Category: Economics

Unwarranted Fear

I’m sure you’ve all heard the news that Hostess, the company that produces Twinkies and other foodstuff that’s bad for you, have decided to liquidate:

Hostess Brands Inc., the maker of iconic treats such as Twinkies and traditional pantry staple Wonder Bread, said Friday it is shuttering its plants and will seek to liquidate the 82-year-old business.

The company, which filed for Chapter 11 in January, said it has requested bankruptcy-court authorization to close the business and sell its assets.

A victim of changing consumer tastes, high commodity costs and, most importantly, strained labor relations, Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.

I could write about the Union’s effectiveness at preventing Hostess from cutting its employees’ wages by 8% by forcing them to cut wages by 100% but you’ve heard it all by now. Instead I want to focus on the panic buying. There has been a lot of talk about people buying up stocks of Twinkies in the hopes of either storing them for personal consumption or selling them when they become more scarce. Although I expect this I’m still baffled by the behavior.

There is obviously a demand for Twinkies. Now that Hostess is being liquidate enterprising entrepreneurs have an opportunity to buy up the trademark, recipe, and production equipment for Twinkies and produced them without repeating the same mistakes as Hostess. Through the miracles of the market Twinkies are almost certain to continue on. Somebody else will own the manufacturing capabilities, pay the employees, etc. but they will likely be the exact same yellow cream-filled cakes as people seem to love.

In the immortal words inscribed on the cover of The Hitchhiker’s Guide to the Universe, don’t panic.

The Economics of the Affordable Care Act

With Obama’s reelection and the Democratic Party’s control of the Senate it appears that The Affordable Care Act is here to stay (it would still be with us had Romney won, he’d have just repealed it and replaced it with the same thing but under a different name). Now that the law is starting to go into affect we’re seeing the unintended consequences. Since the legislation raises the costs for many business owners we’re seeing changes in employment methodology. Many companies are laying off employees to avoid the financial burdon of the legislation, other companies are cutting employee hours, and now some franchises are going to implement surcharges to offset the additional expenses of Obamacare:

While some business owners threaten to cut workers’ hours to avoid paying for their health care, a West Palm Beach, Fla., restaurant owner is going even further. John Metz said he will add a 5 percent surcharge to customers’ bills to offset what he said are the increased costs of Obamacare, along with reducing his employees’ hours.

“If I leave the prices the same, but say on the menu that there is a 5 percent surcharge for Obamacare, customers have two choices. They can either pay it and tip 15 or 20 percent, or if they really feel so inclined, they can reduce the amount of tip they give to the server, who is the primary beneficiary of Obamacare,” Metz told The Huffington Post. “Although it may sound terrible that I’m doing this, it’s the only alternative. I’ve got to pass the cost on to the consumer.”

Economically literate individuals expected this to happen. You can’t increase the costs faced by a business and not expect that business to compensate. Unfortunately man people are economically illiterate and are therefore throwing a fit about the layoffs, slashed hours, and additional surcharges. The economically illiterate are advocating businesses that adjust their employment methodology in response to Obamacare be boycotted or sued.

What’s ironic is the economically illiterate got exactly what they wanted, Obamacare. As with anything there were consequences and now advocates of Obamacare are trying to escape those consequences. The only lesson that should be learned here is to be careful what you wish for.

How Laws Against Price Gouging are Causing Gasoline Shortages

After hurricane Sandy caused immense damage to the Eastern United States government officials moved in to prosecute price gougers. Anybody caught charing higher prices for goods faced prosecution and punishment by the state. What did this prohibition against raising prices lead to? Shortages. Many desperately needed goods, including gasoline, have been in short order. These shortages could have been avoided though if sellers were allowed to adjust their prices to match supply and demand:

Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas. Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out. Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.

Thank the gods for the “black” market for without it there would be no gasoline anywhere. The need for a “black” markt wouldn’t exist if the state didn’t prevent sellers from raising their prices to match the increase in demand. Furthermore the price of gasoline would likely be lower than it is now because “black” market entrepreneurs increase their prices partially in response to the risk they face. Anybody selling goods on a “black” market must make enough profit to outweigh the risks of being caught and punished by the state. Additional risk tends to transform into additional costs for consumers.

When the state implements prohibitions against raising prices they cause shortages.

How Price Gouging Saves Lives

With the recent storms that hit the eastern coast of the United States there has been some talk regarding price gouging. People get up in arms when store owners jack of their prices during a natural disaster. Those who lack an understanding of economics claim that price gouging is immoral and should be stopped. The truth is that price gouging is actually beneficial and can save lives:

Let us postulate that a small Orlando drug store has ten bags of ice in stock that, prior to the storm, it had been selling for $4.39 a bag. Of this stock it could normally expect to sell one or two bags a day. In the wake of Hurricane Charley, however, ten local residents show up at the store over the course of a day to buy ice. Most want to buy more than one bag.

So what happens? If the price is kept at $4.39 a bag because the drugstore owner fears the wrath of State Attorney General Charlie Crist and the finger wagging of local news anchors, the first five people who want to buy ice might obtain the entire stock. The first person buys one bag, the second person buys four bags, the third buys two bags, the fourth buys two bags, and the fifth buys one bag. The last five people get no ice. Yet one or more of the last five applicants may need the ice more desperately than any of the first five.

But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.

Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs). Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don’t need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can “afford” it in the sense that they have $20 bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.

Increasing prices of goods during natural disasters encourages conservation, which increases the chances that those goods will be available to those who need them. Jacking the price up encourages those who aren’t in critical need of a good to go without whereas those who separately need a good have access. Using the above example of ice, somebody wanting to keep beer cold may be unwilling to spend $15.39 to buy a bag of ice whereas the diabetic needing ice to keep their insuline cold will be more than happy to spend $15.39 on a bag of ice and will likely be grateful that the price increase ensured ice was available.

The Importance of Economic Education

Ron Paul still remains one of the few politicians that I respect. He was a great recruiter to the liberty movement and got liberty loving individuals motivated to help change this country. Ultimately he encourages individuals to participate in the political process in an attempt to hijack the Republican Party and turn it into a free market anti-war organization. Needless to say it would seem that the political process is his tool of choice for bringing liberty to the United States but during the 30th anniversary celebration of the Ludwig von Mises Institute he went on record saying that economic education is more important than any political action:

If you’ve read any of Paul’s books you’ve likely noticed that he often references the likes of Ludwig von Mises and Murray Rothbard. Paul’s knowledge and philosophy stem from reading and comprehending the great minds of libertarianism, which were also the great minds of, what is now referred to as, Austrian economics. Understanding Austrian economics is understanding libertarianism. Reading material by Ludwig von Mises, Murray Rothbard, Friedrich Hayek, Hans-Hermann Hoppe, and the other big names of Austrian economics will explain why voluntary interactions are more beneficial and coercive force.

Spreading liberty can be done far more effectively through economic education than political action. Economic education teaches why liberty is important and allows individuals to internalize those lessons whereas political action requires participants not already educated in the school of liberty to mindlessly follow orders from figures of authority.

The Absurdity of War

War has to be one of the most absurd concepts humanity has invented. Somehow we, as a race, are so incredibly stupid that we can’t even see the absurdity of people dying in the name of colorful pieces of cloth that denote imaginary lines on a map. Beyond the absurdity of the concept itself there is also the additional absurdity of the wasted resources that go into blowing one another up. In fact I think this picture concisely shows the mind boggling waste involved with warfare:

Consider for a moment the cost of war. Not only does it cost human lives but every ton of metal, hour of labor, and gallon of fuel is wasted on destroying other things made of metal by human labor that are powered by fuel. You don’t only have resources sunk into building weapons of war but you also have to sink more resources into replacing everything that was destroyed during the war. If you’re a military contractor or a construction company this may seem like a good idea but even for them it’s not. Warfare is nothing more than the biggest example of the broken window fallacy ever conceived. While it seems the military contractors and construction companies are getting rich off of warfare they fail to consider all the resources they’ve sunk into blowing stuff up and replacing stuff that was blown up could have been put into creating new and better things.

People often complain about the consumer culture we live in today where products are thrown away into of being repaired. Warfare is a great example of this on a very large scare. Think about the Javalin missile, an $80,000 tube that can only be used once. $80,000 thrown down the tubes every time you launch one of those missiles. On top of that you also have the massive cost of resources required for research and development to create the missile. Who thought that was a good idea?

Some groups have figured out that Achilles’ heel of warfare and have begun relying on cheap technologies and easy tactics to win wars. When you consider what warfare is you realize it’s nothing more than a competition to see who can maintain the most resources. If you’re tossing away $80,000 missiles willy nilly and your enemy is using cheap easily constructed explosives you’re not going to last in the long run.

The Problems with Keynesian Solutions to the Current Depression

I apologize but real life has been interfering with this blog quite frequently as of late. As you can guess it’s interfering again today so instead of a critique of a story, a discussion on anarchism, or other such common content I’m going to be lazy and let Robert Murphy explain why Keynesian solutions to the current depression are wrong:

Making the Poor Poorer

Yesterday the Federal Reserve announced that it would ramp up it’s war on the poor:

The US central bank has announced it will resume its policy of pumping more money into the economy via so-called quantitative easing.

The Federal Reserve said it will buy “additional agency mortgage-backed securities at a pace of $40bn per month”.

The central bank also said it could increase the size of its purchases if the economy does not improve.

The Federal Reserve is going to start printing a minimum of $40 billion a month for an indefinite period of time. Printing money inevitably leads to inflation, which is a decrease in purchasing power. If the entire economy was made up of $100 and the Federal Reserve printed another $100 it would effectively reduce the purchasing power of each dollar by half. What’s more insidious about this is that the devaluation doesn’t occur immediately, the first receivers of newly printed money enjoy it’s use at full purchasing power. It’s not until the money begins circulating that the reduction in purchasing power hit. Effectively the poor, being the last receivers of newly printed money, get hit the hardest.

With this latest announcement the Federal Reserve might as well have said, “Fuck the poor!” Those who are barely able to get by on the current purchasing power of their money will soon find themselves entirely unable to get by as prices increase due to dollar devaluation. If you’re holding Federal Reserve notes it would be wise to convert them to something tangible quickly.

Destroying Incentives to Provide Services

What happens when a business owner, who requires the state’s permission to increase his prices, petitions to the state to increase his prices and is denied? He retires:

David Bryson, president of Champion’s Auto Ferry, blamed the MPSC’s refusal to grant a requested fare increase for his decision to retire and close the ferry service at a yet to be determined date.

[…]

“Our tariff was rejected even though we submitted detailed evidence that the traffic volumes were down 8% and that it has been almost 4 years since the last price adjustment,” Bryson wrote.

He said the commission refused to allow the ferry company to include pensions, leases, employee bonuses and legal costs in its operating expenses.

[…]

In his letter, Bryson also blasted the agency for publishing “Champion’s sensitive and detailed financial information on the internet, even though it was shared with you on a confidential basis.

“As a result of the Commission’s practice of applying ever more burdensome utility rules and standards to Champion, we find that we are essentially being regulated out of business and there is no longer any incentive to continue to provide this non-subsidized transportation service.”

Imagine that, when an individual is no longer able to make a profit on his work he no longer has an incentive to do that work. I’m sure Bryson’s announced retirement came as a shock to the regulators. In fact I wouldn’t be surprised if the regulators make a statement blasting Bryson for his “greed” and condemning him for taking away a “right” from the people he served. As much as I don’t like Ayn Rand’s philosophy she really did call it when it came to regulators destroying businesses.

GM is Heading Towards Bankruptcy Yet Again

The state spent billions of tax victim dollars to keep General Motors (GM) from filing bankruptcy and it appears, unsurprisingly, that GM is heading for bankruptcy yet again:

Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company. It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday. This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.

Right now, the government’s GM stock is worth about 39% less than it was on November 17, 2010, when the company went public at $33.00/share. However, during the intervening time, the Dow Jones Industrial Average has risen by almost 20%, so GM shares have lost 49% of their value relative to the Dow.

This is why bailouts are such a joke, they reward companies that misallocate resources. When a company allocates resources towards fulfilling the desires of consumers that business is rewarded with more resource, which are voluntarily given to them by consumers. When a company misallocates resources by putting them towards producing goods and services consumers don’t want that company doesn’t receive further resources and eventually fails. When you insert government into the mix you destroy the market feedback mechanism as companies are given additional resources even though they’ve failed to provide for consumer wants. If GM gets another bailout there will be even less motivation for them to fulfill consumer desires as they would be rewarded twice for failing to do so, and the government seems more than happy to deliver GM another bailout less it be embarrassed by the dismal failure that the bailout programs have been.