Author: Rodger Malcolm Mitchell

MBA Northwestern, business turnaround expert, economist

Thought for the day. The UPS method of pricing for airlines.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Businesses usually try to set prices in relationship to costs. The things that cost more to create and sell usually are priced higher. While competitive pressures can change this “rule,” a business that departs too far from the cost / price relationship can experience a serious loss in profits and business viability.

I remember when stock brokers charged on a per-share basis, so trading 100 shares cost more than 10 shares. But, for the brokers, the cost and effort of trading a large lot were nearly the same as for a small lot, so today, brokerages mostly charge on a flat, per-trade basis.

Losses are a key cost of insurance, so insurance companies generally charge more for higher risk. Machine-made generally is more costly than hand-made, so prices for hand-made things usually are higher.

For UPS, one significant cost is fuel. UPS charges more for heavier packages going farther, and less for lighter packages going nearer. Makes sense.

Airline costs are even more fuel-related than those of UPS, because airlines don’t have truck delivery considerations. Yet, airlines don’t price according to costs – or at least not as closely as they could.

All passengers, heavy or light, pay the same, with the differences not related to weight, but rather to how they purchase their tickets (On line or through a consolidator like Orbitz or how far in advance or season, etc.). Some airlines have begun to charge for luggage, which considers the reality that luggage has weight, therefore uses fuel. Spirit airlines comes closest to the cost/price relationship, by unbundling almost everything – luggage, food, seat location — but even they don’t charge extra for some weight-related things like purses and under-seat packages.

What if an airline went all the way with cost-related pricing? Every passenger would pay according to total weight. At check-in, the passenger would step on a big scale, along with all his/her luggage, carry-on, lap-top, coat, hat, briefcase, snack, magazine, crutches, wheelchair – everything. The total weight multiplied by the total miles would determine the price of the ticket – in short, the UPS method of pricing.

Men mostly would pay more than women. Football players would pay lots more. Anorexic models would pay less. Children, much less. Heavy purses, more. Heavy boots, more. Morbidly obese people, who flow over into adjoining seats, way more.

Ultimately, the thinner, less-baggage-encumbered flying public would gravitate to the lower priced airline, which because it would use less fuel per passenger, could afford to charge its lower prices.

So in summary. Price is the prime motivator for consumer airline choice. Fuel is the prime airline cost. Weight and distance are the prime fuel determinants. So the airline that charges by weight and distance can afford to charge less, thereby attracting more passengers.

I think UPS has it right. They charge packages by weight and distance. After all, today’s airlines already think of us as nothing more than freight, don’t they? Why not copy UPS?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY

–The single, most misunderstood fact in all of economics. It will blow your mind.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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When you ask the wrong question, you get the wrong answer. Congress and the President are asking, “How should we reduce the federal deficit?” The correct question is, “Should we reduce the federal deficit?” And the answer is “No.”
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Sometimes, something is so simple it can be hard to understand, as though “It just couldn’t be that easy.” This is one of those times.

The media don’t understand it. The columnists don’t understand it. The Tea Party, the Republicans, the Democrats and the debt hawks don’t understand it. For sure, President Obama doesn’t understand it. The old-line economics professors do understand it, but they’re afraid to admit it, because it makes them look like boobs for not telling you, all these years.

It is the single most important equation in economics. It’s so simple as to be laughable, yet it will amaze you (unless you are among the one-in-ten-thousand who already understands it). And once you understand it, you will look at the politicians in wonderment at their incredible ignorance.

Are you ready? Here it is:

Federal Deficits – Net Imports = Net Private Saving

This is not a hypothesis. It’s not a theory. It’s not my opinion or anyone else’s opinion. It is an accounting fact. In a closed economy (where money exports equal money imports), your annual savings, plus my annual savings, plus everyone else’s annual savings equals annual federal deficit spending, to the penny. In such an economy, Federal Deficits = Net Private Savings.

This means, if the federal deficit is reduced $1, our combined savings will be reduced by exactly $1 — not $.99; not $1.01 — exactly $1.00.

Today, the politicians in Washington are talking about a $4 trillion (!) deficit reduction. That means our savings will be reduced by $4 trillion. There are about 310 million people in America. A deficit reduction of $4 trillion will reduce the savings of each man, woman and child in America by an average of $12,900.

That’s $12,900 out of your pocket, another $12,900 out of the pockets of your spouse, each of your children and each of your grandchildren. A four-person family will lose $51,600 in savings. If both your parents are alive, they’ll lose another $25,800 in savings.

Why do the politicians want to reduce your savings? Sheer ignorance of Monetary Sovereignty. They think “deficit” is a bad word and want to eliminate it. But a federal deficit is money in your pocket. And a federal surplus? That’s money taken out of your pocket.

How can this be? Again, simple. When federal spending exceeds federal taxes, it’s called a “deficit.” When the federal government spends, its payments for goods and services enter the economy. When you pay taxes, the money leaves the economy. So federal deficits add money to the economy, and where does that money go? Into your pocket as savings. Similarly, federal taxes take money out of your pocket.

(If you want to see a longer, more erudite explanation, you might try Deficit = Savings, or Mosler letter to the President but I think you get the picture.)

Now tell me, how much would you like the federal deficit to be reduced? That is, how much of your savings would you like to lose? Tell your Congressperson.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY

–Is NPR in league with the Tea Party, or simply clueless?

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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It was at 11:00 AM Central time, today, that I heard a discussion on National Public Radio, station WBEZ. The participants claimed the media are hamstrung by the need to present both sides of each issue.

They lamented the fact that “fairness” required them to give equal weight to opposing opinions, even when one opinion was far more persuasive than the other — and shouldn’t the media have more leeway in exercising their judgement on this?

Aside from the fact that columnists and editorials do exercise a form of censorship (aka “judgement”), there is one other aspect to the conversation that troubled me. The specific subject was the federal deficit. Both participants agreed the deficit must be reduced, so the “two sides” were: Raise taxes or don’t raise taxes.

As readers of this blog know, those are not both sides of the deficit issue. Those “two sides” are mere details in the real issue: Increase the deficit or don’t increase the deficit.

The media, including public radio, have been derelict in not presenting the “increase the deficit” side. And its not as though they don’t know or can’t find out. They easily can access such sources as this web site, Warren Mosler’s The Center of the Universe), Bill Mitchell’s Billyblog ), almost the entire faculty at the University of Missouri, Kansas City (far ahead of traditional Nobel winners like the University of Chicago and Harvard) and many,many others, to see powerful arguments, substantiated by facts, about why the federal deficit should be increased.

Why do they never broadcast these opinions and facts? It’s yet another puzzle surrounding the entire Monetary Sovereignty subject. Because “everyone” agrees the world is flat, the media don’t consider the possibility it may be round, so nothing is said.

There is only one solution. I’m following it and I urge you to follow it: Contact your local NPR station (www.mpr.org) and ask them to do as they claim to do: Broadcast both sides of the issue – the real both sides. If enough people request it, NPR finally may realize they are missing an important part of the economics debate.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY

–What are the best recession/depression investments?

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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It looks like Congress and the President, with the approval of the media, old-line economists and the voting public, are determined to reduce the deficit. Historically, deficit reduction has resulted in recessions and depressions. Federal deficits are the government’s method for adding money to the economy, and economic growth requires money growth.

So, we will cause ourselves a recession or a depression. I’m resigned to the fact that the vast majority doesn’t believe this, so I suppose I should enjoy the pleasant irony of seeing all the fact doubters lose their money, their jobs and their homes in the years to come.

But I don’t, partly because my own children and grandchildren will be hurt by the mess Congress is creating. I’ll be hurt, too – unless I can think of some recession-proof investments. While it seems nothing can prevent the out-of-control freight train known as “Congress” from destroying America, I’d like to protect my own family as best I can.

Many of you are investors. Some may know far more about stocks, bonds etc than I do. So I ask you this:

Given that we will have deficit reduction, which absolutely, positively will cause a recession or a depression (depending on how big the deficit reduction will be), what are the best investments to make today? Cash may be safest, but there’s no income. Treasuries are safe too, but again, there is scant income. Its a dilemma. What do you suggest?

Thank you for your help.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY