Tag: Basic Economics

How Tariffs Work

People who subscribe to mercantilism tend to favor internal trading over external trading. If external trading is to occur, they prefer that their nation only export goods while the other nations of the world only import goods. But that ideal is difficult to realize because people in one nation are often interested in the goods and services provided by people of other nations and that interest leads to mutual trade. How can a mercantilist thwart this mutual trade? By imposing artificial barriers on international economic activity. While there are many such barriers that can be raised, the most popular barrier today is the tariff. The Mercantilists imagine that implementing tariffs means that its people will develop a preference for domestic products over foreign products while foreigners will still prefer importing the goods of their nation. Nobody likes an unfair deal so in actuality all that happens is that the nation implementing the tariffs is bypassed:

The European Union and Japan have signed one of the world’s biggest free trade deals, covering nearly a third of the world’s GDP and 600 million people.

One of the biggest EU exports to Japan is dairy goods, while cars are one of Japan’s biggest exports.

The move contrasts sharply with actions by the US Trump administration, which has introduced steep import tariffs.

If the United States won’t play fair, then it won’t get to play at all.

The current administration is playing a stupid game. It’s trying to develop domestic economic activity by artificially raising the price of imported goods even though the United States doesn’t have the experience or capacity to manufacture many imported goods on a scale that can satisfy demands. The result of this game is that consumers in the United States will be forced to pay more for their goods while the rest of the world bypasses the United States.

Unsurprising Results

What happens when your government decides to place additions taxes in the form of tariffs on imported materials that your business relies on? You face the possibility of going out of business:

Steel tariffs could force the nation’s largest nail manufacturer to close or move to Mexico.

The Mid-Continent Nail plant in Poplar Bluff, Missouri, laid off 60 of its 500 workers last week because of increased steel costs. The company blames the 25% tariff on imported steel. Orders for nails plunged 50% after the company raised its prices to deal with higher steel costs.

The company is in danger of shutting production by Labor Day unless the Commerce Department grants it an exclusion from paying the tariffs, company spokesman James Glassman told CNN’s Poppy Harlow.

Shocking, I know.

This isn’t the first business to announced difficulties due to Trump’s new tariffs. Harley Davidson announced that it will move at least some production outside of the United States to get around the new tariffs. More dominoes are likely to fall as well.

“But, Chris, why don’t these unpatriotic companies buy American steel instead,” you ask? Because America doesn’t produce a whole lot of steel and what steel it does produce costs more than imported steel. “Well these tariffs will cause domestic steel production to increase, right?” Not so much. Profit is only one reason for the lack of domestic production. There is also a terrible amount of red tape strangling steel production. The environmental regulations on mining raw materials are many and when those regulations are finally dealt with the refineries get to deal with a bunch of additional environmental regulations. Labor is another factor. American labor isn’t cheap, especially when employers are required to pay Social Security, Medicare, disability, and other mandatory benefits for each employee they hire. Then there is the simple fact that a lot of Americans don’t want a job working in mines or refining metals.

Domestic manufacturers import foreign steel because it’s cheaper but foreign steel is cheaper due to many factors. While the recently implemented tariffs are likely to encourage some increase in domestic steel production, the additional steel probably won’t be enough to satisfy domestic needs and will almost certainly be more expensive than foreign steel, which means domestic manufacturers will still have to move outside of the country if they want to keep their prices at a level to which consumers have become accustomed.

Somebody Pilfered the Lock Box

The Ponzi schemes that is Social Security is, not surprisingly, facing some financial issues. Apparently somebody has pilfered the lock box because the program is going to be dipping into its reserves:

Medicare’s finances were downgraded in a new report from the program’s trustees Tuesday, while the projection for Social Security’s stayed the same as last year.

Medicare’s hospital insurance fund will be depleted in 2026, said the trustees who oversee the benefit program in an annual report. That is three years earlier than projected last year.

This year, like last year, Social Security’s trustees said the program’s two trust funds would be depleted in 2034.

For the first time since 1982, Social Security has to dip into the trust fund to pay for the program this year.

This shouldn’t surprise anybody. The entire idea behind Social Security, forcing employees to put money into a government account so they can withdraw from it when they reach an arbitrarily defined age (which continues to increase), is impossible to maintain with a deflationary currency. An employee who puts a dollar into an account in 1960 will only withdraw $0.12 worth of purchasing power in 2018. Under these conditions either the amount of money available to retirees has to be increased, which will deplete the account quickly, or the retiree cannot be given the same purchasing power that they deposited (which, in effect, means their purchasing power was stolen from them).

But inflation isn’t the only issue facing Social Security. Ponzi schemes require a constantly increasing number of participants. With the birth rate declining rapidly in the United States, there aren’t going to be as many workers as there once were so the number of people paying into Social Security will diminish while the number of people extracting from Social Security will increase.

The bottom line is, regardless of what politicians claim, Social Security is doomed.

With Friends Like the United States, Who Needs Enemies

A lot of people refer to Trump as a fascist. While he (along with almost every other politician) certainly displays a lot of fascist tendencies, I think it would be more accurate, at least economically, to refer to him as a mercantilist. His policies have been aimed at discouraging importing goods in favor of internal trade. While many people still believe that mercantilism is a sound economic policy, it wrecks havoc on international relations:

The US is to impose tariffs on steel and aluminium imports from key allies in Europe and North America.

The US said a 25% tax on steel and 10% tax on aluminium from the EU, Mexico and Canada will start at midnight.

The move immediately triggered vows of retaliation from Mexico, Canada and the EU, which called the tariffs “protectionism, pure and simple”.

With friends like the United States, who needs enemies?

Mercantilism falls apart because it discourages international trade. First one nation implements a policy that harms another nation. Then that nation implements its own policy in retaliation to harm the first nation. This cycle can continue until trade between the two nations halts entirely.

I know a lot of people believe that this will bring prosperity to the United States. However, if you believe that policies like this will bring back the good old days of the 1950s where a single factory worker could buy a house, truck, and boat, you’re sorely mistaken. Manufacturing is highly automated, which reduces the number of available factory jobs. Moreover, the regulatory red tape makes many economic activities such as resource extraction, resource refinement, and manufacturing cost prohibitive. In addition to all of that, the United States has been out of the game for so long that it lacks the experience and knowledge necessary to mass produce many desired consumer goods. Overcoming all of those issues will take a significant amount of time and even if they are overcome, the available market will be tiny because foreign nations will have already implemented retaliatory policies prohibiting trade with the United States (not having the biggest market in the world, China, available would itself strongly discourage manufacturing goods in the United States).

Solve the Housing Shortage by Making Houses More Expensive

California is suffering from a decades long housing shortage. This shouldn’t surprise anybody. The regulatory burden in California has been increasing along with the population, which has made new construction more expensive than it otherwise would be. But instead of working to relieve the shortage by allowing homes to be built for less, the California bureaucrats have decided to make building new homes even more expensive:

On Wednesday, the California Energy Commission approved a set of standards that will require most new homes built in the state after 2020 to include solar panels on their roofs.

The standards (PDF) apply only to single-family homes and certain low-rise condos, townhomes, and apartments. Exceptions are made for homes with roofs that would receive excessive shade during the daytime or homes with roofs too small to benefit from a few solar panels.

The last two exemptions are interesting because they have the potential to change how houses are predominantly built in California. I foresee a trend in small roofs and heavy shading.

This legislation is also, rather obviously, aimed at coercing a preference for high-density residential. While that may make sense in an extremely dense urban area like Los Angeles, it doesn’t make sense to implement such a requirement statewide since much of California is actually rural and therefore space isn’t at a premium. However, bureaucrats are seldom aware that the existence they experience in their capital city isn’t the experience of everybody in their state, which is why centralized planning always turns into such a fiasco.

Consumers Always Lose Trade Wars

Trade relations between the United States and China had been relatively smooth in recent years. Had is the keyword there. Trump decided to provide some protection to his cronies by implementing a series of tariffs to artificially raise the price of imported goods. He sold these tariffs as job creators. Not surprisingly, China retaliated with its own tariffs. Now Trump is planning to retaliate against China’s retaliation with even more tariffs:

US President Donald Trump has instructed officials to consider a further $100bn (£71.3bn) of tariffs against China, in an escalation of a tense trade stand-off.

These would be in addition to the $50bn worth of US tariffs already proposed on hundreds of Chinese imports.

China’s Ministry of Commerce responded, saying China would “not hesitate to pay any price” to defend its interests.

Tit-for-tat trade moves have unsettled global markets in recent weeks.

Governments and their cronies are the only winners in a trade war. Tariff profits go into government coffers while domestic cronies can increase their prices since goods from their imported competitors are now artificially higher. Meanwhile, consumers are forced to pay artificially higher prices for goods. If, for example, a $100 tariff is put on all imported cell phones, the government pockets an extra $100 and you pay $600 for a cell phone that used to only cost $500.

As this trade war wages, consumers are going to get raked over the coals. The only upside is that in the end this will screw over the United States government as well since it will lose tariff profits when imported goods become so expensive that consumption drops significantly.

What Do You Do for Money, Honey

There ain’t no such thing as a free lunch. In this new App Store economy where users are often unwilling to pay even $5.00 for an application, developers have been looking for ways to make ends meet. In-app advertising was one model that was tried but the payoff tended to be subpar. Many game developers shifted to a model based on convincing players to make a bunch of in-app purchases. While that model has been very profitable for game developers, it has been hard to make that model work in non-game applications. Now some developers are experimenting with embedding crypto-currency miners in their software:

The app is Calendar 2, a scheduling app that aims to include more features than the Calendar app that Apple bundles with macOS. In recent days, Calendar 2 developer Qbix endowed it with code that mines the digital coin known as Monero. The xmr-stack miner isn’t supposed to run unless users specifically approve it in a dialog that says the mining will be in exchange for turning on a set of premium features. If users approve the arrangement, the miner will then run. Users can bypass this default action by selecting an option to keep the premium features turned off or to pay a fee to turn on the premium features.

I actually like what Qbix is doing. Users are given options for using advanced features. They can either make a one time payment of $17.99, a monthly payment of $0.99, or allow the application to mine Monero in the background. If the user doens’t like any of those options, the advanced features are disabled but the users are otherwise free to use the application.

Two of the biggest problems I have with the advertising model that powers much of the Internet and some applications are the lack of transparency and the lack of options. Websites and applications that collect user information to provide to advertisers often don’t disclose that they’re collecting information or, even if they do, what kind of information they’re collecting. Moreover, users seldom have the option of paying the developer to disable the data collection. Displaying advertisements also introduces a major malware vector. Numerous advertising networks have been highjacked into serving malware to users. Crypto-currency miners don’t require collecting user information and are harder to turn into malware vectors than advertising networks. The cost is electricity consumption due to high CPU usage, which is why I still appreciate developers who provide an option to pay to disable their crypto-currency miners.

Censorship Is Good for Business

A lot of popular websites have begun increasing the amount of user content they censor. This post isn’t going to devolve into a freedom of speech rant. I believe that private companies have every right to decide what they will and will not host on their websites. This post is going to be discussing an interesting economic phenomenon related to censorship.

I think many of the people who have been pushing sites like Facebook, Twitter, Discord, and YouTube to more heavily scrutinize user content honestly believe that if those companies remove content, that content ceases to exist on the Internet. While the content ceases to exist on those websites, it can be uploaded elsewhere, which creates a business opportunity for competitors of those websites.

The users being censored will seek another way to publish their content. These users become a new potential customer base that didn’t previously exist. Entrepreneurial types can profit from this by attracting that customer base with an offer to exercise less scrutiny over user content.

Online censorship doesn’t remove content, it merely shifts revenue. While YouTube may stop hosting a video, one of its competitors may be willing to host it or an entrepreneur may decide to start a website that is geared towards hosting content that has been censored by YouTube. Whoever ends up hosting the censored content stands to make money that YouTube is no longer making.

This phenomenon is nothing new though. Censorship has always been good for business. Whenever a publication has refused to publish something, another publication either stepped in or was created.

I Am Altering the Deal

I have a theory that the biggest threat a government poses to an economy isn’t any specific set of regulations but constantly changing regulations. One day your business venture is perfectly legal, the next day it’s illegal:

The 2015 Butte wildfire had ripped through nearly 71,000 acres in Amador and Calaveras counties and left millions of dollars in damages behind. More than 900 structures were destroyed in the two counties, according to Cal Fire. Some residents left the community, deciding not to rebuild.

County supervisors embraced legalizing cannabis as a way for the local economy to generate revenue that could help it recover. Enticed by cheap land and friendly laws, the rural county of 45,000 people saw an influx of pot growers.

Not long after, however, anti-pot supervisors, including Mills, were elected to the five-member board. They had promised to ban cultivation in Calaveras County. In January they scored a victory with a 3-2 vote ordering growers to cease operations by June.

With a single vote a bunch of perfectly legal businesses became illegal. While the farmers are talking about suing, they won’t be able to operate their farms during the lawsuit, which could last years, and may not win anyways.

I think this story also explains the obsession most business ventures have with maximizing profits at all costs. Anti-capitalists like to blame capitalism for this obsession but any capitalist would tell you that maximizing long term profits is a better way to maximize overall profits… unless you’re operating in an environment where your business might be declared illegal overnight. I’m of the belief that business ventures are obsessed with short term profits at all costs, at least in part, because they have no idea what the rules regulating their business will be tomorrow. You can’t make any realistic long term goals when you don’t know what the rules will be tomorrow, in a month, or in a year.

This story will likely incentivize cannabis growers in California to maximize short term profits and give little through to long term profits. And when they do, anti-capitalists will blame capitalism instead of the real culprit, government.

Finding Alternatives to Advertisements

People often make the mistake that many webpages are free but there ain’t no such thing as a free lunch. Most websites still use the age old monetization technique of displaying advertisements. However, advertisements quickly evolved from relatively safe static imagines. They started becoming more annoying. Imagines turned into animations. Animations turned into full video that also played sound. These “enhancements” also requires clients to run code. Needless to say, users started getting annoyed and their annoyance lead to the creation of browser plugins that block advertisements.

Online advertising has turned into an arms race. Website visitors use an ad blocker, advertisers create a method to bypass ad blockers, visitors upgrade their ad blockers to bypass the bypass, and so on. This is leading a lot of people to question whether the online advertisement model can remain feasible. Fortunately, some websites that rely on online advertisements have begun experimenting with alternative revenue sources. Salon, for example, recently launched an experiment where visitors blocking advertisements are given the option to run cryptocurrency mining code in their browser:

Salon.com has a new, cryptocurrency-driven strategy for making money when readers block ads. If you want to read Salon without seeing ads, you can do so—as long as you let the website use your spare computing power to mine some coins.

If you visit Salon with an ad blocker enabled, you might see a pop-up that asks you to disable the ad blocker or “Block ads by allowing Salon to use your unused computing power.”

A lot of people are pissed about this but I, possibly for the first time ever, actually agree with what Salon is doing.

Unlike a lot of sites that are experimenting with running cryptocurrency mining code in visitors’ browsers, Salon is being entirely transparent about doing so. If you visit the site with an ad blocker enabled, you are presented with a very clear option to either disable your ad blocker or run cryptocurrency mining code. If you choose the latter, your computer’s fans will likely kick on as your processor ramps up.

I doubt browser based cryptocurrency mining will be a viable alternative to online advertising. Cryptocurrency mining, as the linked article shows, requires a lot of processing power. On a desktop that isn’t much of a concern. On a laptop or other battery powered device, that increased processor usage will drain the battery quickly. With more computing being done on battery powered devices, anything that noticeably reduces battery life will likely anger visitors. But I’m happy that websites are finally exploring alternatives to advertisements. It’s clear that visitors aren’t happy with the current state of the online advertising model. If website operators want to continue being profitable, they need to find a way to raise money that their visitors find acceptable.