Basic Economics – A Geek With Guns

Full Faith and Credit Continued

I wrote a post discussing the full faith and credit of the United States dollar compared to the value of Bitcoin. However, I want to add a comparison of the value of the dollar to another currency.

As many of you are certainly aware, the United States Congress was dissolved on October 12, 1859 by order of Emperor Norton. In addition to abolishing the United States Congress and winning a war against the reincarnation of George Washington, Emperor Norton also issued money. As a testament to his benevolence, he offered a one-to-one exchange rate between United States dollars and his currency. During some unrelated research into the glorious reign of Emperor Norton, I came across a 2018 auction for one of his $0.50 bills issued on August 1, 1878 that sold for $10,500.

In 1878 the exchange rate between United States dollars and Emperor Norton’s script was one to one. In 2018 the exchange rate was $21,000 to one.

Once I again I can only conclude that the full faith and credit of the United States isn’t worth what it used to be. On the other hand, the full faith and credit of Emperor North has skyrocketed, which is yet another sign of his legitimacy.

All hail, Emperor Norton! May he reign forever!

Full Faith and Credit

A common criticism made against market based currencies (for example, precious metals and cryptocurrencies) by advocates of fiat is that market based currencies aren’t backed by the full faith and credit of any notable governments. The implication is that governments are the best shepherds of currency. Is this really true though? A quick look at the historical performance of government fiat indicates that it isn’t.

The dollar is currently experiencing a high rate of inflation. While official numbers state an inflation rate of approximately eight percent, the real rate is likely significantly higher. Compounding this issue is the fact that these numbers aren’t unprecedented. The linked article notes that this is the highest rate of inflation since 1982, which wasn’t that long ago in the grand scheme of things. If you look at the performance of the dollar since 1800, you’ll find that 22.52 2022 dollars are needed to equal the purchasing power of a single 1800 dollar.

When people think of Bitcoin, they often think of its short term ups and downs. Critics use its sometimes wild short term fluctuation in value as an argument against it. But if you look past its short term performance and instead look at its long term performance, you’ll notice that it has increased in value dramatically. When Mt. Gox (remember them) came onto the scene in 2010, one Bitcoin was worth $0.07. As of this writing, not quite twelve years later, one Bitcoin is trading at approximately $44,428.81. Meanwhile, in the same span of time a single dollar has inflated to $1.30. Had you invested in dollars in 2010, you would have lost almost a third of your purchasing power. Had you invested in Bitcoin in 2010, you would have gained a tremendous amount of purchasing power.

Bitcoin isn’t the only market based currency that increased in value over the last 12 years. Let’s take a look at gold. At the beginning of 2010 a troy ounce of gold was worth approximately $1136.40. As of this writing a troy ounce of gold is worth $1,934.43. That’s nowhere near the same increase in value as Bitcoin, but it’s still a sizable increase. As with Bitcoin, had you invested in gold in 2010, you would have gained purchasing power.

The dollar isn’t the only government backed currency that sucks. Since 2010 a single euro has inflated to €1.20 , a single ruble has inflated to ₽2.09, and a single Canadian dollar has inflated to $1.24. Even the Swiss franc has inflated, albeit only to fr.1.01 (making it the least terrible fiat store of value on this list).

It seems that the full faith and credit of a notable government is actually detrimental to a currency. Unless, of course, you like losing purchasing power over time. But if that’s your thing, I suggest just sending your unwanted purchasing power to me. I’ll happily take it.

Killing Yourself Slowly

Trump is working to take this country back to the good old days of mercantilism when governments decided who would succeed and who would fail. Implementing tariffs was just the first act in his strategy to provide a supposed advantage to American companies. His latest act was far more blatant. He issued an executive order to prohibit Huawei from the United States market. In the aftermath of this executive order Google has revoked Huawei’s use of its services, including its Play Store:

President Trump issued an executive order last week banning “foreign adversaries” from doing telecommunication business in the US. The move was widely understood as a ban on Huawei products, and now we’re starting to see the fallout. According to a report from Reuters, Google has “suspended” business with Huawei, and the company will be locked out of Google’s Android ecosystem. It’s the ZTE ban all over again.

That’ll give a much needed boost to American device manufacturers, right? You know, all of those device manufacturers who manufacture their devices in China, where Huawei is headquartered. Because I’m sure this executive order won’t result in any reciprocation from the Chinese government.

But even if we set aside the likelihood of a Chinese retaliatory response, this executive order sends a rather clear message for companies headquartered outside of the United States. That message is that they shouldn’t rely on products or services from companies headquartered in the United States. Huawei can still use Android since it’s an open source project (a good reason to prefer open source code to closed source code) so it doesn’t have to write an operating system for its devices from scratch. It does have to figure out a replacement for Google’s proprietary bits though. There are several solid third-party clients available for Android that allow access to online calendaring, contacts, and e-mail services. Many of those clients are also open source. Huawei could utilize them in place of apps like Google Calendar, Google Contacts, and Google Mail (Google Maps is the tough one to replace but a third-party client could be written for it). So it would only need to worry about distribution and it has enough funding to build its own app store (it could also use something like F-Droid, but that’s unlikely). It could also make licensing money off of its app store by providing access to other Android device manufacturers who had their access revoked by Google due to an executive order.

Foreign companies aren’t going to stop doing business when the figurehead of the United States puts his signature on a piece of paper. They’re going to either make or buy replacements for everything can no longer use. If this behavior of barring foreign companies from business in the United States continues, companies headquartered outside of the United States are going to become more and more wary of relying on American products and services and instead seek foreign alternatives. American companies like Google will find themselves more and more isolated from the global market. The constantly dwindling market size will cause them serious economic hardship, which will translate into economic hardship for their employees.

Isolating domestic businesses from foreign markets is slow economic suicide.

Totally Not Socialism™

Alexandria Ocasio-Cortez and her pals within the Democratic Party are touting their Green New Deal, which is their vision for a massive wealth redistribution scheme. Of course they’re not calling it a wealth redistribution scheme because that sounds like socialism and if there’s one thing Americans won’t stand for it’s anything that calls itself socialism. But Americans will stand (with their hand over their heart no less) for socialism so long as it’s wrapped up in Totally Not Socialism™ packaging. So to claim that their Green New Deal is Totally Not Socialism™ the advocates of this Green New Deal are calling it an economic stimulus package. One ritual required for wrapping a socialist program in Totally Not Socialism™ packaging is explaining how the programming will be funded by using traditional American methods (because, you see, America has always been anti-socialist so if something was done in the past it obviously can’t be socialist).

Ocasio-Cortez are performing this crucial ritual by pointing out that income tax rates between World War II and Regan’s presidency seldom dipped below 70 percent and even reached as high as 90 percent for the “wealthiest” Americans. So funding this stimulus package doesn’t require socialism, it merely requires going back to America’s (totally not socialist) halcyon days! Needless to say their supporters are lapping up their bullshit and eagerly asking for more because they’re ignorant about the difference between statutory and effective tax rates:

Yet this historical narrative is both simplistic and wrong. It relies upon a confusion between the statutory tax rate (i.e., the number that’s on the statute books) and the effective tax rate (i.e., the percentage of income that people actually pay once exemptions, deductions, and other tax-code incentives are accounted for).

Although statutory rates were extremely high between World War II and the Reagan-era tax cuts, practically nobody actually paid the taxman’s full sticker price on their earnings. Instead, a plethora of intentional tax exemptions, deductions, and legal income shelters ensured that wealthy individuals paid a much lower effective tax rate.

How much lower are we talking about exactly? Let’s take an example from 1963, the last year that top rates exceeded the 90 percent high water mark. A single filer in the $1 million bracket ($8.2 million today) faced a rate of 91 percent for every dollar earned over $200,000. While the statutory rate dropped for earnings below $200,000, it did not drop much. The 72 percent rate’s threshold kicked in at $44,000 (about $360,000 today). A 50 percent rate applied to single-filer earnings above $16,000 (about $130,000 today), with several other rate jumps as you attained higher income thresholds in between.

Finding a person who can obtain power without being corrupted is almost impossible. Finding a person who is willing to tell their benefactor to fuck off is even harder.

Those wealthy Americans that Ocasio-Cortez and her pals are claiming they’re going to soak? It turns out that they’re the ones who pay their biggest campaign contributions, the lobbyists who host their lavish dinners, and the human resource personnel who offer them absurd salaries to become lobbyists after they become bored with politics. So there’s no way that Ocasio-Cortez or almost any other politician is going to fuck them over.

The difference between the statutory and effective income tax rates is the key to how politicians keep their base supporters and benefactors happy. They promise their base supporters that they’ll soak the rich and redistribute the seized money to them. Since their gullible base supporters are ignorant of how taxes actually work for the wealthy, they fall for it hook, line, and sinker. Meanwhile, their benefactors are happy because the same politicians who passed the higher statutory income tax rate also created a large number of tax-incentives that allow anybody who falls into the new higher rate category to avoid paying the published rate.

Order of Operations

What do you do when a bunch of uppity plebs continue to protest even after your great and generous government was benevolent enough to removed the gas tax hike that sparked the protests? You begin laying the groundwork to justify bringing in the military. That’s what Finance Minister Bruno Le Maire is attempted to do by rewriting history a little bit:

The “yellow vest” protests have been “a catastrophe” for the French economy, the finance minister says.

He has his order of operations a bit backwards. It was the catastrophic economic policies implemented by the French government that sparked the protests. The gas tax was merely the straw the broke the camel’s back. But even funnier than his attempt to rewrite history is his attempt to redefine democracy:

Finance Minister Bruno Le Maire called the situation “a crisis” for both society and democracy.

Democracy is a method of government where the majority rules. What could be a more pure form of majority rules than the masses rising up and declaring their opposition to a government decree? These riots are direct democracy in action.

What Part of Free Didn’t You Understand?

Did you know that a majority of apps targeted at children contain ads:

(Reuters Health) – Those cute little apps your child plays with are most likely flooded with ads – some of which are totally age-inappropriate, researchers have found.

A stunning 95 percent of commonly downloaded apps that are marketed to or played by children age five and under contain at least one type of advertising, according to a new report in the Journal of Developmental & Behavioral Pediatrics. And that goes for the apps labeled as educational, too, researchers say.

That’s just terrible… oh:

The researchers scrutinized 135 of the most downloaded free and paid apps in the “age five and under” category in the Google Play app store. Among them were free apps with 5 to 10 million downloads and paid apps with 50,000 to 100,000 downloads.

Emphasis mine.

To once again quote The Moon is a Harsh Mistress, there ain’t no such thing as a free lunch (TANSTAAFL). If you can download an app without paying upfront, the developer is making money in some other way. Advertisements are the quick and easy go to. In app purchases are the more sophisticated method although more difficult to execute because you need to incentivize users to buy your in app purchases. When your target audience is children, in app purchases are even more difficult because parental controls often prevent children from making purchases directly.

Instead of performing a study with an obvious result such as determining how many free apps display ads (almost all of them), a better study would be to learn why people are so foolish as to believe that they can get something for free.

I Want to Alter the Deal

The Witcher series of games have been phenomenally successful. In fact their success has overshadowed the books that they were based on. Unfortunately for the author, he made a bad deal and now wants to alter the deal:

“I was stupid enough to sell them rights to the whole bunch,” Sapkowski said at the time. “They offered me a percentage of their profits. I said, ‘No, there will be no profit at all — give me all my money right now! The whole amount.’ It was stupid. I was stupid enough to leave everything in their hands because I didn’t believe in their success. But who could foresee their success? I couldn’t.”

Sapkowski has now made a public demand for six percent of the profits obtained for the lifetime of the franchise, which adds up to more than $16 million for The Witcher 3: Wild Hunt alone.

I especially enjoy how he admits that he was initially offered a percentage of the profits and turned the offer down because he didn’t believe that the project would be successful. So even he’s admitting that his failure to capitalized on his novels was entirely his fault.

Higher risks generally come with greater rewards, which makes sense since there needs to be a justification for taking a risk. Sapkowski played it safe and took the low risk/low reward option. Generally speaking, if you can bear the brunt of losing out on a high risk/high reward situation, take it. Sapkowski had income from his books so he may have been able to bear the brunt of not receiving any money on the series if it flopped. If you ever find yourself in a similar position, give the high risk option some serious thought.

Creating Jobs

If you ask an advocate of tariffs what punishing consumers is supposed to accomplish, amongst other things they will claim that tariffs create domestic jobs. That ignorance is based on the belief that foreign companies don’t employ people domestically but since we live in a global economy, a lot of foreign companies hire domestic employees. So tariffs often destroy jobs rather than create them:

Alibaba’s founder and chairman Jack Ma says the Chinese mega e-commerce company no longer has plans to create 1 million jobs in the US, citing the ongoing trade conflict as the reason Alibaba is retracting its promise to Donald Trump. A new round of tariffs between the US and China will make mutual trade more difficult.

Who would have guessed that alienating one of the largest economies on Earth would have consequences?

Buying Less for More

The Trump administration has decided to devalue your dollars even more by placing additional tariffs on Chinese goods:

The US is imposing new tariffs on $200bn (£150bn) of Chinese goods as it escalates its trade war with Beijing.

These will apply to almost 6,000 items, marking the biggest round of US tariffs so far.

Handbags, rice and textiles will be included, but some items expected to be targeted such as smart watches and high chairs have been excluded.

The Chinese commerce ministry said it had no choice but to retaliate but is yet to detail what action it will take.

The US taxes will take effect from 24 September, starting at 10% and increasing to 25% from the start of next year unless the two countries agree a deal.

The upside of trade wars is that they don’t start out as shooting wars. The downside of trade wars is that they’re a war on consumers. Every tariff means that consumers are stuck paying more for less. A bag of rice that costs $5.00 can suddenly cost $6.25 for no reason other than where it was produced. A cell phone that costs $500 can suddenly cost $625. What makes tariffs a real gut punch though is that since they’re usually calculated by the price of a good, they increase as inflation causes prices to increase. If that $500 cell pone begins to cost $600 due to inflation, the cost with the tariff tax included will be $750.

The only winner in a trade war is the government because it pockets the tariffs.

Domestic Tariffs

Tariffs are in the news after Trump decided that the playing field between the bureaucratically choked United States and the rest of the world needed leveling. But what about domestic tariffs? The states that make up the United States aren’t supposed to implement tariffs against each other but thanks to the Supreme Court they now can:

If an internet retailer in Pasadena, CA sells a good or service to a resident of Washington, D.C., simple logic dictates that the transaction not be sales-taxed in Washington, D.C. It shouldn’t because the business isn’t in Washington. It’s on the other side of the country, and there the business will pay Pasadena taxes. So when judges and politicians talk about the importance of levying sales taxes on outside vendors, what they’re really saying is that they want government to dip its hands into our pockets twice.

Stating the obvious, the internet sales tax isn’t about leveling the tax playing field as much as it’s yet another grab of the economy by politicians. “Grab of the economy” is an apt phrase simply because politicians don’t tax away our dollars to stare lovingly at them; rather they take our dollars for what they can be exchanged for. The more tax dollars that politicians collect, the greater their ability to be size buyers of cars, trucks, land, buildings, and most economy-suffocating of all, human labor. Having decided they’re not collecting enough of what we earn, and plainly averse to competing with other locales when it comes to keeping taxes down, gluttonous local governments naturally love the idea of using internet commerce as another way to take.

About all this, let’s make no mistake about what these tax-thirsty governments are doing. Much like businesses that seek protection from competition, they’re seeking protection from lower-tax cities, states and countries. To be very clear, they’re seeking tariff-protection. Let’s call them domestic protectionists.

The reason the issue of online sales taxes arose is because politicians in tax heavy states were losing out to states with less burdensome taxes. Online retailers can operate anywhere in the world, which means many operate in states with relatively low sales tax. For example, an online retailer could headquarter in Montana, which has no sales tax and sell to somebody living in Minnesota, which has an absurdly high 6.875 percent sales tax. The person in Minnesota will be encouraged to purchase from the online retailer over a local sellers because the local seller will charge an addition 6.875 percent on top of the cost of the good or service. This arrangement upsets the politicians in Minnesota because they lose the opportunity to pocket some of the buyer’s money. If Minnesota can force the retailer in Montana to collect sales tax for it, it wins (and, of course, retailers throughout the country lose because they have to become experts on Minnesota sales tax laws along with the sales tax laws of their own state).

A lot of people believe that arrangement sounds fair (funny enough, they’re often the same people who are currently bitching about federal tariffs). But the alternative, states with high sales taxes having to lower their taxes in order to compete with states with low sales taxes, would be far fairer to consumers, especially poorer consumers to whom an additional 6.875 percent isn’t chump change.