidify their [control](power.md) of a market with a simple procedure:

1. Someone dies consuming a product.
2. The largest company that creates the product sends many lobbyists to the government demanding they do something.
3. The government passes [laws](people-rules.md) for mandatory safeguards that only a large company can afford.

Frequently, governments will set price controls on various domains, which can create perverse incentives:

- Rent controls can prevent prices for rent going up above a certain legally defined amount instead of letting the price fluctuate from market demand. Without the rent controls staying *extremely* lax, landlords eventually won't be able to pay for basic maintenance on the rental properties.
- Minimum wage laws set a minimum price. However, it prevents inexperienced people who want the work experience to work for employers who wouldn't hire them for a higher wage. Over time, it also raises the cost of living in areas that implement it due to a diminished scarcity of money in the region.

APPLICATION: A good welfare system will completely sidestep money. To avoid destroying [meaning](meaning.md) for the individuals (and therefore making a welfare state), that system should provide for *only* [basic needs](people-boundaries.md) (i.e., food, water, shelter), which empower people in their discomfort to strive for something better. This also won't last long in a [free society](politics-systems.md), since [the underclass](classes.md) will always want to vote for whatever gets them more free stuff.

### Trade

The domains of trade come from the fact that each nation has the means to [specialize](jobs-specialization.md) in certain goods and services. If everyone had the unrestrained freedom to trade with each other, everyone would collectively benefit.

However, a nation's leadership [doesn't always want completely free trade](mgmt-badsystems.md). By placing tariffs and laws that make trade more difficult, they can protect themselves from losing [power](power.md). For that reason, the [discussions](people-conversation.md) and [optics](image.md) about free trade are always more prominent than actual [legislation](people-rules.md) that promotes it.

Even when a group is collectively producing more than exporting, they may operate at a trade surplus because of the relative market value of that product. This can get confusing when a rich nation is somehow making more of a product than they need from other countries, but the supplier countries *still* influence the market price.

Over time, as long as people continue to trade, savvy [traders](money-investing.md) will edge out less savvy ones. In a [culturally](people-culture.md) well-ordered system, the gap between the [wealthiest and poorest](classes.md) will grow more dramatically from trading skills than in a poorly ordered one. Irrespective, enough time with *any* social system guarantees a partially [unfair](morality-justice.md) redistribution of wealth, whether by [war](people-conflicts-war.md) or [bureaucratic incompetence](mgmt-badsystems.md).

A country can import more than they're exporting. When that happens, they're sending more of *their* money out and are operating at a "trade deficit". On the other hand, a country can *acquire* more money by exporting more than they're importing and run a "trade surplus". A trade surplus is a nation's means of gaining more economic power long-term by owning the means of getting people to [do things](results.md) later.

These discrepancies can make it difficult to measure. To that end, economists try to use a universal standard. For a while, they used the Big Mac Index, which measured the cost for for a Big Mac at a McDonald's restaurant (since the sandwich was all across the world). This worked because most of the ingredients had to be locally sourced.

## Additional reading

[Sim CB](https://benoitessiambre.com/macro.html) - try to regulate central banking like the Federal Reserve