Fluctuation Means Competition

Every now and then, someone says something silly about economics to me that makes me cringe a little.  A few weeks ago, my mother did exactly this. 

We were watching the news and a reporter said that an impending hurricane had caused a rise in oil prices.  My mother, frustrated that she would now have to pay more for gas, exclaimed that, “They’ll use any excuse to charge more.”  She seemed to think that there was a monopoly or cartel of some kind that controlled the price of oil and would raise it whenever they could. 

This is actually not  an uncommon misconception.  There are always plenty of people seeing evidence of collusion amongst oil companies whenever oil or gas prices spike.  Accusations of “price-gouging” were rampant a few years ago when gas prices jumped quickly and the price of oil increased by nearly 600% in only a few years*.

Fluctuating prices for a commodity as important as fuel is a cause for concern and should be addressed (the question of whether it should be addressed by the innovators in the free market or bureaucrats in the government is another topic entirely.)  But while fluctuating prices may be a cause for concern, they are most certainly not evidence for collusion.  In fact, they are strong evidence against collusion. 

A monopolist seeks to extract the maximum amount of profit from the service or product they control.  For the nonexistent oil monopolist, this means keeping prices just below the level at which people stop finding it profitable to travel places by car. 

More importantly, it means keeping prices at this level consistently.  Raising them above this level would mean that the monopolist would see lower sales, and therefore less profit.  Allowing them to fall below this level would mean losing potential profits unnecessarily.  Neither action makes sense.

Therefore, the one thing we can count on a monopolist to do is to keep prices steady.  Granted, they will be exorbitant, but at least they will be steady.  When we see prices fluctuating widely, that means other forces are at play. 

In the case of oil, these other forces are the increasing demand for gasoline and plastic products in the developing world, war and turmoil in oil producing nations and the falling value of the dollar.  Another factor at play might be that we are closing in on the point in time when the maximum rate of global petroleum extraction has been reached—an idea known as “peak oil”—but this remains a mostly unsubstantiated concern. 

What we do know is that monopolists do not raise prices sporadically or, for that matter, seasonally.  They raise them up to the highest possible level that they can without losing customers and keep them there.  So, the next time someone tries to tell you that high summer gas prices are evidence of an avaricious monopolist, ask him what accounts for the relatively low winter gas prices—an altruistic monopolist perhaps?    

                                                                                                                                           
*http://en.wikipedia.org/wiki/Oil_price_increases_of_2004-2006

Why Saving Is Good (For Everyone but the Saver) Pt 2

The argument made by many of those on the left is that because saving money does not directly create value and spending does directly create value, in order to stimulate economic growth, the government should tax those likely to save and subsidize those likely to spend.   The worst perpetrators of this fallacy, in addition to the president and Democrats in Congress, are the former economist and current NYT blogger, Paul Krugman and Hilary Clinton’s college boyfriend, Robert Reich.  In my last post, I showed how saving does actually create a net benefit to society, and that taxing savers therefore makes no sense. 

But I did not address whether or not spenders should be subsidized.  So, let’s go back to the deserted island I mentioned in the last post to see why redistributive programs like unemployment benefits and food stamps are not economically stimulative.

If you remember, a small group of people—Bob, Alex, Jill and Rita—were unfortunate enough to become stranded by themselves on a deserted island.  They all divided up the duties for survival—Rita collected the water, Bob hunted for food, Jill built the shelter and Alex made the fire—and they all shared the benefits by drinking water, eating food, sleeping under the shelter and getting warmth from the fire.

Rita decided to become a “saver”—i.e. producing more than she consumed.  As a result, everyone was better off.  But let’s see if the demand-side idea to stimulate growth makes everyone else better off, too. 

Imagine Bob, the hunter, falls and breaks his ankle while chasing a wild boar.  He can no longer hunt (or produce anything) and has to lie on the beach all day and wait for his ankle to heal.  The group, being compassionate, implements the equivalent of unemployment benefits for Bob—they let him continue being a consumer without being a producer. 

Now, in this situation, no one would say that the group letting Bob starve to death would be okay.  In the real world, the same is true.  No one wants to see people who are put out of work for whatever reason homeless and starving in the streets.  We may debate whether these people should be wards of the federal government or of their friends, families and local charities, but we all recognize that people can’t be abandoned when they fall on hard times. 

But I am not addressing the morality or immorality of such programs here.  I am addressing whether or not they are economically beneficial—that is, whether or not redistributive programs stimulate or stall economic growth.  That is, we are looking at what the effect will be on the group, not on just the individual. 

So, what happens when Bob becomes a “ward”?  Well, because the resources are limited, everyone else has less.  Rita, Jill and Alex all have to hunt, now, in addition to their original responsibilities.  Bob being a consumer and not a producer is the opposite of Rita being a producer and not a consumer.  Bob’s consumption drives up the amount that must be produced and it drives down what each member of the group can consume individually. 

What happens if Bob does not become a ward and the group chooses not to subsidize him?  Well, the group still loses Bob’s ability to hunt, but their consumption is not driven down.  They are down a producer, but not up a consumer.  Their micro-economy is worse off than if it had not lost Bob as a producer, but not as bad as if it had retained him as a consumer. 

The same is true on a larger scale.  When programs like food stamps or unemployment benefits make consumers out of nonproducers, consumption becomes more expensive for everyone else.  The gain of the beneficiaries is the loss of everyone else.  The fact that money is moving around more means absolutely nothing—scarce resources have become scarcer.  There are more buyers and the same amount of sellers—that means prices rise for all buyers. 

Again, it comes down to that piece of wisdom that Milton Friedman spent his career trying to impart to us—when dealing with government, there ain’t no such thing as a free lunch. 

Why Saving Is Good (For Everyone Except the Saver) Pt 1

We hear a lot of talk about how, in order to get out of the current economic slump, we need to “stimulate demand”.  The “demand-side” economists love programs like food stamps and unemployment benefits, because the recipients of these benefits “spend the money right away” and the people paying for these benefits might, god forbid, save the money instead of spend it. 

This is a particularly tricky fallacy because its underlying assumptions are actually mostly true.  The first assumption is that spending money is good because it creates value, which is true, and the second assumption is that saving money does not directly create value, which is also true.  The fallacy comes in when one assumes that because saving money does not directly create value, there is no benefit to society when you do it, and so it is justifiable to tax money from those who might save it and give it to those who we know won’t.   As Barack Obama once put it, “there are only so many yachts you can buy,” so it can be beneficial on net to tax the rich and give to the spendthrift. 

The problem is that the benefits of spending are obvious and direct—the benefits of saving are not so obvious and not so direct.  But they still exist. 

Let us first reframe the discussion so it is easier to understand.  When you earn money, you are giving someone something they value—carrots you grew, lattes you brewed, work you did—and in return you are getting money.  You can then exchange the money for something you value—a DVD player, a cleaning service, a taxi ride.  When you earn money, you are acting as a producer, when you spend money you are acting as a consumer.  The money itself doesn’t mean anything—it’s low in protein and carbohydrates and doesn’t offer much entertainment to look at unless you happen to be Scrooge McDuck.  What matters are the things of value that the money can be exchanged for, not the money itself. 

So what is a saver?  A saver is someone who earns he does not spend; someone who produces more than he consumes. 

How does that benefit the rest of us?  Well, to simplify, imagine a deserted island on which a small group of people—Bob, Alex, Jill and Rita—get stranded.  They all divide up their duties—Rita collects the water, Bob hunts for food, Jill builds the shelter and Alex makes the fire—and they all share the benefits by drinking water, eating food, sleeping under the shelter and getting warmth from the fire. 

But what happens if Rita decides she is going to be our “saver”?  She does what the saver does in the real world—produces without consuming.  Rita continues to collect the water, but she eats less of the food, drinks less of the water, doesn’t sleep in the shelter and does not warm herself by the fire.  This leaves more food, more water, and more space in the shelter and by the fire for everyone else.  Rita is worse off but Bob, Alex and Jill are better off.  They are getting more for the same amount of work. 

The same thing happens in the real world, but it’s much more difficult to track, given the vastness and complexity of modern economies.  Still, the principle is the same.  If I decide I am going to keep doing work, but save most of my income, I am doing the same thing Rita is doing on the island with the same effect.  I am producing more than I am consuming, and everyone but me is better off for it. 

The way saving benefits others in our modern economy is slightly different, though, and, as I said before, more indirect.  By not spending the money he earns, the saver is, in effect, reducing the money supply.  This makes everyone else’s money ever so slightly more valuable (it’s the opposite of what the Federal Reserve does.)  It seems insignificant, but if 10% of all the dollars floating around in the economy were taken out of circulation by magnanimous savers, each dollar you earn would buy 10% more—that’s like a 10% raise without any extra work on your part! 

Saving, as we see, is redistributive in and of itself.  There is no need for the government to get involved by taxing away money that might be saved and giving it to those most likely to spend.  The savers are doing that—indirectly—themselves, by reducing prices for everyone else. 

But we aren’t just choosing between two different yet equal methods of redistribution.  One is clearly worse.  If we presume that the savers are rational people, as we always must, we can assume that they are saving for a reason.  Perhaps they are putting money away for their retirement or their posterity.  Perhaps it is going towards some future ambition.  Whatever the reason, they get some benefit out of saving. 

When the savers are allowed to keep their savings and the spenders benefit from more valuable dollars, the savers and the spenders both win.  The savers get to save and the spenders get to spend.  When the government taxes savers and lavishes spenders, the spenders win only insofar as the savers lose.  There is no net gain for society, just one group benefitting at the expense of another. 

What we always need to remember is that, when we are talking about government, there ain’t no such thing as a free lunch.  We should always prefer to see a rising tide lift all boats than to play a zero sum game. 

Lord Keynes Prayer (illustrated)

What do Michele Bachmann and Elizabeth Warren Have in Common?

Most people will be familiar with the stupid comments Elizabeth Warren made recently about a "social contract" that demands progressive taxation (I never signed any such contract.)  It was an inane platitude that quickly went viral on the liberal blogosphere (as inane platitudes so often do).  But just in case you didn't see it, this is what she said: 

"There is nobody in this country who got rich on his own. Nobody.  You built a factory out there — good for you!  But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for…You built a factory and it turned into something terrific, or a great idea — God bless. Keep a big hunk of it.  But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

 In yesterday's CNN Republican Presidential Debate, Congresswoman and Republican presidential candidate Michele Bachmann recently made similar comments about the 47% of Americans who currently don't pay income taxes:

"I believe absolutely that every American benefits by this magnificent country, so absolutely every American should pay something, even if it's a dollar, everyone needs to pay something in this country."

The point both women are making, and the point I disagree with, is that taxes are somehow your contribution for living in society. 

Now, it's certainly true that everyone benefits from living in a society, especially a society as advanced and free as America.  We benefit not only from the technologies and economic opportunities offered by society, but also by more basic things that others invented which we can use--language, mathematics, social norms, etc.  Without these, human cooperation would be impossible and life would be as barbaric as it was hundreds of thousands of years ago. 

But that doesn't have anything to do with taxes.  Government is not society, it is a leech on society.  It fills a few essential functions and, even in my ideal world, a government does exist.  But the vast majority of what government does hurts society.

Your contribution to society is the value that you add through your productive work.  Taxes are your involuntary contribution to government, a bloated, inefficient behemoth that starts unnecessary wars in foreign countries, imprisons Americans for victimless crimes, stops people who love each other from getting married, bails out big corporations with your money, redistributes your wealth upwards and downwards, and fails to do the few things we expect it to do, like educate our kids, maintain our infrastructure, keep us safe from foreign enemies, and establish an efficient, fair and objective justice system. 

Given this, when I hear Michele Bachmann say that 47% of Americans don't pay taxes, I don't demand that those people pay up.  I say, "Good, that's 47% down, 53% to go!"

Lord Keynes Prayer

Our Fed, which art in Washington,
Hallowed be thy Name.
Thy Kingdom come.
Thy will be done on Wall Street,
As it is in Congress.
Give us this day our daily bread (because we sure as hell ain’t gonna earn it.)
And enable us to break windows,
As we enable those who break our windows.
And lead us not into inflation,
But deliver us from recession.
For thine is the kingdom,

The power, and the glory,

For a short period of time until the next bubble bursts.

Amen.

We Are the One Percent!

The chant “We Are the 99 Percent!” is one of the more commonly heard ones at the recent occupy protests.  The “1%” are the top earners who have supposedly absconded with all the wealth in the country and are hording it like Nordic dragons.   The “99%” are those who work hard but simply cannot get ahead because of the avaricious “1%”.   

To be fair, many in the occupy movement, just want a fair shake and a chance to earn a living without having their savings eviscerated by the federal reserve or having to go through a period of unemployment and retraining every seven or eight years thanks to an exacerbated business cycle. 

But there are those socialists in the movement who are demanding that the richest 1% have their wealth confiscated in order to pay for things like a mandatory minimum income, a single-payer healthcare system and free college education for the remaining 99%*.

Setting aside the enumerable practical, economic, social and moral problems with this proposal, let’s try applying this logic consistently.  The socialist occupiers (again, not all occupiers) believe that the richest 1% of people have some kind of responsibility to pay for some things that the remaining 99% want. 

What does it mean to be in the 1%?  Well, in America, it means to earn over $364,000 a year.  That might not be Warren Buffet rich, but that’s definitely enough to live a very comfortable life in most places in the country.  But why just look at America?  What makes the borders of this country so special?  If you are going to presume some kind of metaphysical responsibility that the wealthy have to care for the poor, why would this responsibility stop at the arbitrary lines that we have drawn to mark our national boundaries?  Surely the wealthy have just as much a responsibility to care for the poor in Mexico or Botswana as they do for the poor in New York.  

When the predictions of Karl Marx—that capitalism would fall because the exploited proletariat would eventually rise up and overthrow the rapacious bourgeoisie—failed to materialize in the industrialized west, Vladimir Lenin claimed, in Imperialism, that this was because the exploitative nature of capitalism had been outsourced.  Now, capitalist nations were exploiting the Third World instead of their own working class. 

So, instead, let’s ask not what it means to be in the top 1% of Americans, but what it means to be in the top 1% of humans, period.  Well, according to a great website that uses World Bank data to tell you exactly where you rank on the global income spectrum***, if you have an income of over 47,500 USD a year, you are in the top 1%. 

Furthermore, if you have an income of over $500 a week, you are in the top 10% globally.  The median global income is actually only $850 per year.

Now, I think a lot of the occupiers are actually unemployed recent college grads, so some of them probably do not actually crack the top 1%.  But there are plenty of college professors, teachers, and other professionals out there protesting right along with them, and I am willing to bet a sizeable chunk of the protestors actually do make more than $47,500 a year (the average American income is right around $40K.) 

So, this means that a lot of the protestors, angrily demanding that the 1% give up some of their exorbitant wealth, are actually in that 1% themselves!  They are hording an extremely disproportionate amount of wealth that could and, by their logic, should be redistributed to the 99% of people suffering in poverty around the world. 

So, occupiers and supporters of the occupy movement, I would challenge you to meet the request that Sam Harris issued to America’s rich****—If you meet the minimum requirement to be in the top 1%, make a onetime donation of at least 50% of your income this year to the education and/or employment of the poorest 99%. 

If we are to apply your logic consistently, you have a responsibility to do it. 

* http://occupywallst.org/forum/proposed-list-of-demands-for-occupy-wall-st-moveme/

** http://www.taxfoundation.org/news/show/22652.html

***the data being used on this site is a few years old, circa 2003, but the point is still relevant.  http://www.globalrichlist.com/

****I have enormous respect for Sam Harris, and he has written insightfully about religion and philosophy in the past.  Unfortunately, writing a blog has caused him to wander into topics on which he is not qualified to speak.  As this article shows, economics is one such topic.  http://www.samharris.org/site/full_text/a-new-years-resolution-for-the-rich/