Business & Economics: October 2003 Archives

a while back I posted a link to an article in the NYT about Farm subsidies and their effect on the production of food in this country. The important points, for this post, are:

1) Before the mid-1930's, farm economics meant that, for farmers, if the price of corn went down, they would grow more instead of less in order to individually be able to make as much money as they would have at the original price/quantity. As this excess quantity was difficult to transport or sell in its normal form, it was converted to whiskey, and after a while we had, I would say, a serious alcohol problem here.

2) Between the mid-30's and 1972, farm production was kept at a lower level through a system of farm loans and a government operated "ever normal granary"

3) After 1972, due to food riots, the Nixon administration ended the ever normal granary, and instituted straight farm subsidies. Since then, food production has increased just as it did in the past, but now instead of whiskey it the excess is largely converted into things like high-fructose corn syrup. We produce 500 calories more per person per day, and we consume 300 of them ourselves.

I bring this up again because, if this is really the way farm economics is going to work for us, there is someplace else for this excess corn to go: ethanol. We're already growing too much, and farmers are just going to grow as much as they can at whatever price, unless it goes to 0. If what they're turning it into isn't helping (as I drink my third Vernors of the day), then maybe it can/will eventually be used for something arguably much more useful. Maybe this is old news, or uninteresting, but it would be interesting to me to see us go to a third age of corn, from liquor to sugar to fuel.

Bill Hobbs has a good summation of the current spurt of economic growth that'll leave the lefties singing "Springtime for George Bush, and America!" The GDP grew at an astounding 7.2% annual rate in the 3rd quarter of 2003, the strongest showing in a doublepluslong time.

I just bought by parents a new computer from Dell on the Dell website. When I had originally configured it, and tried to send my parents a link so they could just buy what I had configured, it didn't work, so I had to do it again about a week later. When I re-did it, I went through dell small business instead of their regular home user site. The exact same computer was over $200 less.

I believe this is well known about Dells site; I knew about it beforehand but had forgotten and just got lucky that my parents couldn't buy the first PC. But this isn't how the internet is supposed to work! I'm supposed to be able to go to places like pricewatch or just search around the web and find myself the best price. But places like amazon.com and airlines have been price discriminating for a while on the internet. As retailers are able to gather more and more information about us, price discrimination on the internet is growing rapidly.

There is an article in last weeks Economist about this very subject. Unfortunately it's in their premium content section, but I can link to the paper they site, "Privacy, Economics and Price Discrimination on the internet", by Andrew Odlyzko.

Price discrimination is much more difficult for goods than it is services - theoretically a secondary market for Dell computers could open up, if I bought a ton from dell small business and tried to sell them at some middle price point. Heck, this type of reselling is big news right now, when it comes to perscription drugs. But this can't happen for airline tickets due to federal law about who's name has to be on the ticket, and services are impossible to resell - look at the price discrimination (scholarships) at Universities for a good example.

The real difficulty of price discrimination is that people loathe it. The idea of paying more than someone else had to drives people nuts. So the key is to either find a way to make it acceptable (such as the aforementioned scholarships), mask or protect it with laws (airlines), or hide it. From the economist:

They already discriminate in the non-electronic world: petrol stations, for example, charge more in some parts of town than in others. But two techniques look likely to flourish: loyalty clubs, which extract additional information from members and give them discounts; and “bundling”, or the offering of packages of services, partly in order to make it harder for consumers to compare the prices of individual components.

The Washington Times reports that American Airlines is turning a slight profit. That's good, and what I would expect. Does this mean that they'll start paying back the $900 million in cash plus additional loan guarantees that the people of the United States gave the company two years ago? Not likely.

I'm not saying that it should be paid back, necessarily. I've wavered over whether or not the post-9/11 bailout of the airline industry was a good idea, but I tend to think it wasn't. Yes, many airlines would have gone out of business, but that would have been a good thing. It's not like the planes would just vanish, or even stop flying (most likely); the horribly mismanaged and poorly organized relics of the past century would likely have been reorganized and rebuilt using the more successful business models of Southwest and JetBlue.

One of the biggest advantages held by the later two airlines is that they only fly one or two types of plane. Pilot, air crews, and mechanics are normally only trained and certified on a single type of aircraft, and the older airlines' wide variety of different planes tends to push their labor costs through the roof. Having a variety of planes can save money if the most efficient plane for each length journey is always used, but such theoretical savings are never realized. On the contrary, the large fleets are not flexible enough to allocate planes in an optimally efficient manner, and they are terribly expensive to maintain. Planes and crews may sit idle because they are not compatible with each other.

Plus, the old airlines are built around business travellers, and with the tightened belts of the past few years even business travellers are scouring the web for cheap tickets.

In general, I think that we as a society need to be willing to let giant corporations fail, rather than bail them out. By my understanding, one of the reasons Japan's economy has stagnated over the past 15 years is because of government bailouts of unprofitable companies -- I certainly don't want America to meet that same fate. Failing companies will hit the stock market in the short-term, but once their assets are reallocated and restructured the economy will be better off from the gain in efficiency.

I've talked about the Fed, and I've talked about gold, but now I want to talk about an assumption that I think is maybe a stretch. Specifically, the assumption that the money we use is Fiat, that its value is based only on the word of the bankers or the Fed.

I learned about the real bills doctrine in college; one of my main sources, here, is an article written by one of my UCLA professors, without whom I likely would not have graduated. So I may be biased. But I would like to talk about it anyway, because I think the real bills doctrine is important, even if many economists believe "The dead horses of economic theory have a habit of suddenly springing back to life again, which is why it is necessary to beat them even when they appear lifeless."

The basic tenent of the real bills doctrine is that, with or without gold, the Fiat money we use today actually does have backing; You can have money that is backed but inconvertable. The main result of this concept is that "money issued in exchange for sufficient security (usually short-term commercial bills) will not cause inflation."

Of course, this does not address the problem that inflation sometimes IS caused by central banks, but it is only because they issue it without sufficent security. The federal reserve actually does hold assets, just like other central banks, and it is against this that it issues federal reserve notes. The Feds balance sheets identifies them as "Collateral Held Against Federal Reseve Notes". So if the money is fiat, why the backing?

Money is not Fiat. The fed holds assets against the notes it issues, as backing, including but not restricted to gold. Money's value is not based on scarcity, or the word of the bankers. When banks fail to take a sufficient amount of assets in to back newly printed money, inflation results. This is not due to the fiat nature of modern money but due to the way it is backed; Under the gold standard or anything else, banks can print more money and cause inflation, the backing is irrelevant.

I do not wish to reproduce the whole paper here in my post. But I believe it is important for people to read it, as it is not particularly long.

There are other issues here though. As I've said before, the gold standard and money convertability does us no good, if convertibility can be suspended. If someone can suspend it for a weekend, they can spend it for a million years. The government has suspended convertibility before, and even if the gold standard was reinstated, it would do it again. The real bills doctrine admits that inflation is going to occur if money is issued without sufficent security. So, even if the real bills doctrine is true, and all money is backed but inconvertable, we still have to deal with danger that the fed isn't going to actually do it's job, or, in other countries, that the government is just going to go on a printing spree and stuff its pockets with the excess. Unfortunately, so long as there are governments, this risk exists. The gold standard doesn't protect us from eminent domain. It doesn't protect us from the goverment revaluing the dollar overnight, after they find a few billion dollars in their bedstands.

I'm getting off topic now (remember, money is backed!), but I imagine the only way that a gold-standard could be safe is if money was actually made of gold. Otherwise, there is nothing stopping governments from re-valuing their currency vs gold. Of course, then the alchemists would all become government employees. Or, amazingly, at the first sign of crisis the government would change the rules.

There is an interesting article here in the economist about the current monetary system and the gold standard, and specifically problems we are facing now which may be directly related to a lack of trust in central bankers.

There seems to be some misperceptions about the gold standard, so I'm going to try to talk about the good and bad of it, and maybe explain why we will never never ever go back to it, ever, never ever. Maybe after a nuclear war or captain trips, but I would be surprised if it was before that.

The gold standard in this country was begun in 1900, with the Gold Standard Act. Before that we used a bimetallic system, but it was basically a gold standard as little silver was traded.

This only lasted until 1933, when Roosevelt outlawed private gold ownership. After WWII, the Bretton Woods system was put in place - it set a fixed global exchange rate for gold, I think at $35 an ounce.

That ended in 1971, when Nixon ended it, and since then there have been no formal links between currencies and any commodity.

A gold standard, at its heart, prevents a rapid increase in the money supply, and the inflation associated with it. If the government prints a bunch of bills, there will be more supply than demand for money, and people will eventually start turning it in for gold until the treasury has none left.

The problem here is that there is more than one factor that causes inflation. There are 4:

Supply of money increases
Supply of goods decreases
Demand for money decreases
Demand for goods increases

I'll just quote a real economist here, stolen from about.com:

Economist Michael D. Bordo explains:

"Because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8.

Basically, economies of the world were way more unstable under the gold standard, as governments and central banks had control over absolutely nothing. The gold standard prevents long term inflation, and does nothing else. It does not allow for changes in exchange rates between countries due to relative economic changes, it does not allow for any central control of the money supply (other than maybe through alchemy). The only argument for a Gold Standard seems to come from fear that the government or central bank in charge can't be trusted to keep inflation low. If you don't trust them to keep inflation low, why do you trust them to stay on the gold standard even if they went back?

A large part of economic analysis is based on the concept of utility. Utility is, basically, something that people all try to maximize. It's an amalgamation of money, happiness, whatever the heck ever that people individually want. It is assumed that people have complete information about what maximizes their own utility, and probably are equally well informed about what to do to get what they want. They're basically omniscient. This is all complete bullshit.

My favorite example of how people aren't maximizing any kind of utility, because they don't have a clue what is going on, is their ability to access risk. People are afraid to fly, but they drive every day where they would be hard pressed to find a common behavior that is more unsafe. Piles of people freaked out when anthrax hit, when a whopping four people died. People were wearing SARS masks...but I'm not sure how bad an idea that is, in some places masks may be a good idea all the time. The point is people don't have a friggan clue. People from Beverly Hills high seem to have a high rate of cancer, perhaps due to an oil rig next door. How do you even begin to access a risk like this anyway, much less on an individual basis? Now, you can argue that part of "utility" is peoples psychological well being, so their perception of the risk could be more important than the actual risk, but then you'd have to measure people's psychology. Good luck.

I have no point.

The idea of capitalism as a moral system, or the most moral system, is very strange to me. But first, I think it's important to say that what would happen in an actual capitalist economy is hard to say for certain, because it's never happened.

One of three things would have to happen for actual capitalism to occur. They all have to do with government. While government is political and capitalism is economic, all political systems end up distorting whatever economic systems they try to have in place. In my opinion, true, free market capitalism will not occur without either:

One-World government

No Government

All the governments of the world scrapping all regulation of trade, and internal regulation of markets.

Obviously condition 1 is not going to happen, and even if it did who's to say that government would actually give a shit about capitalism. The other two options are also pretty unlikely. Capitalism, at least pure capitalism, is not going to happen.

But is this bad? I don't blame the governments for not caring about capitalism, because capitalism does not care about them, or us. It doesn't care about anyone. Economic systems are at their heart amoral - the government’s application and manipulation of these economic systems is what would truly determine any systems morality.

Let’s look at the United States. Probably the closest thing to a capitalist economy in the world today, but that doesn't keep the state from seriously distorting the markets. Some examples:

Patents and copyrights (these, sadly, have nothing to do with capitalism)
Fiat money and a monopoly on the printing and issuing of money.
Corporations as legal entities, equivalent to a person
Eminent Domain
Trade embargos, tariffs, and subsidies of domestic products (especially farming)
Income Tax
Favorable tax status or other business incentives

My favorite one on this list, and one I've been thinking about a lot, is Corporations as legal entities. This has been the norm in this country for about 100 years, and thanks to the golden state of Delaware the rules and costs of incorporation are...lax, at best. But what kind of effect would this have on capitalism? Capitalism is besotted with non-market problems referred to as "externalities". Pollution is the most common and recognizable market externality, often referred to as part of the "Tragedy of the commons". No one owns it, so no one wants to pay to keep it clean. How this relates to corporations as legal entities is that most people do not make a significant amount of money through pollution, but some corporations can and do. While the government makes some efforts to regulate or internalize the externalities through pollution payments and the like, for the most part even if the Corporation violates these rules, only the corporation is liable, not the people who actually made the decisions, as the corporation is a legal entity.

I make no claims that this is the wrong way to do things, or that this is somehow immoral. But the next time you think to complain about political correctness or people not taking responsibility for their actions, think about whom else in this country doesn't take responsibility.

A lot of these problems are fixable; a few are not. Either way this says almost nothing about the overall morality of any system. How can socialism be less moral than capitalism, as it is practiced here? How much of the redistributed wealth was earned only because of government regulations or rule in someone’s favor? Who's to say? There is a pretty strong argument for "poor people are bad for the economy and for society". Does capitalism in its purest form solve these problems? I haven't seen it. That doesn't, of course, make Socialism right, or any kind of redistribution of wealth (even if the wealth was just printed by the government anyway...). But it doesn't make either system, or any system (federalism, communism, I don't care) less or more "Moral".

I was talking to my brother earlier about the supermarket workers strike, and he had a pretty choice quote:

"Why the heck are they striking, man? They've already struck gold!"

This was in response to some of the wages that these people were making; While obviously not everyone is paid the same (I'm living proof some people get paid less!) even some of the middling pay rates were higher than anything my english-major brother was making as either skate park manager or "Cabana Pat, the backyard concierge".

Of course, I don't think these strikes are about wages, but benefits, and this is where it gets kind of hairy. I have no idea how much their benefits are changing, but I do know that the cost of medical benefits in the last few years have gone completely insane, and this is a big problem for business in california, as well as the workers, and "something" needs to be done about it. My first response is to deregulate em all and let the market sort em out, but that isn't always the best solution.

The LA Times (and others) is claiming that the grocery workers' strike is causing turmoil and confusion, but I went shopping last night and didn't really notice anything was amiss. Could it be that huge numbers of picketers and protesters only show up when there are journalists and cameras around?

Shoppers in Southern California arrived at their local supermarkets Sunday to buy groceries, only to find turmoil as thousands of union workers picketed the region's three largest chains. ...

"Support our picket lines! Don't shop at this store!" sign-wielding clerks yelled out to customers pulling into the parking lot of a Vons in Eagle Rock.

Picketing workers discouraged many customers from entering the stores, leaving aisles mostly deserted. Those who crossed the picket lines to shop found a few clerks fumbling with the store's cash registers.

"It's very bad in there," said Sondra Alcantara, as she lifted her bags into the back of her SUV at the Eagle Rock Vons. "The guy didn't know what he was doing," she said, adding that he tried to give her change twice.

Yeah, there's no way that non-union workers could possibly provide the level of service we're used to at our grocery stores. I mean, it takes intense training for a half-dozen people to stand around talking instead of opening a new check-out station just because there are 10 people in line. Give me a break.

Workers walking the picket lines at stores around the Southland said they were disappointed that things had come down to a strike, but they insisted that they were prepared to hold out for as long as it took to preserve their health care and pension benefits, which the companies are intent on rolling back.

"I get paid 80 cents above minimum wage," said Gina Guglielmotti, a floral clerk overseeing locked-out workers at a Pasadena Ralphs. "People just don't realize what we're fighting for. They think we're ungrateful. But we want to stop the constant degression of wages."

It's possible that the work you perform isn't worth as much as you think it is. Also, I've never heard of a grocery union worker making that little. I know people who work at and manage grocery stores, and no one makes that little there unless they've just been hired. The LA Times does give some hard numbers:

UFCW negotiators are seeking hourly wage increases of 50 cents the first year and 45 cents each of the following two years. Veteran clerks and stockers now earn as much as $17.90 an hour. Meat cutters, the highest-paid union employees, earn up to $19.18 an hour. Baggers earn up to $7.40 an hour.

It shouldn't be a surprise to anyone that the store owners think they can get a better deal than that for what amounts to unskilled labor. Here are some more numbers, and while the average wage isn't $15 an hour, it's far above the statutory minimum.

I feel pretty much like one shopper who ignored the strikers outside his favorite store:

Indeed, although most people appeared sympathetic to the strikers, yelling out support or honking their horns, some gave them a thumbs down or called them names as they passed by.

"The gravy train is over," yelled one man, as he strode from the Eagle Rock store, not wanting to be interviewed.

Somehow, I have a feeling this strike will have about as much effect as the transit worker strike in 2000: no one will care.

I was reading an article in the New York Times today that someone sent me, here which talks about the well-publicized "obesity epidemic" in this country. It approaches it in a much different way than what I had read and seen up till now. The gist of the article is that the obesity epidemic seems to coincide with a radical change in our country's agricultural policies. Between the 1930's and 1972, the government tried to smooth out food prices by offering farmers loans with their corn as collateral when the price of corn was below a set price. The Farmer could either hold onto his corn until the price went up, and then sell it and pay the loan back, or he could just give his corn to the government and then keep the money from the loan. The government kept any corn it got and stored it in its own granary, and would sell it when prices went up, often at a profit.

This was all done because, during the depression (and before) farmers would overproduce. If prices fell, farmers would try to grow more in order to keep the same income, which would in turn depress prices further.

In 1972, due to various factors, food prices began to rise to a point where people began to stage food protests. The Nixon administration then changed the rules to just straight farm subsidies, to avoid anything close to a food shortage ever again.

Now, relative to 1972, farmers produce about 500 calories more per person today, and we consume 300 of those each.

The most interesting assertion in the article is that portions are larger now because it is much cheaper and easier to just increase portion sizes, and use that as a competition point, than it is to compete on price. This of course is due to the ridiculous supply of food, which is a direct result in the rules changes in 1972.

Anyway, I haven't summarized anything in quite a while, so sue me. Read the article, you might just learn something.

A few weeks ago I was talking to Michael about intellectual property (specifically, patents and copyrights) and proposed that these things are artificial and probably completely unnecessary. Unfortunately, when challenged at the time I was unable to formulate any kind of an argument, other than, in effect, "just because something seems to have always been a certian way, or because you can't really concieve of how else it would work, doesn't mean it's correct or even necessary." Pretty weak, and not at all descriptive of how we would expect things like "innovation" or actual investment in new technologies to happen without patents, or for art and other activities, copyrights.

I've thought about the issue quite a bit more, and have not come up with any definitive answers. I have, however, put together some points of focus, questions that need to be asked, etc - organizing the problem and, I think, making the solution to the problem of "no IP" a bit easier to eventually get to.

Copyrights and patents are not that old. I believe the first patent law wasn't enacted until 1623, and the Statute of Anne was enacted in 1710. To say there was no innovation, or investment, or creation of works that would today be worth copyrighting before 1623 or 1710 seems to be incorrect. These facts don't really make any statement about the validity of copyrights or patents; You could just call them "advances in business technology" or something similar if you wanted, but I think it does demonstrate that the advance of technology does not grind to a halt without these concepts in place.

In effect, copyrights and patents are a state-created monopoly for a set period of time. But the necessity of this action has yet to be proved in any way. No one seems to think monopolies are good, so why would ones created by the state be different? Companies that create original products or works still have a period of monopoly - however long it takes for someone else to copy everything about it. In some cases, they are uncopyable - you can distribute all the CDs you want of a band, but you'd be hard pressed to form your own band, performing the songs off the CD, and draw the same crowd to your concert. For businesses, your monopoly would last as long as you could keep your invention secret, through obsfucation or trade secrets or anything other than government coercion. While I don't think that would last very long for most things, that doesn't mean that there would be no profit to be made, even after someone tried to copy you. Plenty of companys continue to compete in businesses where nothing they produce or do is covered by any IP laws, but they still find a way to profit.

I think a good (or at least popular) example of what may happen in the modern age without patents would be the software industry. Software patents are a very recent invention, and have been fraught with problems since their inception. Before their conception (at least in the US), we didn't have a shortage of creativity, new algorithims, etc, and the industry flourished. Perhaps it was just a young industry that, once it "matured" needed stronger IP laws. And of course they still benefited from copyrights if not from patents. But there is still no evidence that these things are needed. You do not need a copyright to sell people support for the software you make, nor do you need a patent on one-clicking or something equally ridiculous to compete in the marketplace. These are small examples and there may be a flood of instances where nothing would have been done without strong patent or copyright law, but I haven't heard of it.

Patents and Copyrights are, (unfortunately?) not universally recognized. The US has worked hard to push our IP laws on other countries, but it is far from complete. One statement Michael made was that places like China, who have weak to nonexistant copyright laws and patent laws, don't create anything. In regards to art, or other copyrightable material, that seems wrong. But most asian artists are forced to make their money through tours, personal appearances, and corporate sponsorship as opposed to CD sales. I cannot say if this is "good" or "bad", but I do not see a lack of innovation. With patents in china, while it is obvious they are behind technologically, I do not think it is fair to blame a lack of patent IP when looking at a huge, largely rural still communist contry in comparison to the western world. Historically, china produced a ridiculous amount of important technology, well before patents were in place. 40 years of communism, not patents, seems a much easier target for any blame on Chinas technological development.

The point of all this is really just an intellectual exercise, of course - plenty of people have said the same things I say here better. But they need to be said, and said again. Intellectual property is completely artificial, a relatively new concept, and, I'd say, unproven in its merits. The experiment to prove its merits is beyond me at this moment, but suffice to say development and creativity happened on a large scale before copyrights and patents, and I'd be hard pressed to believe it would cease if they went away tomorrow.

I haven't seen any news articles to this effect yet, but I imagine that the success of the recall and the election of Arnold have caused car sales in California to temporarily plummet. Why? Because the tripling of the Vehicle License Fee ("car tax") went into effect October 1st, 2003, and Arnold has vowed to repeal it.

As it stands, the VLF is 2% of the value of the car, but once it is discounted again (assuming Arnold follows through) it will be reduced back to 0.65%. So, for example, a family considering buying a new $20,000 sedan will pay a VLF of $400 if they buy now, but only $130 if they buy... next month? Next year? No one knows, and so I imagine no one is buying.

There's a strong push in California to eliminate the VLF entirely, but with the budget deficit that's another $2 billion Arnold would need to cut from elsewhere. I'm not holding my breath.

Bill Hobbs reports that this Thursday is the first birthday of the Bush Bull Market, and he points to an Atlanta Journal-Constitution article which says:

• As of Friday's close, the Dow Jones industrial average has risen 31.4 percent since Oct. 9, 2002.
• The Standard & Poor's 500 index is up 32.6 percent.
• And the technology-loaded Nasdaq composite index is up a stunning 68.8 percent.
Those gains rival historical norms, including the robust annual growth rates of the 1990s market boom.

The stock market recaptured $3 trillion in value of the $8.5 trillion that was lost between March 2000 and October 2002, according to the Wilshire 5000 index. And the rebound is worldwide. This means that, barring a calamity of epic proportions, the stock market will end its dreadful drought by posting positive numbers for calendar 2003, the first since 1999.

Bill and Dean Esmay (in the comments) blame the Bush tax cut, which is reasonable, but don't discount the positive economic impact of the War on Terror. Good stuff!