Browsing the archives for the economics category.

Death by Regulation

economics, regulation

Total bliss is just one more regulation away.

Anyone who has read the Black Book of Communism knows that government kills. Death by government even has a name: democide. The staggering death toll of government in the 20th century has been estimated over 150 million people, not including wars. That means the number only includes people killed by “their” government.

Sadly, these studies ignore what Henry Hazlitt called the forgotten man. The forgotten man is not murdered in the night by government agents or starved to death by a dictator. No, he is murdered by bureaucrats who do not know or ever see him. He is killed with regulation.

For example, when the government mandates that cars have good gas mileage, car companies have to make them lighter. Lighter cars give less protection in the event of a collision, leading to more deaths each year. These unintended consequences are not limited to cars, but apply to all consumer products.

Another sad example is when the FDA outlaws potentially life saving medication.

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Equal Opportunity

finance, government, intervention

The poor need not apply.

I was discussing hedge funds with my uncle a few weeks ago and he was impressed that many had very high annual returns.  Of course, with higher returns comes higher risk, as demonstrated by the massive losses hedge funds suffered during the 2008 stock market correction.

However, he was interested enough that he asked me how he could invest in a hedge fund.  I explained that he would have to buy into one with a large sum of money, typically $1-$5 million dollars.

He was disappointed, not so much that the investment was out of his reach, but that the system seemed rigged against poor people.  He didn’t like the idea that there were opportunities only available to the rich.  Rich get richer, and all that.

Well, I didn’t know exactly what to say about that.  Sure, having more capital will always open up more opportunities.  Not many individuals have the savings to start a competitor to FedEx.

I considered trying to justify the minimum buy in by arguing that it lowered administrative costs of dealing with lots of clients.  However, there are other investment vehicles, like close-end mutual funds that are exclusive, too.

Then today, I was reading a little bit about hedge fund history.  Apparently, Regulation D of the Securities Act of 1933 requires that hedge funds be offered solely to “accredited investors.”  What is an accredited investor? 

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The Ridiculous Rahn Curve

economics, taxes

The Rahn Curve indicates two things.  The first is that there exists a single, optimal level of taxation for maximizing economic productivity.   The second is that this maximum is somewhere between 15-25% of GDP.

The first statement is true.  The second is not.

Here is the Rhan Curve:

Notice the pathetic nature of this graph. No grid, no units and no endpoints. It gives us little information but implies a lot.   It implies that GDP can only grow, not shrink.  It implies that what lies outside of the narrow (?) range covered by the graph is unimportant — nothing to see here citizen.  Let’s improve the graph a little:

Here we show that GDP could rise or fall, and some potential values for the curve near 0% and 100% taxation.

I’ve drawn three potential extensions of the Rhan curve.

If the red extension were correct, then without government (0% government spending), then the economy would collapse (presumably due to lack of police services).  On the other hand, giving government total control of the economy would lead to even more impressive GDP growth than the local maximum that was originally marked as optimal.

If the blue curve were correct, then there would not be much to complain about — just that whoever made the original graph was lazy.  One interesting thing about the blue curve is that the economy would remain the same size with either no government or total government.

Finally, if the green curve were correct, then totalitarianism would lead to economic collapse, and anarchy would lead to prosperity.

Of course, drawing lines on the graph does not tell us anything about what is true about the economy.  However, it does help indicate how poorly conceived the Rhan curve is.

In order to maximize economic productivity, there must be every incentive to produce, and little incentive not to produce.  Why do people work?  To get money.  What do taxes do?  Take away their money.  Taxes are clearly a reason to work less.  The higher tax burden is, the less productive people will be.  The lower taxes, the better.  This is not rocket science.  How low can taxes possibly go…?    Zero!

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Sweet

economics, health

Money grows on corn.

The Coca Cola company vowed that they would never change their original cola formula.  Yet, in 1984 they substituted high fructose corn syrup for sugar.   Sugar tastes better than corn syrup, so why the switch?  The government forced them to.

Not directly, of course.  The government simply forced up the price of sugar and pushed down the price of corn syrup.  Then companies like Coca Cola and Pepsi responded.  What’s the proof?  They still use sugar in every other country.

As an aside, let me point out that the government also prevents Coca Cola from putting cocaine in their beverages the way they used to.  People should be free to buy or sell cocaine laced soft drinks if they want to, but that is a matter for another post.

Anyway, it would have been bad enough if the government had simply passed a law forcing companies to use corn syrup instead of sugar.  Instead, they found an even more immoral way to bring about the same effect.  This plan had two parts.  The first part had the following steps:

  1. Take a bunch of money from innocent people.
  2. Keep some of the money.
  3. Give the rest to corn farmers.

The second part had these steps:

  1. Take a bunch of money from innocent people.
  2. Keep some of the money.
  3. Use the rest to suppress foreign sugar competition.

These plans might seem oddly self serving for a public benefit organization like the government.  And they are.

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Unintended Consequences

economics

A baby on an airplane would be safer in a car seat than in his mother’s arms.  Recognizing this, government mandates that infants must fly in a car seat. This makes babies on airplanes safer.  However, many mothers will not be able to afford an extra plane ticket for their infant.  Instead, they will choose to drive to their destination rather than fly.  Since driving is far more dangerous than flying, many infants end up injured or killed as a result of this law.

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Democracy

economics

“The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer.

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Obamagician

economics

The State pretends that it has the power to create wealth, peace and happiness. It writes a few magic words on a piece of legislation, waves the non-partisan wand and, presto, our every desire is realized. Sadly, many people accept this facade of the State as a magic lamp. They see politicians wishing for boondoggles and wars and think, “if I were in charge, I would only wish for good things.”

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Obama’s Job Plan

economics, Feds

Fact:
Barak Obama intends, as President of the United States, to institute a fiscal program that would increase the number of jobs in America by three million, with eighty percent of those jobs in the private sector. Therefore, six hundred thousand of those jobs would be government jobs, filled by employees who are paid from the tax dollars of Americans in the private sector. This plan will, if successful, will help to alleviate the pressures from the mass firings and layoffs of Q3 and Q4 2008. With the unemployment rate of 7.2% being the highest seen in the US in sixteen years, (http://finance.yahoo.com/news/Economy-loses-524000-jobs-in-rb-14013641.html) addressing the causes of unemployment is a matter of national concern.

The average salary for a government worker is $56,000. (http://www.simplyhired.com/a/salary/search/q-Government). Comparatively, the average American worker’s salary is just over $42,000. (http://www.worldsalaries.org/employment-income.shtml). Obama intends to increase the government payroll by $33.6 billion annually. The President’s budget for 2009 provides $14.3 billion in Title I funding for low-income schools. (http://www.gpoaccess.gov/usbudget/fy09/pdf/budget/overview.pdf, page 3). This figure does not include the cost of benefits for government employees. The Bureau of Labor Statistics puts the number of civilian government employees at over 1.8 million. An increase of 600,000 employees is an increase of 33%.

Editorial:
Increasing the number of employed Americans is a good thing. However, this remedy may be worse than the disease. Governments can’t spend their countries out of recessions. When governments attempt to spend their way out of economic downturns, they turn recessions into depressions. Assuming a perfect return of 2.4 million American jobs from Obama’s plan, the plan would return the number of employed Americans to their pre-2008 levels. Of course, now the American people would be also paying $33.6 billion in salary to 600,000 more government employees, and additional billions in the form of government employee benefits.

Instead, Obama should embrace his tax-cut plan. While Congressional Democrats were briefly divided on the plan, history has demonstrated that increased capital in the private sector directly leads to increased employment in the private sector. In a capitalist society, centralized planning leads to inefficiencies in the ability of the market to react to consumer forces. To maximize the economic benefit the American government can have on the American economy, Obama should pursue legislation that plays to the capitalist country’s strengths, rather than mandating weaknesses.

-AC

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Political Corruption

economics

When a peace officer takes a bribe to ignore an illegal act he is engaging in political corruption. This is merely a technical term to describe the selling of political favors. If the crime was malum in se, such as theft, he is behaving immorally. However, if the illegal act in question was merely malum prohibitum, such as smoking marijuana, then the officer is performing a positive market function. This sort of good corruption allows markets to get around oppressive state regulations that would otherwise prevent people from exercising their right to life, liberty and property.

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