Category: Economics

Unintended Consequences of Farm Subsidies

Every time the state interferes with the market they create unintended consequences. This year’s weather can be summed up as hot and dry, which isn’t ideal for growing crops. Needless to say that bitch Mother Nature has greatly reduced the yields on foodstuff and that is leading to increasing food prices:

The price of many food products could rise later this year as much of the country is hit with the worst drought in a generation. Wholesale corn prices shot up nearly 5 percent yesterday, and soybean prices are also heading higher. Crop losses will be a blow to America’s rural economy and cut farm exports. The US Agriculture Department slashed its estimate of this fall’s corn crop by 12 percent – compared with last month’s forecast. Officials say 38 percent of the corn crop is in poor condition because of the drought. A shortage of corn and soybeans is raising concerns about global food shortages and inflation. That said, it would be easy to overstate the impact on the national economy and American consumers, especially if the weather improves soon. It may take months for some food and meat costs to rise in supermarkets. According to a government estimate, cereals and grains accounts for just 2 percent of the US consumer price index.

Nobody should be surprised by this, less supply combined with steady or increasing demand has a tendency to lead to higher prices. What does this have to do with government interference in free markets? Consider a free market in foodstuff for a moment. As food prices continue to fall producers are likely hold onto the food they’ve produced until prices increase sufficiently. Effectively a surplus is created with the intention of selling it at higher prices at a later time.

This is where state interference in the agriculture market comes into play. Through various agricultural subsidies the state has discouraged farmers from creating a surplus of food, instead they are paying farmers to destroy surpluses [PDF]:

In 1936 the U.S. Supreme Court ruled that the federal government had no authority to administer land-idling acreage controls under New Deal farm legislation, on the Constitutional grounds “that powers not granted are prohibited. None to regulate agricultural production is given, and therefore legislation by Congress for that purpose is forbidden.” (U.S. Supreme Court 1936). Subsequently, the Court’s alleged respect for precedent was not extended to this decision, and many later production control measures have passed Constitutional muster.4 At the time, the result of the Court’s decision was a merger of prior concerns about conservation with measures to remove acreage from commodity production. This was done in the Soil Conservation and Domestic Allotment Act of 1936 principally by defining “soil-depleting” crops (the main basic commodities) and “soil-conserving” crops (grasses and legumes), and paying farmers to substitute the latter for the former.

Instead of having surpluses of food waiting to be sold during times of low yield (which are also times of higher prices) farmers have been paid to destroy surplus crops meaning a low yield will necessarily create an actual shortage. Once again an unintended consequence emerges from from state meddling in economic affairs. While the short term gain to farmers was notable the severity of hazard being placed on the rest of society, namely a possible food shortage, has the potential of being extremely damaging.

Markets Cannot be Suppressed

No matter how tyrannical the state gets, no matter what controls they put into place, they cannot suppress the market. What if you want to order something anonymously? In this day and age that can be very difficult because ordering items online generally requires a credit card that is tied to an account with your name attached to it. To get around this the denizens of the Internet decided to combine Tor and Bitcoin to create The Silk Road.

For those who haven’t heard of The Silk Road it’s a Tor hidden service where people can buy and sell anything (except weapons, they allow the sale of drugs but for some reason draw the line at weapons). Being a Tor hidden service it can only be accessed through the Tor network. If you download the Tor browser bundle you will be able to gain access to The Silk Road by going to http://silkroadvb5piz3r.onion/ (if you don’t have Tor running that address will lead you nowhere). Once you’re there you can buy anything from homemade cookies to drugs, so long as you have the Bitcoins.

Needless to say unhindered trade is big business. The Silk Road netted an estimated $22 million in annual sales:

In the year since Senator Joe Manchin called for the “audacious” drug-selling website Silk Road to be “shut down immediately,” the world’s most high-profile underground pharmacy hasn’t just survived. With $22 million in annual sales and around double the commission for the site’s owners compared with just six months ago, its black market business is booming.

In a research paper (PDF here) released earlier this month, Carnegie Mellon computer security professor Nicolas Christin has taken a crack at measuring the sales activity on Silk Road’s underground online marketplace, which runs as a “hidden service” on the Tor network and uses tough-to-trace digital Bitcoins as currency, two measures that have helped to obscure its sellers, buyers and operators from law enforcement.

When the state attempts to make the trade of a good or service illegal they don’t make it go away, they just make it go underground. Prohibitions are pointless, an exercise in futility.

What Sowing Subsidies Reaps

When the state give subsidies to a business they are sending a market signal: the businesses failure to make a profit is rewarded. Amtrak is a company that can’t operate on its own, it requires government money to stay afloat. Needless to say since they’re receiving government money they have no motivation to find ways to actually make money:

Taxpayers lost $833 million over the last decade on the food and beverages supplied by Amtrak, which managed to spend $1.70 for every dollar that received in revenue.

“Over the last ten years, these losses have amounted to a staggering $833.8 million,” said Rep.John Mica, R-Fla., in a statement previewing a House hearing today. “It costs passengers $9.50 to buy a cheeseburger on Amtrak, but the cost to taxpayers is $16.15. Riders pay $2.00 for a Pepsi, but each of these sodas costs the U.S. Treasury $3.40.”

If you can’t make a profit off of selling hamburgers at $9.50 you don’t deserve to be in business. I can go to my local butcher and get a pound of ground beef for $4.00 to $5.00 and if I buy a cow directly from a farmer and pay to have him butcher it I can get the entire animal for roughly $3.00 a pound. Since most hamburgers are usually between a quarter pound and half of a pound of ground beef Amtrak is seriously screwing up either procurement or preparation.

Why should they change though? The government keeps transferring money from individuals to Amtrak. Every tax victim is, in essence, a forced customer of Amtrak. Until the subsidies are taken away from Amtrak there is absolutely no motivation for them to offer a product people want at a price they’re willing to pay. Because of their inability to make a profit they will continue to get more government subsidies. Subsidies are a reward for failing, they tell producers that making products consumers want is unnecessary and may actually be detrimental (why risk making $1 million in profit when you’re guaranteed $100 million in subsidies).

They’re Falling Like Dominos

A third California city has declared bankruptcy:

The California city of San Bernardino has filed for bankruptcy protection amid a $46m (£30m) budget deficit and ongoing criminal investigations.

The city listed assets and debts of over $1bn, court documents show, and becomes the third in the state to go bust in just over one month.

When the previous California city declared bankruptcy I was expecting more to follow (although not quite this soon). This is the only possible result of following Keynesian economic ideas. One cannot spent themselves back to prosperity.

Savings are resources that have been set aside for future use. What’s being spent today isn’t actual savings, we’re not spending saved up resources, we’re spending nonexistent resources. One of the failures of Keynesianism is believing savings are bad for the economy. When somebody saves they are foregoing current consumption for future consumption. A city may save in order to buildup enough resources to construct a community center or a road. The key is that resources need to be available in order to do either, something debt spending doesn’t do. Eventually the shortage of resources, that is the misallocation of resources, catches up and people quickly find out that they don’t have enough resources to complete projects. Towns find themselves unable to afford finishing the new community center or road.

We will see more and more stories like this as more and more municipalities collide head on with the reality that there aren’t enough available resources to continue existing projects.

Failing to Learn Lessons

I know when we fail to learn from history we doom ourselves to repeat it but you would think we’d still remember the housing bubble since it only burst and caused massive economic damage a few short years ago. Apparently not:

Amid global economic woes and a struggling jobs market lies a silver lining: Mortgage rates have fallen to the lowest level in at least 40 years, giving the housing market a much-needed boost in Minnesota and across the country.

The rate for a 30-year mortgage is 3.62 percent, less than half of the historical average.

For crying out loud the only thing we need is for some shill at Freddie Mac to come out and tell people how great of an opportunity this is… damn it:

“It’s just an incredible opportunity,” said Frank Nothaft, chief economist for Freddie Mac, which tracks national mortgage rates.

So we’re going to do it? We’re going to repeat the same bad economic polices that lead us into the current economic crisis before we’ve even managed to get ourselves out of said crisis? No lessons were learned? The idea that giving cheap money to people in the hopes they’ll buy a home is still considered solid? I guess if something doesn’t work we must try it again, only harder!

By Thor in Valhalla, we’re screwed. If the idiots in charge of economic policies can’t even learn lessons from things that happened a few short years ago there’s no hope.

Crony Conflicts

The marriage between state and business is always interesting but get’s especially interesting when two or more politically influential cronies come into conflict. Candy and softdrink manufacturers are currently at odds with domestic sugar farmers because the former wants to eliminate sugar import restrictions while the latter wants to leave them in place to protect their artificially inflated profits:

Makers of sodas, candy bars and other sweetened snacks are taking aim at a long-standing federal program that keeps sugar prices high by restricting imports.

Doing away with the sugar program would be a “huge boost” to candy makers and help them grow, said Robert Simpson Jr., president of Jelly Belly Candy Co., which has factories in Fairfield, Calif., Chicago and Thailand.

But the efforts of manufacturers are sparking intense opposition among lawmakers from sugar-growing states and the sugar lobby, as well as from some public health advocates.

“Is this where we need Congress to spend its time, trying to make cheap candy bars?” said Mark Muller, director of the Food and Justice Program at the advocacy group Institute for Agriculture and Trade Policy.

With high-fructose corn syrup getting more bad press every day customers are beginning to demand sugar in their sweets. Candy and softdrink manufacturers, wanting to please their customers, have a direct interest in using sugar but reluctant to do so because the costs are higher. The costs of natural sugar are higher in the United States due to import restrictions on sugar, ensuring domestic producers have less competition and can keep their prices high.

This is the only possible outcome of cronyism, eventually cronies will butt heads with one another and both demand the state’s support. When that happens you really get to see the deals cronies have to make with their state masters in order to gain favor, however temporary that favor may end up being.

The Violence Economy

Recently I’ve been working on an economic idea of sorts, one on the economy of the state, or as I like to call it the violence economy. It’s an expansion of my previous idea regarding the value of fiat currency.

The base of the idea is the fact that the state is an entity that exists entirely by violence. As explained by Albert J. Nock in his book Our Enemy, the State there are two means of obtaining wants, the political means and the economic means. The political means is voluntary trade amongst individuals whereas the political means it the use of the state’s violence to extract wealth from others.

Because of the state’s method of obtaining wealth it has a keen interest in helping and protecting the wealthy. Likewise the wealthy have a keen interest in protecting the state. The state requires the wealthy to leech off of while the wealthy desire the state’s gun to prevent competition and otherwise increase their wealth through political means. A good demonstration of this is how the state treats the poor.

Many people on the political “left” demand the state help the poor. This isn’t surprising as it is typical of a cooperative species such as our own to help those in need. The “left” believe the state is the best mechanism to assist those in need. Their belief is a mistake though because the state has no interest in the poor since the poor have nothing to take. Of course this doesn’t stop the state from claiming to help the poor, after all they are able to gain popular support for wealth stealing programs if they are disguised as methods of assisting those in need. With such justification the state is able to get public acceptance for new taxes, fees, subsidies, and other wealth stealing mechanisms.

Let’s look at subsidies for a second. During the New Deal the Agricultural Adjustment Act of 1938 was passed into law. This act established subsidies for various agricultural goods. One of the provisions of the act was to limit the area farmers could dedicate to growing wheat. This restriction created an artificial shortage of wheat, which increased the price. The act was passed under the guise of helping poor farmers eek out a better living but the shortage it created meant many could not afford wheat-based products such as bread. The Supreme Court upheld the law, claiming it was Constitutional under the Commerce Clause in Wickard v. Filburn.

What benefit did the subsidies have? Making the farmers money. Why would the state want to make farmers money? To take a portion of that wealth. Farmers are producers of a needed good so it’s a safe assumption that they will continue to generate wealth. The more wealth they can generate the more wealth they have for the state to take. To ensure the farmers continue to give wealth to the state they are allowed to keep a portion of what they make (usually a greater portion). The state learned its lesson during feudal times when the nobility took almost everything form the peasants causing them to revolt periodically.

Looking at the economy of any developed nation leads one to realize how tightly the state and big producers are tied together. Every industry eventually gets regulated in such a way as to protect established producers. In turn more wealth is given to the protected businesses, a portion of which the state takes as “protection” money.

What we end up with is a vicious cycle, a violence economy. I plan to expand on this idea over time but I think the foundation of this idea is pretty solid at this point.

More Thoughts on Single-Payer Healthcare

Even though a wrote a posted explaining why opponents of capitalism should oppose publicly funded healthcare I’m not done with the subject yet.

In this post I want to talk specifically about single-payer healthcare. Single-payer healthcare, for those unaware, is a system where everybody pays into a single insurance pool that is administered by the state. Proponents of the system generally believe it would be an effective solution to the healthcare issue facing the United States. These people are either ignorant of history or psychopaths.

Publicly funded healthcare is another example of trying to use the One Ring of government for good. Unfortunately the One Ring is malevolent in nature and therefore can’t be used for good. Let’s consider the entity that would be granted administration over the insurance pool in a single-payer system, the state. How responsible would the state be with the insurance pool? Would they use it for altruistic purposes? We need not speculated on this because the state is the administrator of another pool of collected money, Social Security. The idea behind Social Security was to have a “safety net” for the elderly. When you were no longer capable of working you would begin collecting money from the Social Security pool you previously paid into. How has that pool been managed? Poorly:

What bothers us the most is the opposing view by Jacob Lew, director of White House office of Management and Budget (“Social Security isn’t the problem”). He states, “When more taxes are collected than are needed … funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government.”

What he doesn’t say is “converted” means the excess is being spent by Congress and replaced with potentially useless bonds. He then says the bonds “are held in reserve for when revenue collected is not enough to pay the benefits due.” He evidently didn’t have the nerve to say where the money would come from to convert the bonds into cash.

That’s the catch-22. According to the Social Security Board of Trustees:

The assets of the combined OASDI Trust Funds increased by $69 billion in 2011 to a total of $2.7 trillion.

The assets are those Treasury Bonds. Whenever there is a surplus paid into the Social Security pool the federal government “borrows” that money using an interesting system of trickery. Surplus money is replaced by Treasury Bonds while the actual money is then spent by Congress on items not related to Social Security. Congress claims that the Treasury Bonds are as good as money but that’s not true because the money to pay those Treasury Bonds has to come from… the federal government!

In other worse Congress has taken that money, replaced it with Treasury Bonds, and spent the money so they don’t have it to make good on the Treasury Bonds. This would be like a bank replacing all of the money in your account with an IOU and spending that money. No guarantee can be made that the bank will be able to make good on the IOU because the money is gone.

What does Congress use the money for? War. OK, they may use it for more than war but the defense budget is a major part of the federal budget so it’s likely a great deal of the borrowed money flows there. Through Social Security Congress has developed yet another way to claim taxes from the populace to buy the necessary war materials to expand the empire. This is the only outcome when using the One Ring. Those who demanded Social Security likely had good intentions but they used the state, which is malevolent by nature, and thus ended up killing people by giving more money to the war effort. In my book a system that is used to kill people under the guide of helping people isn’t a good system.

It’s easy to see that the state has been somewhat irresponsible with its control over the Social Security pool. Returning to the economic argument, some will bring up the fact that Congress is only taking excess money so the program is still able to run effectively. That may be true but Social Security is slightly different than healthcare.

Social Security is paid out to those who surpass retirement age or are disabled. In general the amount of people Social Security is being paid to remains relatively knowable. The state knows who will exceed the retirement age and they know the number of disabled people in the country. There is some variance as a person can be involved in an accident and end up disabled but the influx of unknown individuals isn’t terribly high. Healthcare is an entirely different beast.

The number of people who will develop cancer, break bones, need an organ transplant, suffer a heart attack, have a stroke, etc. will wildly fluctuate. It’s not a predictable number and therefore it’s impossible to know how much money should be put into the insurance pool. This is a risk all insurance companies run, their entire model is based on the idea that fewer people will collect from the insurance pool than pay in. While the risks are the same the consequences are entirely different. If an insurance company fails only those who have policies with them are affected, while policy holders of other companies will remain unaffected. What happens if there isn’t enough money in the state’s single insurance pool? Everybody suffers and they have nowhere else to turn to. This usually results in rationing and some groups of individuals become “less valuable” than others (namely tax payers become more valuable than non-tax payers). The two countries that are held up as the pinnacle of state managed healthcare, Canada and Britain, both practice rationing and tax payers are given priority over non-tax payers.

Single-payer healthcare systems are a sham. Like Social Security they end up being another source of funding for the state’s desires, which are usually destructive, and when the system fails everybody suffers. There are no good arguments for single-payer healthcare unless history and long-term effects are entirely ignored. All ends the require the state as the means are destined to be malevolent.

The Value of Fiat Currency

Fiat is Latin for “it shall be.” Fiat currency is money that has value because the state says it shall have value. This is the opposite of a commodity backed money. Commodity backed money is money that is backed by a good, which is said to have intrinsic value. Intrinsic means belonging naturally. Intrinsic value means the value of a good is held within the good itself.

Thus people, including myself, often claim that fiat currency has no actual, or intrinsic, value. After a great deal of consideration I believe that statement is wrong, fiat currency does have intrinsic value under the state. Under United States code:

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

In other words one must pay off their public changes and taxes in government issued money (technically you a debt holder must accept fiat currency in payment on the debt but you could use other forms of payment if both parties agree to it so that’s a separate case).

We must now consider what happens if one fails to pay their taxes or other charges brought about by the government (fines, etc.). If you fail to pay your taxes, fines, etc. you will generally be kidnapped by a state agent and brought to a court. At the court it will be decided what is to be done with you, usually it involves a jail sentence, garnishing of wages, or other form of punishment. If you refuse to comply with your kidnapper you will have force brought against you, and deadly force may be used if you resist sufficiently. Ultimately the result of not paying taxes, fines, etc. is force bring brought against your person.

Under United States law the only form of payment that the state will accept for taxes, fines, etc. is government issued money, which is all fiat currency issued by the Federal Reserve. In order to avoid violence being brought against you by the state you must hold their issued fiat currency, ergo people desire fiat currency as a means of avoiding violence. In effect fiat currency is similar to firearms, many people buy firearms to protect themselves from violent individuals.

Avoiding violence, like anything else, has a subjective value. Some people will go to greater lengths to avoid violence than others. Most people facing the option of starvation or violence will take violence as it is still preferable than death. Thus a person may spend their last dollars to buy bread while knowing it means they will be unable to pay their taxes tomorrow. Other people value the principle of not submitting to tyranny so highly that they won’t pay taxes, instead they will subject themselves to kidnapping and imprisonment. To such a person fiat currency may have no value at all.

Thus I believe saying fiat currency is without value isn’t entirely accurate. Under a state fiat currency contains within it the ability to avoid state violence and thus it can be said that fiat currency does have an intrinsic value under specific conditions. It would seem technically accurate to me to say fiat currency is the value of avoiding violence.

Some Economists are Simply Insane

They say a sign of insanity is doing the same thing over and over again while expecting different results. By that definition many of today’s so-called economists are insane:

Inflation occurs when there is too much money chasing too few goods. Deflation occurs when there is not enough money. For years, inflation alarmists have been forecasting runaway prices as a result of the Fed’s efforts to expand the money supply. But prices have remained stable, with the Consumer Price Index down last month and up just 1.7 percent in the past year.

There is so much wrong with this paragraph that I’m not entirely sure where to begin. First of all the Consumer Price Index (CPI), which is used to “measure” inflation, is crap:

The first thing to keep in mind is that the CPI is not an economic variable. It is a statistic that at best gives an inaccurate picture of an economic phenomenon: inflation. To calculate the monthly CPI, the USDepartment of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a “mythical” household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on.

Armed with the proportional spending of the “average” household, the statisticians then assign that percentage to price changes of each item. Obviously, the higher the percentage of a household budget for a certain item, the more “influential” that item may be. For example, if gasoline prices rise sharply, then those particular price increases are seen as “fueling inflation” (no pun intended).

CPI isn’t some kind of fixed economic variable, it’s a statistic. Statistics is the best mechanism available to lie through numbers. A practically infinite number of variable can be manipulated to get the result you want. Do you want to make it appear as though the rate of inflation is minor? Simply give less weight to items that are increasing in price such as gasoline and food. Do you want to make it appear as though the rate of inflation is actually negative? Give more weight to items that exist in a mostly free market, such as electronics, since their prices generally trend down overtime. Do you want to show a massive increase in the rate of inflation? Give the more weight to food and gasoline.

Let’s talk about inflation. According to the article author, inflation means there is too much money in circulation. That’s not an accurate definition:

As economists and others of the Austrian School understand, inflation occurs when the value of money declines relative to the goods and services it can purchase. In other words, inflation is a monetary phenomenon, not a price phenomenon. Prices go up because inflation is happening, not the other way around.

Putting more money into circulation causes the value of that money to decline because it is less scarce. That value can also be affected by other things. What would happen if the oil producing nations in the Middle East decided they no longer valued American dollars and demanded all payments for oil be made in gold? We would see the value of the dollar plumet while the value of gold would jump.

The third point I want to address is the claim by the author that, according to CPI, inflation was up by just 1.7 percent. If, as the author claims, inflation is caused by too much money entering the market then any inflation rate above 0 would indicate the money supply must be retracted.

His remark about the low rate of inflation combined with his remark about inflation being caused by too much money in circulation also means he has admitted, indirectly, that he wants to rob holders of dollars. He admitted that inflation is the result of too much money in circulation, he admits that there is inflation meaning that there must be too much money in circulation now, and he wants the Federal Reserve to inject more money into the system. Since there is already too much money in the system a further increase in the money supply can only result in more inflation, meaning that current holders of dollars will be able to purchase less. By the author’s own statement he is advocating the state steal purchasing power from people who current hold dollars.

The author then moves on to use another set of numbers of prove his claim:

Don’t believe the official numbers? The Billion Prices Project at MIT says that lately inflation is actually lower than the government estimates.

That’s interesting, because last year the Billion Prices Project showed that inflation was higher than CPI:

The price of everything seems to have skyrocketed. Only housing, the dollar, and inflation-adjusted income are negative. World food and commodity prices are up 28 percent over the last 6 months. The MIT “Billion Prices Project” confirms that prices have been surging higher than indicated by the consumer price index. Entrepreneurs tell me that big price increases are already planned for everything from vegetables to blue jeans.

In fact, if you look at the data, the correlation between MIT’s Billion Prices Project and CPI is nonexistent. Often the rate of inflation according to the Billion Prices Project is higher than CPI and often the rate of inflation according to CPI is higher than Billion Prices Project.

Regardless of that fact the author still admits that according to the Billion Prices Project there is still inflation, which indicates that there is too much money chasing too few goods and services already.

The stupid doesn’t stop there:

The commodity price index is down 7 percent from a year ago. Home sales have been tepid despite mortgage rates lower than anyone could ever have dreamed.

Funny thing about home sales, there was a recent crash caused by a Federal Reserve created bubble. Home sales were through the roof a short while ago, before everybody started losing those houses. On top of that actual unemployed is hover over 20 percent so nobody could afford a new home even if you inject a few trillion more dollars into the economy. More money in circulation doesn’t help those who don’t have jobs to acquire that money.

The central banks have performed three rounds of quantitative easing (basically printing money) already and we’re still in a rut. How is printing more money going to magically cure our economic woes? If printing money fixed economic problems then the Weimar Republic should have been the epitome of economic health when it decided to try printing its way out of debt. Instead they experience hyperinflation, their economy tanked even harder, and the Nazi Party was able to sieze control of Germany.

Every nation that has attempted to print its way out of debt has experienced nothing by hardship. Printing money doesn’t work, it can’t work. When you hear somebody say the problem with our economy is the fact that there isn’t enough money in circulation just walk away because you’re dealing with an individual that has no understanding of economics.