Category: Economics

Things are Looking Up in Spain

Spain has been suffering a great deal of economic distress. Fortunately, there is a silver lining to the country’s storm clouds. While the “legitimate” economy is floundering the “underground” economy is flourishing:

Spain’s illicit economy–all that is unaccounted for because it’s illegal or unreported–is worth an unseemly 20% of the country’s GDP, according to a new report by Spain’s Foundation for Financial Studies (FEF). That’s higher than every other country in the European Union except Italy, with 21%.

Spain only has a little catching up to do before it overtakes the current leader of the European Union, Italy.

While a Keynesian would look at such news in despair, an agorist, such as myself, would point out the fact that a country’s economy isn’t in the toilet simply because the state says it is. In the eyes of the state an economy’s health is measured by the rate rate of expropriation. If the state is able to expropriate a great amount of wealth from the general populace then, in its eyes, the economy is health. On the other hand, if the state is unable to expropriate a great amount of wealth from the general populace then it believes the economy is failing.

Markets don’t cease operating because participants are unable to fulfill the state’s demands. When the state begins to demand more than market participants can or are willing to surrender then those markets move underground. The state sees such “underground” markets as its enemy because they are its death knell; they are the the result of the people finally standing up a saying “Enough! Go bad to Hell from whence you came you evil plunderers!” As we can see by the estimated size of Spain’s “underground” economy, the people there have finally grown so sick of their rulers that they are refusing to surrender any of their hard earned wealth even under the threat of being thrown into a cage or murdered by costume clad thugs with badges.

I only hope that Spain’s overall disgust in rulers will eventually spread here to the United States.

Detroit Files for Bankruptcy

Eventually bad economic decisions catch up with everybody. Detroit, after suffering decades of bad economic decisions, has taken its place as the largest city in the United States to file for bankruptcy:

Detroit has become the largest US city ever to file for bankruptcy, with debts of at least $18bn (£12bn).

The city, once a symbol of US industrial power, is seeking protection from creditors who include public-sector workers and their pension funds.

Unions described the bankruptcy filing as a power grab.

Detroit has faced decades of problems linked to declining industry. Public services are nearing collapse and about 70,000 properties lie abandoned.

Governments can only survive off of stolen money and Detroit has had less and less of a base of tax victims since the collapse of its automotive industry. As people fled the city or fell so far into poverty that they no longer had anything to take the state found itself with less and less plunder.

Now we just have to wait for Omni Consumer Products to buy the city up.

I Guess We’ll Need a New Tax in Minnesota

At the beginning of this month a new tax on cigarettes took effect here in Minnesota. While proponents of the new tax claim it will help fund education the tax is actually being used to bailout billionaire Zygi Wilf since the proceeds from gambling having met the levels projected by the politicians who decided to provide public funding for the new Vikings stadium. Unfortunately, the politicians may have to find something else to tax now that cigarette sales have dropped:

DULUTH – After the Minn. state tax increase on cigerettes on July 1., Duluth tobacco shops and gas stations said their sales have decreased.

Some gas stations said cigarette sales are down by thousands of dollars a week.

Meklye Wahedi, a cashier at “Cigs for Less” said carton sales are especially down.

“People were buying 3 or 4 at a time, they would come in the next week and but 3 or 4 again, and yeah, it increased a lot,” Wahedi said. “When July 1 first hit, that’s when it was really slow.”

We will have to wait and see if sales increase but if they don’t the Minnesota legislation will likely have to create a new tax on something else. This demonstrates the issue with taxes, as taxes are increased individuals begin to avoid those taxes. If a new tax on cigarettes raises the overall price of cigarettes sufficiently less people will buy them and the state will take in less tax money, leading to more taxes. It’s a never ending cycle.

The French are Voting with Their Feet

What started as a small movement of capital leaving France is becoming a massive hemorrhaging of capital:

For months now, there has been a steady rumbling of people packing up and moving out. There are few reliable figures of the numbers of people leaving, in part because many are moving within the E.U., where there are no immigration requirements for Europeans. Yet for those of us living in France, the exodus has been notable. Around New Year, a moving truck rolled up to our building and loaded the worldly possessions of the couple and four children living below us as they headed off to Singapore where better prospects awaited the father of the family. Earlier last week, a woman flopped on to a bench next to me in the schoolyard of the school our children both attend, fatigued from apartment-hunting in London, where she is moving with her family next month — driven out by what she describes as the aggravation of running a small business with 35-hour work weeks and by tax hikes introduced by President François Hollande, who was elected last May. “I resisted the move, but it’s become impossible,” she says.

To paraphrase a famous Star Wars quote, “The more you tighten your grip, Hollande, the more people will slip through your fingers.” Statist socialists often believe the solution to a floundering country is to increase taxes. They believe that collapsing countries can be salvaged if only the state is able to collect enough money to keep things going. In the end this never works because people will eventually leave a country if conditions become worse that they’re willing to tolerate. When you have to make a decision between putting food on the table or paying taxes to keep yourself out of prison you tend to disappear in pursuit of greener pastures.

At some point Hollande will be faced with a decision. He will either have to accept the fact his policies are driving people out of France or he will have to close the borders to prevent people from fleeing. If history is any indicator he will choose the latter, which means anybody wanting to flee France needs to do it now.

Americans should take note because this phenomenon is beginning to happen here. Droves of people are fleeing New York and California, two of the most burdensome states in the Union. The federal government has been increase its rate of expropriation for some time and shows no signs of relenting. At some point in America’s future there will be a massive exodus of people, which will likely cause the individual and federal governments to enact border controls to prevent capital from leaving. Fortunately technologies like Bitcoin exist that allow individuals to conceal their wealth from Big Brother’s prying eyes.

Minnesota Loses 11,600 Jobs, Unemployment Goes Down, Math Stops Making Sense

According to the Star Tribune the State of Minnesota lost 11,600 jobs last month but, somehow, unemployment went down:

Minnesota’s job market posted its second straight negative month, shedding 11,400 jobs in April, the state said Thursday.

The biggest job losses were in trade, transportation and utilities, which shed 5,700 jobs, according to figures released by the Minnesota Department of Employment and Economic Development.

Meanwhile, the Minnesota unemployment rate fell to a seasonally adjusted 5.3 percent in April, its lowest point since May 2008 and well below the U.S. rate of 7.5 percent in April. The March figures were revised upward from 5,200 jobs lost to 3,300 jobs lost.

One may wonder how an economy could lose jobs and experience a drop in unemployment. Logic would dictate that unemployment would go up as the number of people without jobs also went up. What we’re seeing here is another example of the state cooking the books in order to make unemployment look better than it actually is. I’ve touched on how the Bureau of Labor Statistics uses what is called the U3 unemployment statistic in order to make unemployment look better than it actually is. Another trick often used by statist statisticians, such as the ones employed by the State of Minnesota, is seasonal adjustments.

Seasonal adjustments, as the name implies, involves removing drops in unemployment caused by seasonal changes from the official statistic. The theory goes something like this:

  1. During certain seasons there is a spike in employment during the rush to hire needed seasonal help. Christmas, for example, generally involves a spike in employment as stores try to have enough staff to deal with the Christmas season rush.
  2. After these seasons conclude stores, who no longer need the additional help, can the seasonal employees.
  3. Since this is seasonal it can be safely ignored when creating unemployment statistics because those employees aren’t actually unemployed, they’re, err, um, look over there!
  4. …
  5. Prosperity!

In other words if your unemployment statistic is looking bad you merely have to write off a large section of unemployed people as a seasonal phenomenon and your unemployment statistic will suddenly look better! Further adding precedence to this scam is the fact that there are multiple seasonal adjustment calculations to choose from! If one of the calculations isn’t giving you the statistic you want you can simply use a different one. Eventually you’ll find a calculation that will give you the statistic you desire.

War is peace, freedom is slavery, and unemployment is employment.

Let Me Explain the Economics of College Tuition

The Atlantic has discovered that many colleges are soaking the poor by charging high tuition while handing out discounts to students from wealthy families:

Sometimes, colleges (and states) really are just competing to outbid each other on star students. But there are also economic incentives at play, particularly for small, endowment-poor institutions. “After all,” Burd writes, “it’s more profitable for schools to provide four scholarships of $5,000 each to induce affluent students who will be able to pay the balance than it is to provide a single $20,000 grant to one low-income student.” The study notes that, according to the Department of Education’s most recent study, 19 percent of undergrads at four-year colleges received merit aid despite scoring under 700 on the SAT. Their only merit, in some cases, might well have been mom and dad’s bank account.

There’s nothing inherently wrong with handing out tuition breaks to the middle class, or even the rich. The problem is that it seems to be happening at the expense of the poor. At 89 percent of the 479 private colleges Burd examined, students from families earning less than $30,000 a year were charged an average “net price” of more than $10,000 annually — “net price” being the full annual cost of attendance minus all institutional and government aid. Less technically, it’s what students can actually expect to pay. At 60 percent of private colleges, that net price was more than $15,000.

Of course the author of the article is unable to understand why colleges are partaking in such chicanery:

Otherwise, it’s hard to think of a justification for their behavior. Could it be that their prices are worth it, that the educations they provide justify the eye-popping cost? It’s hard to say definitively. But I’m hoping to put that possibility to the test in the coming week by matching Burd’s data against graduation and student loan default rates. In the meantime, the preponderance of evidence seems to suggest that many private colleges are either undercutting the intent of the Pell program, if not abusing it outright.

I’m nothing if not helpful so let me explain what is going on here. The phenomenon noted by the author is really another version of the state’s war against the poor. That is to say colleges, like states, want to raise a herd of dairy cattle that will produce a lot of milk. Doing so requires culling cattle that produce less milk and breeding cattle that produce more milk.

As the article notes many of the students being favored didn’t score notably well on Scholastic Assessment Tests (SAT) or demonstrate any real form of academic exceptionalism. The primary criteria for handing out discounts appears to be parental income. Why would a college prefer to attract students from wealthy families over students who demonstrate academic exceptionalism? Because students from wealthy families provide more milk.

When a college accepts students from wealthy families they stand to get far more than just tuition. Have you ever wondered how college buildings get their names? In many cases college buildings are named after large donors. For example, Parkhurst Hall at the Georgia College is named so because:

Next to Foundation is Parkhurst (2003), an imposing structure that replaces the 1949 Parkhurst Hall that chiefly had been occupied by faculty. The first Parkhurst was built with money from the Sylvester Mumford Fund, established by Mumford’s daughter, Goertner Parkhurst (1850-1949). Sylvester Mumford was a New York merchant who settled near Waynesville, Ga., and built a stately, antebellum home. The beautiful Goertner Mumford cast a romantic figure in the 1870s as she rode her favorite white stallion through the sand hills and pines of the Brantley County estate. Mrs. Goertner Mumford Parkhurst later used her considerable fortune to support the cause of women’s education.

Wealthy families tend to donate money to the college their student(s) went to even after their student(s) graduated. In addition to donations, colleges also gain name recognition by having students from prominent families in their communities (often wealthy families) attend. Name recognition can greatly increase enrollment because many people want to go to a famous college (I’m told it also looks good on a résumé). Not only that but children are often encouraged by their parents to attend whatever college one or or both of them attended. That means a college may enjoy multiple generations worth of students from a wealthy family, thus expanding the amount of time they enjoy the previously mentioned benefits.

What do colleges stand to get when they accept a student from a poor family? Tuition. Somebody is probably saying, “Hey Chris, you dumbass, a student from a poor family will make more money after they graduate college!” As it turns out economic mobility in the United States isn’t very mobile. If you are born into a poor family you are more likely than ever to remain poor. That means a college is less likely to see large donations from students of poor families after they graduate. On top of that, students from poor families are more likely to be, at least somewhat, fiscally conservative. That means even if the student becomes wealthy he or she isn’t as likely to waste that wealth by tossing it to a college they already paid. Because of those two things the college has to milk cattle from poor families as much as possible right away.

In summary colleges favor students from wealthy families because they expect to gain more. The mistake being made by many people is believing colleges are something other than businesses. Colleges aren’t magical egalitarian institutions that are able to rise above self-interest. If that were the case senior college administrators wouldn’t make six-figure salaries, they would forgo a great deal of their salary so that money could be used to educate more students. But they do make six-figure salaries and they know that they need a strong herd of cattle to milk in order to continue making six-figure salaries.

Markets, Markets Everywhere

After most socialist revolutions the newly established burgeoisie (the revolutionaries who claimed to be fighting for the proletariat) begin monopolizing the economy. This monopolization involves the use of violence in an attempt to completely suppress markets. Shortly after the state begins its war on markets nasty periods of bread lines and starvation begin. As it turns out there is no way for the state to plan an economy and when it attempts to do so everything falls apart. Fortunately markets, which are nothing more than events of human economic interaction, cannot be suppressed and when things start turning south in a planned economy markets begin to spring up in spite of the law. An interesting editorial in the New York Times written by a North Korean expatriate explains who even in a totalitarian state like North Korea markets continue to be the salvation of the people:

Dialogue will never entice the regime to give up its nuclear weapons; the nuclear program is tightly linked to its survival. And talks will not lead to change over the long term; the regime sees them only as a tool for extracting aid. High-level diplomacy is no strategy for getting the regime to make economic reforms. The key to change lies outside the sway of the regime — in the flourishing underground economy.

All North Koreans depended for their very survival on a state rationing system until it collapsed in the mid-1990s. Its demise was due in part to the regime’s concentrated investment of funds in a “party economy” that maintained the cult of the Kims and lavished luxuries on an elite instead of developing a normal economy based on domestic production and trade. Desperate people began to barter household goods for rice on the streets — and the underground economy was born. With thousands of people starving to death, the authorities had no option but to turn a blind eye to all the illegal markets that began to pop up.

Like the Soviet Union, North Korea now has a flourishing “underground” economy, which is the only thing preventing more people from starving to death. In fact the “underground” economy has become so rampant that party members have had to give up the ideals of socialism and involve themselves in markets.

Jang Jin-sung, the author, rightly points out that North Korea’s salvation from tyranny isn’t diplomacy, sanctions, or war. The country’s salvation lies in its markets. The only way to topple a regime is to take away its power and the only effective means of doing that, without establishing another regime in its place, is to starve it of resources. Socialist states such as North Korea monopolize the economy because it gives them unfettered access the nation’s resources. Instead of burdening the general population with taxes socialist states merely claim that the best way for everybody to flourish is if the entire economy is controlled by the ruling class (which is ironic when you consider the philosophical reason for socialism is supposedly to overthrow the ruling class and empower all people).

Although they probably don’t realize it the people in North Korea who are participating in the “underground” economy are agorists. Agorism is a simple idea where the people withhold resources from the state by participating in an “underground” economy. Through this practice the state is starved of resources and loses its legitimacy in the eyes of the people. Who is going to suffer a state when it does nothing but take resources? The people of North Korea can be saved but it is up to them. No outside force is going to save them. At most an outside force, such as the United States, would merely topple the current regime and put another, possibly more brutal, regime in its place. If the North Korean people can topple the regime by depriving the state of resources they will come out with a functioning economy already in place and have no need to suffer another regime.

Why Terrorism Works

Feat your eyes on the following picture lifted from the BBC’s story covering the manhunt for Dzhokhar Tsarnaev:

That picture shows very succinctly why terrorism works. For the cost of some explosives and a couple of pressure cookers two individuals have managed to cost the state what must be approaching millions of dollars. The streets of Boston are crawling with expensive police officers, wearing expensive armor, driving expensive armored personnel carriers, and carrying expensive weaponry.

Terrorism works because it exploits basic economics. For very little cost a handful of individuals can excise a heavy toll from the state. Warfare, ultimately, is a competition of economies. The loser of a war is the one who no longer has resources to continue. They lose because they run out of soldiers, guns, ammunition, food, medical supplies, effective countermeasures against the other army’s weapons, etc. Fourth generation warfare tactics, such as terrorism, work because they’re too expensive to counter militarily.

An improvised explosive device, like the bombs used in Boston, can injure and kill multiple people with ease. When killing a soldier you not only kill a person but you also wipe out the resources poured into his training and unrecoverable equipment. If you injure a soldier you not only remove a fighter off from the field, possibly permanently, but you also cost his military resources in medical care. Killing an innocent bystander can also cost the other military morale. Vietnam was an example of this. By killing Vietnamese civilians the United States military generated a great deal of hatred back home and that hatred, often aimed at soldiers, eroded the morale of fighting men.

The Central Banks are Flying Blind

Are you ready for some surprising news? You may want to sit down for this. As it turns out, the central banks haven’t a clue as to what they’re doing:

Growing concern at the International Monetary Fund over the long-term side-effects of interest rates close to zero came as some of the leading figures in central banking conceded they were flying blind when steering their economies.

Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, captured the mood at the IMF’s spring meeting, saying: “We don’t fully understand what is happening in advanced economies.”

But the best part of the article the following paragraph:

It is troubling for monetary policy experts that their crisis-fighting tools – rates stuck at zero, money printing operations to bring down longer-term interest rates and encourage private sector spending, and efforts to calm financial market fears – might have nasty side-effects.

Who would have thought that artificially lowering interest rates to nothing, printing billions upon billions of dollars, and sucking people into malinvestment would have any harmful side-effects? Just everybody with an elementary school understanding of basic economics. Unfortunately the politicians decided that Keynes’s mysticism sounded much better than Mises’s deductive logic, which isn’t surprising since Keynes’s mysticism basically said anything the state does to bolster the economy is good whereas Mises said the state should take an entirely hands off approach. Needless to say the state liked the idea of monopolizing the monetary system and it has been downhill ever since.

Nothing is Free

With the demise of Google Reader those of us who depend on Really Simple Syndication (RSS) for collecting and reading news articles have been scrambling to find a replacement. A couple of prospective replacements that have take on Google Reader refugees are Feedly and Feever. My primary concern in finding a replacement has been compatibility with Reeder, which I use as my RSS client on my iPhone, iPad, and Macs (Yeah, I’m a bit of an Apple whore, want to make something of it?). Via Reeder’s Twitter account I found out that the developer was planning to include support for Feedbin. When I looked into Feedbin the thing that immediately caught my attention was the subscription fee, in order to use Feedbin you need to either pay $2.00 a month or $20.00 a year. The part of me that has become accustomed to free online services was quickly taken aback. Would I be forced to pay a monthly or yearly fee just to use my preferred RSS client? Why should I pay money to use something that’s free?

Most of us use online services and most of us pay nothing for them. My reaction to seeing that Feedbin charges a monthly fee is mirrored by other Reeder users and that really woke me up to something I seldom think about: we denizens of the Internet have become so accustomed to free services that we become upset when somebody has the audacity to charge money for an online service. We often fail to remember that there are no free lunches. Providing an online service isn’t a costless endeavor. Servers, electricity, Internet connectivity, development and maintenance time, and providing enough infrastructure for users are all costs associated with providing an online service. This blog, if anything, is a loss for me. I don’t count the costs of the server and electricity when calculating the costs of running this blog because that server is providing other services I use (Virtual Private Network (VPN), e-mail, CalDAV, etc.). But it does costs me time in writing blog posts and maintaining the website. Since I enjoy writing and server maintenance (to a point) neither of these are a higher cost than the blog is worth. However, if I was offering a service with a decent number of subscribers, I would need to charge money in order to make providing the service at least break even.

When an service provider offer its “product” free of charge it is almost always recouping costs elsewhere. Google, Facebook, Twitter, and most of the other major online service providers recoup their costs by selling data. Specifically your data. When dealing with these service providers you must think of yourself as the product and the entities buying your data as the customers. If the collected data isn’t purchased by the customers it isn’t useful to the service provider and will likely be discarded. I’m sure Google dropped Reader because its customers weren’t interested in the data collected by the service. I understand that and don’t hold it against Google, they’re in business to make money and there’s no point for Google to maintain a service that isn’t making a profit.

For some time I’ve become less accepting of being a product for Google. Part of this stems from my innate desire to control my data. If my data is hosted on Google’s servers I have no control over it. There is no way for me to know if that data will be preserved or who will be given access to my data (we know the United States government periodically demands user data from Google). I do know that Google is selling my data to its customers. The only way a service provider has any motivation to keep its user data private is if its users are also its customers.

The other method for a service provider to monetize its services is to charge money for its services or provide another product that ties into its services. Apple chooses the latter. iCloud isn’t provided free of charge out of the goodness of Apple’s heart, it’s provided free of charge (at least for the first 5GB of storage) because it’s a feature that allows Apple to sell iPhones, iPads, and Macs. Feedbin has chosen the former. Instead of offering a free service and monetizing user data the people behind Feedbin are asking users to pay a monthly or yearly free. There are two advantages for users under this model: as a user you are also a customer and Feedbin has motivation to keep your information private and Feedbin is more apt to keep the RSS service running since its business model relies on it.

While my initial response to Feedbin was one of distaste I’m beginning to realize it may be a better model for me. I want three things: an RSS service that works with Reeder, motivation for my RSS service provider to keep my information to itself, and an RSS service that won’t suddenly disappear overnight. Being a customer instead of a product will takes care of desires two and three.

Since the costs of providing an online service are generally hidden from users it’s often difficult for a service provider to charge money. This is why most service providers monetize user data. Trying to charge users money for a service is usually met with outrage. Unfortunately there are no free lunches. If you don’t pay money directly you’re going to pay by being a product. Since I’m concerned with control over my data I would prefer to be a customer. Due to this services that directly charge me money instead of monetizing my data are appealing. For most people, those who think little about their data, services that monetize their data are likely more appealing. Either way it would do well if denizens of the Internet stopped responding in outrage when a service provider asks for money from its users. Scarcity is the ultimate law of economics and ensures nothing is every entirely free.