Bastiat's Bastions

Last January, I wrote in this post about how Mubarak’s hold on Egypt was lost, in part, due to food riots, riots over the rising prices of food.  The problem was that the government in Egypt, to placate its citizens, had created programs to keep food prices down, at least to some, creating “program addiction,” a situation that results in uprisings if the program is cut, and that is what happened in Egypt.

The problem with such programs that give something away is that people come to depend on the program, and then, more and more become attracted to the giveaway.  With increasing numbers of people depending on the program, spending goes up and up and the taxpayers are asked to assume a heavier and heavier burden.  The ranks of the dependent swell while the number of those providing the payments shrinks. 

Now it looks as if a similar problem is occurring.  Take a look at this recent report from Andrew Breitbart about the reported gasoline shortages in Egypt.  Prices of gasoline have been held down through the Egyptian government’s subsidies, but such subsidies look to be unaffordable, leaving the government but little choice to end them, meaning prices will rise.  How do you think the Egyptians will respond to a government that causes gasoline prices to double?  The new leaders of Egypt have not yet solidified their power.  Just like Mubarak, they may soon be out of a job.

As you can read in the Breitbart article, the authorities blame speculators and smugglers.  Hmm? Maybe.  What needs to be asked is “why is smuggling going on in the first place?  Could it be that the policy that keeps prices of gasoline at half of the price in a neighboring country CREATES the opportunity for someone clever to buy in one market at a low price and sells in another at a higher price?  Here is an excellent analysis of what is going on with subsidized oil in Indonesia Price differences create profit opportunities for smugglers.  They create even larger opportunities for thieves. 

So, are the smugglers causing the shortages, or are they just taking advantage of a situation that politicians set up to build and maintain support?

What we will see this term is that when it takes government edicts to keep prices low, the amount buyers want becomes high compared to the amount that sellers want to sell—the textbook definition of a shortage.

-MC

While a bit late for celebrating Martin Luther King’s Birthday, though it is still Monday by my clock, here is a short article by my graduate school mate, Randy Holcombe, of Florida State. 

During the war in Iraq and the war in Afghanistan, some thoughtful observers noted that African Americans paid a disproportionate  price in casualties.  Michelle Alexander’s book, The New Jim Crow: Mass Incarceration in the Age of Colorblindness is about how our 30+ years of a “war on drugs” has piled up far more black than white casualties in our jails, destined more black than white families to failure.     

Well, our drug laws and their disproportionate effects on Black vs. White America is something we must examine more closely and more thoughtfully.  Our “War on Drugs” is a war we cannot win.  However, some Americans lose more in this war than others.

- MC

I just returned from participating in the Southern Economic Association’s annual conference in Washington, DC.  It was the first time I have flown since the airlines started charging extra fees for checked baggage.  As a result of those baggage fees, I fought to smash my bag into the overhead bin and ended up swapping shoes with those in my bag that were keeping the bag from fitting.  Prices not only have financial consequences, but behavioral consequences as well.

Well, amid Congressional disaster over the dealing (or not dealing) with the deficit problem, Louisiana Senator Mary Landrieu is doing something about these baggage fees.  You can see a news story about her proposal here.  To keep travelers from getting nickeled and dimed with baggage fees, she is proposing legislation to ban charges for the first checked bag.  While this may sound good, especially good to those who waited patiently behind me while I fought with my luggage, it really represents the rather typical lack of critical thinking by those in power in our nation’s capital. 

It does not look as if either Senator Landrieu or any member of her staff stopped to consider the consequences of her proposed bag fee ban legislation.   It should be obvious as to the reaction of the airlines.  They will just charge higher fares, and travelers, whether they checked baggage or not, will pay for checked bags, and more bags will be checked than now.  I certainly would have checked my luggage, and probably would have brought a larger bag if I could check it with no additionaly cost. 

Notice what happens with charges for checked bags–travelers packing lighter, airlines carrying less luggage, fewer baggage handlers per plane, and less lost luggage problems.  And these are just the obvious savings to the airlines from the behavioral consequences of baggage fees.  I am sure there are probably some that have not occured to me.  Some of these savings are passed on to travelers who carry their own luggage with them.   

With first bag checked for “free,” airlines will not be able to make these savings and instead of a separate charge, the fares will rise as a result.  They probably would not rise by the baggage fee, but now, travelers would not be able to save those fees.  They would not be given the option of saving some money by carrying their own luggage.  The airlines would raise fares because they would be carrying heavier loads and paying more to handle the extra luggage. 

It looks as if our costliest baggage is the lack of thinking that takes place in Washington, thinking that has given us heavy tax and debt burdens and promises that we cannot financially sustain.  

-MC

     In the late nineteen seventies I was in graduate school at Virginia Tech.  At the time inflation was spiraling out of control and home buyers lined up for 18% home mortgages, fearful that if they waited a month, prices would go up even more.  One thing that really rattled my cage back then was a public service announcement the government paid to run on TV.  It had a Will Rogers look-alike standing in front of the White House twirling a lariat and saying in a folksy twang “we all want to blame someone else for inflation, but the truth is, we’re all to blame.”  Then an announcer told us to write to Pueblo Colorado for a free government booklet called “Dollars and Sense” that explained how we could do our part by eating hot dogs instead of steak; fixing our own cars; and repairing our shoes instead of buying new ones.

     This was just nuts.  Someone was to blame for inflation, and it was the Federal Reserve Board.  Throughout the 70’s the Fed massively expanded the money supply in an effort to keep interest rates low and stimulate the economy.  Americans could eat all the hot dogs they could stomach but it was not going to halt inflation as long as the Fed kept printing more dollars.  This became clear when the fed finally changed its policy in 1980 and began maintaining a stable currency; within two years inflation was down to 3%.

     But how quickly lessons of the past are forgotten.  For the last two years the Fed has again been trying to stimulate the economy by pumping money into the banking system to keep interest rates low.  It hasn’t worked.  The US economy is recovering, but at a much slower rate than the rest of the world, and now inflation is back on the scene.

     The Fed has been watching “core inflation”—which excludes energy and food prices—and deduced that inflation is not a problem in the US.  But energy and food are where prices have been rising the most and, unfortunately, those are items we can least do without.  Americans are finding that after paying for gas and food they have less and less to spend on other goods.  Businesses in those other sectors are reluctant to try to pass on cost increases to their cash-strapped customers, but that doesn’t mean we don’t have inflation.  Inflation is when a currency loses value, and the dollar has definitely been losing its value.

     Two-thirds of US dollars are held overseas, so only looking at domestic prices may not be the best way to assess the dollar’s value.  One reason for the dollars’ popularity overseas is that it has traditionally been considered a “safe haven” for wealth: the US government is not going to be overthrown or default, and inflation has generally been kept under control.  So when the global economy plunged into recession in 2008, the value of the dollar soared as people around the world sold their stocks and stored their wealth in dollars.

     But that has changed.  Continued expansion of the money supply by the Fed and Congress’s inability to deal with the federal government’s growing debt has shaken confidence in the dollar.  Financial markets were rocked recently when Standard & Poor downgraded its long-term outlook for US government bonds from stable to negative for the first time in history.  As S&P explained: “the U.S.’s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.”

     To understand how this has affected people around the world, imagine you are the potentate of an oil-rich country.  Everybody knows the price of oil has been rising: in the past year it has gone from $78 a barrel to $113 a barrel, an increase of 43.6%.  So you should be sitting in high cotton, right?  But your peasants are rioting in the streets over high food prices, your quasi-socialist government has promised free food, and your oil is traded in dollars.  That means when you sell your oil you are paid in dollars, and you must use those dollars to buy food to feed your angry masses.

      The table below shows how many dollars you would have received for 1,000 barrels of oil in June 2010 and how many you got in May of this year.  It also shows how much food you could buy with those dollars last year compared to this year.  Hmm.  Your dollars don’t buy as much food as last year.  So you decide to take an extended vacation in Europe and let your nephews deal with the angry mobs at home.  The price of oil in dollars may be up, but your dollars don’t fetch as many euros as last year, so that 43.6% increase in the price of oil is only true for dollars, in euros oil is only up 15.6%.  Now suppose the Europeans declare you persona-non-grata due to your innumerable human rights violations and the only place you can seek refuge is sub-Saharan Africa where they deal only in gold.  Rats.  Gold is at a record high in dollars (which is the same as saying the dollar is at a record low in terms of gold), so even though you have 43.6% more dollars in your pockets, suitcases and wherever else you stuff it, you can only get 8.7% more gold with those dollars.  Life is not as sweet you might have imagined looking at the dollar price of oil.

     This is inflation.  When you sell your goods you get more dollars, but when you go to spend those dollars, they don’t buy as much.  It has been happening around the world and will soon move from the global stage to Main Street, USA.

-Dr. Michael Kurth
Professor of Economics
McNeese State University

Here is a new study from Notre Dame that you might find interesting, but don’t try using it as an excuse for poor perfomance on your final.

-MC

In 2006, Amanda Walker, one of my Economics 211 students, and I wrote this post on Thanksgiving.  I just found a similar article by Benjamin Powell, a fellow with the Independent Institute, an economics professor at Suffolk University and a contributor to the Charlotte Observer and The San Diego Union-Tribune, at a weekly email newsletter from the Independent Institute, called The Lighthouse.  Read Powell’s Lighthouse article on Thanksgiving here. 

The Pilgrims came here with altruistic values of  equal sharing based on need, much like the values of the Occupiers.  I was just in Washington, DC for the Southern Economic Association meeting.  On may way from the convention, I had to make a subway change at Metro Center, which is near the White House.  On my way to take a few photos of the White House, I came across a small encampment of the Washington, D.C. Occupiers.  Below are a few of the photos I shot of the OccupyWashington protesters.  (While it looks cold because of the fog and cloud cover, don’t feel too sorry for folks in the photos, as it was probably no cooler than 68 degrees at the time.)  Of course, I like the sentiment in the yellow sign the most.   Just click on a photo to see a larger version.   

Notice the use of the word “Needs” in several photos.  When does one person’s “need” become another’s obligation?  If one person is obligated to work to provide for someone else’s need, and this obligation is not voluntary, but coerced,wouldn’t that be forced labor?  Isn’t forced labor “slavery?”

Enjoy your Thanksgiving.  And enjoy your time with friends and family.

-MC

A few days ago I posted this comment on how local governments protect existing businesses from competition by erecting barriers to entry through occupational licensing.  That story reminded me of  another story along similar lines, about a pair of Washington, D.C. entrepreneurs, Taalib-Din Uqdah and Pamela Ferrell who started their small business, Cornrows & Co. in 1980, specializing in African hair braiding.  The pair came under fire by the DC cosmetology board for having a cosmetoloty license, which would require going through a cosmetology school and passing a test on methods of cutting, dyeing, straightening, and perming, but would cover their braiding techniques.  Here is the Institute of Justice’s “Backgrounder” on the case.

Last year, I posted this on the exams required for new florists that the Louisiana board that licenses florists uses to keep its numbers down and their prices up, mentioning other cases of occupational licensing, like the ones for CPAs and massage therapists.

Back in June of this year, John Stossel penned this article on local regulation of both taxi operation and hair braiding, and how it hits the poor, the people that politicians often claim to be fighting for.  Stossel makes a great case here against this sort of occupational licensing.

When it becomes more difficult to become a competitor than to go along with the status quo, both consumers and these competitors lose, all in the name of consumer protection.  What irony!  Or is it just that we don’t realize that Orwellian “NewSpeak“ has been here  for some time.

-MC

Well, just like the line of Cain’s accusers, these stories of special favors for political donors seem to have no end.  In this story, it seems that the White House has once again given out about a half billion dollars of taxpayer money to a political donor to provide a product that we can get at a better price elsewhere.  On top of that, it is not sure that we need this product.  This money is for a vaccine for a disease that was completely eradicted in 1978, smallpox, a virus only known to exist in locked freezers in the US and Russia.  On top of that, this new vaccine cannot be tested for human use and costs about $250 a dose, well more than the $3 a dose cost  our of existing vaccine stock. 

Maybe if I give them a lot of money, I could get the federal government to buy my product, a true technological breakthrough, a circular shaped object used to roll things on, something I call “the wheel.”

–MC

This New York Times article describes the federal government’s huge subsidy program in renewable energy as a gold rush.  Perhaps, a better analogy is a land rush, like the competition to get land when the Oklahoma territory was opened up.  There, something was being given away, and there really wasn’t anything new being created, as that land in Oklahoma had been there for a long time.  The Solyndras in these government giveaways are not developing new technologies, but investing in existing technologies.  The question is ”why don’t investors sink their money into these deals, risk their own money, if these firms are so wonderful?”  Instead, we see companies rush to compete for the government handouts instead of competing for investors by providing sound investments.  And isn’t is just amazing that these firms getting the handounts all happen to be big political supporters of President Obama.  This is rent-seeking waste, just as we have discussed in class.  Rent seeking and promoting wasteful rent-seeking behavior, special favors, remains somewhere between blatantly unethical to blatantly corrupt. 

-MC

In class today, I talked about the “Social Interest Theory” of Regulation.  Note in this article from the Freeman that it is government that is erecting huge barriers to entry and monopolizing something that seems simple, like street vending.  Now why would a government change an industry that is about as competitive as an industry can be into a monopoly?  Should we trust the institutions that do this to regulate other industries in the social interest, or do you think that they might easily be subject to capture?  Could rent seeking be at work here?  Read the article and share your thoughts.

-MC