How Did We Get Here? (A home school lesson for 5th graders and their parents)

Hey, kids, it’s time for a home school lesson, and today we are going to talk about economics.

Sound boring? Well, not really. It’s your allowance. How much you get each week depends on how much your parents earn, and how they earn money is determined by economics.

(OK parents, we have some exceptions, but that’s a matter for another lesson.)

How else does economics effect you and your older sister, who probably gets a bigger allowance and gets to go out on dates?

Well, mom and dad probably work, and the money they make determines the kind of house you live in, where you go on vacation every summer, and whether you will go to camp.

So, economics may be boring, but it’s really important. Right?

(Parents should have a discussion at this point with their children about how much they earn, how much time they spend with the family, and about what their children want to buy. Don’t dwell too much on charity, but don’t neglect it either.)

Now, we get to the hard part. How did economics get us to this horrid situation that the news keeps calling a pandemic. It’s why you aren’t going to school right now, for one thing. It’s why you may not have milk for your cereal for another.

To understand how economics got us into this bad place, you have to understand two things — the Japanese economy and hedge funds.

And, you have to go back a long, long time. To the 1980’s for the Japanese economy and all the way back to 1948 — before your parents were born — for the hedge funds.

CAUTION — I am in no way charging that Coronavirus is an Asian plot against America. We created the problem here all by ourselves. BACK TO The BLOG.

Forget hedge funds for a while. No one really understands them anyway. So, off to Japan in the 80’s, when Madonna and Paul Simon and Billy Joel were popular. See, not much different than today.

What was different is that in the 1980’s, Japan’s economy was much smaller and weaker than America’s, and the island nation — whose needs for raw material started World War II — had one really good business. They made cars that were in demand all over the world.

Japanese cars even sold well in America. In fact, states bid against each other to lure Japanese manufacturers to set up assembly plants here. And, those plants were remarkably profitable.

(Parents — Here would be a good time to explain why all the Japanese auto plants went to states with anti-union right to work laws, and why none of them paid union wages. Discuss the impact that had on our existing auto industry employment. Only for extra credit, of course.)

Anyway, there was one important reason why Japanese auto makers were making more money than American ones. They were far more efficient.

How did they do it?

It takes about 30,000 parts to make a Toyota — counting all the screws and bolts — and auto manufacturers used to store them all in warehouses. Their suppliers made lots of parts — better prices for big orders, of course — and shipped them to the manufacturer when their supplies ran low.

Lots of workers in the warehouses, lots of people handling shipping and storage, lots of money spent on supplies that might not be needed for weeks. After all, you didn’t order a thousand windshield wipers, you ordered a thousand boxes with a hundred wipers in each one.

Then a manufacturer had a brilliant idea. You know how many cars you are building next week, and what parts you will need each day. So, have your suppliers just deliver the parts you need when you need them.

No expensive warehouses to operate and staff and no delay on any assembly line because you can’t find a part you need. You get all the parts you need just when you need them.

Did it work? Beyond anyone’s wildest dream. They called the system Just In Time delivery, and used it in every Japanese auto plant built in the U.S.

They were praised by virtually every right-thinking business group, who could easily see those plants were more profitable than their American competition. And how well the system could work for other things. So, lesson learned. Our manufacturers did the same thing. Profits soared.

And not just in autos. Any business that needs supplies could do the same thing. Leaner, meaner and more profitable.

It even worked for hospitals. How?

I’ll make up some numbers to make it easier to do the math. Let’s say you have 20 hospitals scattered across some midwestern or southern state, and those hospitals collectively have an occupancy rate of 70 per-cent.

Now you don’t know how many patients will be in any hospital at any one time, but you do know the average weekly and monthly and yearly occupancy rates, and those pictures show a lot of money being lost. Empty beds don’t bring in any revenue, and they are expensive just to keep ready in case they are needed.

Staff not treating patients costs money. Storing supplies you don’t really need is also a waste of money. And, the next time you want to spend a million dollars on a new CAT scanner, how many patients will actually be using it?

So, government officials set standards. You can’t just build a hospital, after all. You need permission, and to get it you have to show the need for what you are building. And because you get a lot of state and federal aid to help pay for those beds, the government gets to decide if they are really necessary.

Close some of those underused hospitals or turn them into nursing homes, and the occupancy rate for the rest goes up to 80 or 90 per-cent. In a normal crisis, you can see those rates go up to 100 per-cent or more. Just look at all the hospitals who have beds out in a hall.

I once went to visit someone in a hospital like that, and my visitor pass read “hall pass” to see the patient in bed H-7. Wow, what a lot of money was being saved.

Of course, we now have a major And health crisis and those hospitals are gone. In a lot of our nation’s rural communities the nearest hospital is 30 or 40 miles away. And, the beds are already full.

So, on to hedge funds, which were first traded in 1948. First, some facts. Then a story.

1 — They are often wildly successful, regularly outperforming the stock market and mutual funds.

2 — They can do it because they are not regulated as closely as traditional funds. They can short-sell stocks, they don’t need to keep cash reserves. They can leverage risk by partnering with other firms.

3 — When they crash, lots of people lose lots of money. An unscrupulous manager will buy some small companies, fire half their staff, then say they have doubled its profitability by cutting costs. Which gives him a big bonus. When those firms go out of business the next year, the hedge fund gets a big tax deduction.

4 — You probably can’t invest in one.

(Don’t hold me to those numbers. Standards change quickly in the world of high finance).

So, kids, here’s the story.

Hedge funds are only open to “accredited” or qualified investors. What does that mean?

Hedge funds are only allowed to take money from “qualified” investors — individuals with an annual income that exceeds $200,000 for the past two years or a net worth exceeding $1 million, excluding their primary residence. As such, the Securities and Exchange Commission deems those people to be qualified to fork over their cash.

In return for that consideration, they get a golden ticket — a bag full of tax deductions and credits so that, whether the hedge fund does really well or really badly, they come out ahead.

What are those benefits? Too many to explain. You can look up “carried interest,” if you want to get an idea of how complex things can get with those wonderful investment tools.

So, kids, do you know now how we got here? Not enough hospital beds, not enough supplies, not enough jobs, not enough opportunities and not enough people who understand it?

Well, you’re still young. Keep studying hard, hire a couple of lobbyists, get into a good college and inherit some serious money and you, too, will know how we got here.

You just won’t know how to get out.

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