The Chart Obama Does NOT Want You To See

The MSM will be pointing at a fractional reduction in one measure of "unemployment" that conveniently doesn't count the people who have been out of work so long they no longer qualify for unemployment insurance payments. This is the Bureau of Labor Statistics' chart showing the percentage of people over 16 who have a job:

Capital Games: Buffet BS.

The new proposal to "close loopholes" that allow "rich people" like Warren Buffet to pay a lower (capital gains) tax rate than his secretary pays (on current earned income) offers an enlightened Republican response that is not only reasonable, but ought to be supported by a broad base of the electorate.

The problem with comparing long-term capital gains apples to other income oranges is that the former treats purely paper "gains" as if they were real. Let's try a hypothetical example to flesh this out:

Suppose that ten years ago, I bought shares in a European company at €100/share. On the exact same day, a German citizen also bought shares at that same price. (Over the intervening years, we may or may not have gotten dividends from the company, in which case we'd have paid taxes on those dividends. Whether we did or not has no real bearing on the rest of this.) Today, we each sell our shares, at exactly €100/share. We didn't make any long-term capital gain on our shares, but we didn't lose any either.

But wait. In the intervening decade, the US Dollar lost value against the Euro. My broker puts $150 into my account for every share I sold. (A "low" inflation rate of just over 4% is all it takes to erode 50% of the purchasing power of a unit of currency in just ten years.) And now the IRS tells me I have to pay tax on that $50/share "profit". Never mind that $150 today isn't worth any more than $100 ten years ago.

Why should I be taxed for my $50/share "profit" when I have not really profited at all. My German counterpart pays no tax for two reasons: First, the Bundeszentralamt für Steuern (Federal Central Tax Office) would not consider him to have made a profit by selling for precisely what he'd originally paid for the asset. Secondly, Germany taxes capital gains at the rate of ZERO.

Now, my proposal is not to calculate capital gains in Euros or any other currency that gains and loses value. Instead, I propose that real capital gains on assets held over a year be taxed at the same rate as any other income, but that the calculation of what actually constitutes a "gain" in the first place.

A slight increase in complexity of calculating the profit/loss for an asset held over a year is required: The taxpayer should be allowed to refer to a published table of an appropriate inflation index (such as CPI) to calculate what tax codes call a "stepped-up basis" in the asset: The taxpayer would be allowed to subtract the value in current dollars of their original investment.

What would the effect be of this proposal? For assets held just a few years that appreciate very quickly, the effective tax rate could actually go up a bit from what people are currently paying, but for assets held for a longer time, it will go down or even be eliminated in the case of assets that do not gain any real value. I don't know whether it would be revenue-neutral, but it would be a fairer way to tax capital gains, and it would encourage people to make long-term investments, which should be good for the economy.

I do know this: it would deprive the Left of one of their big class-warfare weapons. They could no longer point to "special loopholes for rich people" to gain votes. It would also deprive the government of the perverse incentive to print too much money, debase the currency, and get to collect tax on inflationary "gains".

And because Warren Buffet makes a lot of money on capital gains, he ought to get his wish, and pay a higher rate.
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"I Don't Understand" with Obama

Neal Boortz describes this video with the tweet: "So simple even a liberal Democrat could understand it."

He may be a bit optimistic about that. In my experience, they recoil at any DoublePlusUngood CrimeThink.

Quantitative Easing Explained

Obama vs. JFK on Tax Cuts

Just saw this tweet and couldn't agree more:
JazzShaw GENIUS from the Winston Group. Obama vs. JFK on the benefits of tax cuts. RT THIS! http://bit.ly/bhxbU8

Threely for this post: http://3.ly/BHOvJFK

Cookie Dough

The deluge of red ink generated by the current Congress and Administration has brought into sharp focus the phenomenon of inflation. Unfortunately, as seems to be the case on virtually every area where government action impinges upon economies, there's so much disinformation that people don't understand what's going on. So, I'm going to explain it in really simple terms. This could take a while, so settle down in your easy chair and we'll start off with a story about Mrs. Smith's cookies....

Every Saturday morning, while Mr. Smith is down at the office catching up on work, Mrs. Smith and her three kids have a regular routine. Each of them has a list of chores to do; Mom's list includes baking a batch of chocolate chip cookies to reward them for getting the jobs done. She always bakes an even dozen, nice large cookies, which allows for each of them to have three cookies.

One day, the eldest, Johnny, tells his mom that it isn't fair that he does more work than his younger brother and sister, but gets the same reward, and insists that he should get four cookies instead of just three. Mrs. Smith thinks about it, and makes thirteen cookies so that Johnny can get four, while everyone else only gets three. Well, you don't have to be Nostradamus to predict out what happens next. Mary thinks she's doing more than little Billy, so she ought to get four cookies too, so the week after Mrs. Smith makes fourteen cookies. Now Billy is upset because he doesn't get as many as his older brother and sister, and he wants four cookies too!

Soon they're up to sixteen cookies, four each. But Mrs. Smith isn't mixing up a larger batch of cookie dough; she's just making each cookie 33% smaller than she did before. Everyone has more cookies, but since there's not any more dough, they aren't getting more to eat.

If you can understand the difference between "more cookies" and "more dough", then you're well on your way to understanding inflation.

Once upon a time, money was based on some objective standard of value. Many tribal cultures that herded animals used livestock in their trading activities. The very word "pecuniary" came to English from the Latin word for cattle, "pecus". But cattle are not interchangeable; some are of superior value to others, (as the President's penchant for Wagyu beef demonstrates) making accounting with such a "currency" rather imprecise.

Humans have always considered certain minerals to be precious; the varying quality issues that plague the use of livestock to measure value go away once the technology exists to refine metals such as silver and gold to standardized levels of purity. Those metals are entirely fungible. Most cultures that possessed that technology settled upon either or both of those two metals to define their currency. The US Dollar was originally based upon the Spanish Dollar, a 90% silver coin (about 25.5g silver content) produced in Mexico and Peru as well as Spain itself. Our Constitution forbids any state from making anything other than gold or silver coin legal tender, which suggests the extent to which those the Framers considered those two metals good objective measures of wealth.

What does this have to do with cookie dough? Back when gold and silver were used in coins, governments would sometimes "debase" the coins by reducing their precious metal content. When that happened, even though the new coins had the same name and nominal value as the old ones, they weren't worth as much. Johnny may not realize that his four new cookies have no more dough in them than the three old cookies, but his stomach is no more full. Some people may not notice that the new coins have less silver or gold than the old ones, but some do. When governments put more money into an economy in proportion to the goods and services that money can buy, it drives prices up in that same proportion. If there are 33% more dollars in circulation, with the same level of production, what once cost $3 will cost $4.

This is where the Clever Kids will complain that you can't argue by analogy, and the Cookie Dough Story is far too simplistic. Of course, it's simplistic, because, as I've said before, all economics discussion is "all other things being equal". Fiscal policy doesn't exist in a vacuum; increases in the supply of dollars don't just relate to the goods and services in the US economy, because those dollars can be spent anywhere in the world. Further, inflation depends not only on how many dollars are in circulation at any given point in time, but also on expectations of the future. But the long-term relationship cannot be denied; stable prices depend on stability of the ratio of the money supply to the goods and services available for that money to purchase.

Since we no longer make any pretense of tying our currency to an objective standard of value, and instead leave it to the Board of Governors of the Federal Reserve System to manage the money supply (within the constraints of the spending authorized by Congress and the willingness of the market to purchase instruments of US Government debt), there can no longer be a sudden increase in the money supply such as followed the discovery of gold and silver deposits in the New World. Changes in the money supply are now entirely under the control of the government. It is therefore particularly galling that an asset held over a period of time may be sold at a paper "profit" representing nothing more than the inflation of the money supply.

Consider that with the low inflation rate of 3% per year, an asset need only be held for nine years and nine months for it to experience a purely paper increase in value by the same 33 1/3% as the Smith family cookies. And then, the same government that created that inflation will tax that 33 1/3% "profit". At the 20% capital gains tax rate set to return soon, the paper value of the asset must exceed the inflation rate by a quarter (3.75% if inflation is 3%, 5% if inflation is 4%, etc.) just to leave enough after paying the IRS (not including any state income tax) to have money worth the original purchase price of the asset. An honest tax code would index all capital gains to inflation, so that these paper gains are not taxed.

But under our current tax code, inflation is a double tax. As the above shows, it taxes as "income" these illusory gains. It is also a hidden tax on cash assets (including bank accounts, or contractual obligations of others to pay future amounts defined as some number of dollars. The uncertainty of how severe inflation may be in the future acts as a powerful disincentive to make long-term investments. A common criticism of US corporate culture is the obsession with "this quarter's profits", to the detriment of long-term considerations. How sophisticated are our betters in Europe, who make five-year plans, the Japanese who think in decades, or the Chinese who think in centuries! Well, is it any wonder, under the circumstances?

When people weigh investment decisions, they have to factor in the inherently uncertain nature of the returns to be had. It's one thing to sell your labor today for a specific amount of money; you know exactly what value you'll be getting in exchange for the time and effort you invest to earn it. But a decision to spend today in the hope that it will pay off many years hence is based on considering a wide range of possibilities: A continuum of returns, starting at none and increasing, with various probabilities for each, can be estimated and quantified. The popularity of lotteries and casinos indicates that some people are willing to make a bet that is unlikely to pay off, but that is self-correcting. The people who make rational decisions about risk and reward (and return with the capital to continue doing so) will always limit the former as compared to the latter.

Government policies introduce further uncertainty into that calculus (and I mean "calculus" quite literally; if you don't use that branch of mathematics, or rules of thumb derived from it, in making investment decisions, you probably aren't doing a good job of it). There is great risk that the money supply will be greatly inflated, robbing our currency of its value, and paper profits will then be taxed away, in reality robbing the asset of part of the little value it retains. Combine that with the knowledge that the Bush tax cuts will go away automatically, little if anything is likely to be done about it, and whatever is done will likewise be temporary (the next Congress will want to fiddle with taxes again; it's just what they do), and you have a recipe not for tasty cookies, but for economic disaster.
[Click on the title above, or date stamp below, to see the full article.]

I Love FedEx!

H/T to Neal Boortz for this story on Federal Express's plans to cancel 30 Boeing 777 cargo planes ($7 billion worth) if the "card check" bill passes Congress and gets signed into law. You see, FedEx had a little clause inserted into the contract for the planes for just such a contingency. And now they've said that they will use it.

Money quote emailed to Neal from a FedEx worker:

"I am in my 14th year with Fedex. Union organizers used to come around every year. Employee would throw stuff at them, scream at them telling them to have sex with themselves. Have not seen the organizers for the last 5 or 6 years. My message to them: the day I quit is the day Fedex becomes unionized."

Obama doubles-down, Doubles-back

The headline reads:

"Obama plans small-business lending boost"

UPDATE -
WooHoo! In the time it took to write this post, the AP has changed it to "Obama offers more aid to small businesses" - (Double-Plus GoodSpeak!)

...but the first line may have been the more telling part:

"The Obama administration announced Monday that the 21 largest banks receiving government money must report monthly on how much lending they do to small businesses."

All the better to find you with my dear.

Toward the bottom of the story we find one of the ways that Obama hopes to have a couple of "small businesses" around after the upcoming budget-blood-bath, so that there's someone left to pay for all of the new entitlement programs:

The plan comes amid Republican efforts to cast doubt about Obama's ambitious budget, in particular the proposal to raise taxes, starting in 2011, on individuals earning more than $200,000 and on households earning more than $250,000. Those provisions also hit small businesses.

Geithner also ordered the Internal Revenue Service to issue a series of new rules for temporary but significant tax breaks, meaning that small businesses:

-That earn up to $15 million will be allowed to claim losses for the past five years in the current tax year;

-May write off up to $250,000 in investments this year.

-Can reduce estimated tax payments to 90 percent of the previous year's filing.

-Are allowed to take larger depreciation deductions within the first year of property purchases.

-And will see 75 percent of capital gains excluded for those who invest in small businesses.

Okay,.... but...

Didn't The One base his entire campaign on class-warfare and promises of "Eat the Rich" policies?

Hasn't he and his tireless and eternal PR division (Hey, MSM-anchors - come on up here and take a bow!) made it abundantly clear that anyone who makes upward of $250,000 annually is, in fact, among the hated "Rich" who must be punished for their success and taxed disproportionately in order to keep the money flowing to the "entitled" - in the name of 'fairness'?

So... doesn't that really mean that Geithner's orders to the IRS are.. well...

..."Tax Cuts for the Rich"?


But - what about all that "We are the ones we've been waiting for" - ?

Just askin' is all.

- MuscleDaddy

Congress Sends White House Auto Aid Proposal...

Ok - it's not the Triple-Digit-Billion tag they wanted the first time around...

"The measure would rush bridge loans to Detroit's struggling Big Three but would also demand that the auto industry restructure itself in order to survive and would put an overseer chosen by President George W. Bush in charge of monitoring that effort, according to a draft obtained by The Associated Press."

Yeah, huh?

Okay - I nominate John Bolton.
(yeah they tell the story with a sneer, but that actually makes it better)


- MuscleDaddy

Iowahawk: Lemon

Paul A. sent us a tip about Iowahawk's latest, a look at what we can expect from the UAW Bailout:

All new for 2012, the Pelosi GTxi SS/Rt Sport Edition is the mandatory American car so advanced it took $100 billion and an entire Congress to design it. We started with same reliable 7-way hybrid ethanol-biodeisel-electric-clean coal-wind-solar-pedal power plant behind the base model Pelosi, but packed it with extra oomph and the sassy styling pizazz that tells the world that 1974 Detroit is back again -- with a vengeance

That's just a taste. You owe it to your funny bone to read the whole thing.

Tumor, Inc.

Very interesting, if somewhat dense, essay on how free market principles and Big Business' corporate interests are not the same, and why everybody confuses the two.

Call me a rube, but I don't understand this notion of a business being "too big to fail." How does this happen? As I recently wrote to a friend whose professional expertise I sought to tap for an answer: If a skyscraper was discovered to be built on sinking sand, with rotting i-beams, wouldn't it have to come down regardless of how big it was, or how many people would be put out of work due to the high number of offices it housed? Maybe the analogy is too simplistic, but I just don't understand how sheer corporate size and the variety of tentacles a company has embedded throughout our economy insulate the company from the consequences of mismanagement, unhealthy risk-taking, or an obsolete business model. Hmm . . . a large mass with complicating tentacles making removal impossible. AIG or cancer? You make the call.

Senate's War For Oil Profits

So, you had to work an extra day's overtime last weekend? Well, even though you didn't get to relax with your family, and you didn't even get paid time-and-a-half for your extra effort -- just straight time, one extra day's pay.



But wait! The U.S. Senate has just hauled your rear end into their "court". Seems that they think you're just as bad as Big Oil.



That's right. You got an extra day's pay for an extra eight hour shift. That's 20% extra pay for the week. A windfall profit! They call you an Evil Capitalist.



You argue that you're different from Big Oil. You claim that your boss forced you to work that weekend.



So what? That committee of Senators points out that your profits for the week are 20% higher than your profits for the previous week. Just like Big Oil this year versus last year. It's a windfall.



But, you argue that your pay was the same per hour -- it was just the extra time you had to spend that was different. It wasn't a "windfall".



The committee is not amused. They point out that Big Oil's pay was the same per cost, too -- it was just the extra costs they had to spend that was different. To remain in business, they were forced (by some Arabs) to pay much more for the oil they refined into gasoline. Their costs went way up, but they still only charged 9% over the costs -- the same $1.09 for every $1 they spent buying and refining the oil. That was the same 9% profit margin over costs that they made last year, just like you got the same pay rate as the previous week. But because they had to spend 20% more on buying and refining, just like you spent 20% more effort on that weekend, they got 20% more profit just like you got your 20% extra profit.



But, you plead, you didn't know that working longer hours, expending more effort, was a bad thing. You didn't know it created a "windfall profit". Oddly, this changes their minds and, because this is your first time before the committee, they let you off with a warning not to let it happen again.



You quickly thank them and head out of the room muttering that, now, you'll have to change jobs because you know your boss will be demanding that you work on the upcoming holiday, and you'll even get time-and-a-half. If that happens the committee will likely send you to jail.
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As you leave the Senate committee room, the next guy in line quietly agrees with you. He's from Big Oil, and he's going to get out of the gasoline business, too, before they send *him* to jail for working too hard. (H/t Don)

Used Bookstores & Attention Deficits

I sometimes buy books at a local used bookstore. I've also occasionally scrounged a few books that I don't want anymore and taken them down to that store for credit. But not too often. I figure over the years I've spent easily more than twenty times the amount of money on books at that store than I've obtained in credit from the books I've taken to the store.



Fortunately, my wife doesn't think that I'm crazy for doing this. In fact, she's not worried at all by my not having gotten as much credit from taking in books that I no longer want as I've spent buying books there. She doesn't whine about how the money isn't balancing out with this store.



And that's probably to the good, because I wouldn't want to have to point out to her that our one-sided bargaining with that bookstore is nothing compared to the amount of money we spend at the local supermarket for groceries each month. We never bring in anything for credit to them. We just buy food and such.



I'm sure by now there are some people that are confused by our behavior, wondering how we can keep doing it month in, month out. Well, as with most people, I have a day job. And interestingly, that company is happy to give me money, a paycheck they call it, twice a month for the labor I give them. Oddly, my company isn't too worried about getting any money back from me. And that money they give me ends up paying for the supermarket groceries and for the used books and for a number of other household bills.



But there really *are* some people that are confused by all this. They count things differently. They're very rigid about it. They only look at one relationship at a time, and they pronounce judgment on whether that relationship is healthy or not.



So, they think that my relationship with my employer is great for me but terrible for my employer. And they think my relationship with the supermarket is terrible for me, but great for the supermarket. And they are pretty worried about my relationship with the used bookstore; they feel it is unhealthy and that it will lead to trouble.



You see, these people are actually a group of economists; not all of them, just a few. (But they *do* have access to several large newspapers.) And they have funny names for my various relationships.



For example, they call my relationship with my employer a trade surplus because I take in more money from selling my labor to my employer than I give back by buying things from them. Of course, I don't buy anything from them. And they call my relationship with my used bookstore a trade deficit because more of my money goes out to that store than comes back in (in the form of store credits).



It's weird the way this small group of economists rationalize things. They can't seem to understand that whether I have a trade deficit or not with a trading partner, like my used bookstore, is actually irrelevant to whether I'm making enough money overall -- irrelevant to my own household economic health.




Oddly enough, this group of economists has the same comprehension problem with the relationships between America and a few of its trading partners; like China or Japan.

[Click on the title above, or date stamp below, to see the full post.]


But then, being myopic is a chronic problem for some economists. Apparently, they have an attention deficit with the concept of trade.

The Coming Obamination!

Sure, "Change" is wonderful. But what actually *are* Sen. Obama's political views? What will we have to look forward to once he's elected?



Well, he's finally beginning to mention a few details recently, in economics.
For example, everyone under $50,000 per year... no taxes. (I wonder if you could get a chicken in every pot with that?)



Oh, and here's another theme. The rich are soaking the non-rich; that's apparently how they get rich according to Obama. While he definitely claims to favor free markets, he says that they are clearly broken. They will need to be fixed: by taxation and regulation.



But even though that's about it for details, I'm sure we all want to know the Obama nitty gritty in other political areas.



Fortunately, Project Vote Smart provides some answers to Sen. Obama's political positions. Unfortunately, Obama "repeatedly refused to provide any responses to citizens on the issues through the 2008 Political Courage Test when asked to do so by national leaders of the political parties, prominent members of the media, ..." As a result, Project Vote Smart has made available Obama's responses to the Illinois State Legislative Election 1998 National Political Awareness Test. Let's just have a look, shall we?



Racial/Sexual Discrimination?



So, should Illinois government agencies should take race and sex into account in giving out contracts? In choosing whom to employ? In university admissions? Obama scored a clean sweep; "Yes" to all of those.



Crime?



Should no parole be allowed for repeat violent felons? Not according to Obama. How about prosecuting juveniles (gang bangers, for example) as adults if they commit murder or other serious violent crimes? Nope, Obama didn't like it. Maybe criminals should be required to pay restitution to the crime victims? Well, apparently this doesn't look that good to Obama either.



Education?



Obama supports education. Just ask him; he'll tell you so. But he's dead set against vouchers for parents to send their kids to any good school (public, private, religious).



Environment?



Obama wants you to use cleaner burning fuels, and is willing to pass a law to make sure you do.



Campaign "Reform"?



Obama would love to pass laws to impose spending limits on campaigns. But it's okay because he's willing to give tax dollars to candidates to make up for preventing supporters from contributing. At least that way, he can control how much supporters can contribute.



Gun-Control?



What about favoring allowing citizens to carry concealed firearms? Nope, Obama doesn't trust law-abiding trained citizens. He's even willing to increase the currently onerous Illinois restrictions of the purchase and possession of firearms.



Are you familiar with auto-loaders? They're also called semi-automatic guns. They were invented in the 1800s. They work like this: one trigger pull, one shot fired. They don't work like machine guns, or like military assault rifles (which were invented in WWII), and they don't work like machine pistols -- for these, instead, you just hold down the trigger. What do auto-loaders include? Many hunting rifles and shotguns, target pistols, and nearly all police firearms.



Well, bad news, Obama wants to pass laws to eliminate "all forms of semi-automatic weapons".
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So, there you have it. This is what the coming Obamination will look like: grim.



(H/T to my daughter's razor wit for the title.)

Macroeconomics for the "Compassionate"

Before you cast your vote for someone who promises to 'help' the downtrodden by fixing the prices of things, you ought to understand some basic economics.


Methodology note: Although it's said that a picture is worth a thousand words, I make every effort to avoid using pictures unless they are absolutely necessary. This is one of those necessary cases. I'll be using the kind of pictures you can see in most macroeconomic texts, only with the P and Q axes reversed, because it makes more sense to my math/science background: Quantity is a function of price, so the P axis is horizontal.

Fundamentally, a sale takes place when both parties to the transaction believe it benefits them. The buyer values the good/service more than the money he's spending, and the seller values the money he gets more than the good/service. Economists like to split this up and look at the motivations of both parties:

The Law of Supply

People sometimes have trouble grasping this simple concept:

When the price of something goes up, more of it will be produced.

It may seem backwards, especially to those familiar with 'volume pricing' arrangements, where suppliers will offer incentives to purchase large quantities, or 'sale' pricing designed to help liquidate inventory, or to keep contstruction workers productive during the slow season, etc. Those are actually responses to the interaction of the LoS and the Law of Demand as we'll see later. One factor that's important here is there are short- and long-term effects of the LoS: Potential producers make long-term decisions based on that they expect the price they can charge for their goods/services will be, that affect their capacity to produce the actual goods/services. Then they make short-term decisions based on fluctuating market conditions.

• If farmers think the price they can get for wheat will be higher next year, they may plant more wheat and less soybeans, or spend more money on fertilizer and pest control to increase yield per acre.
• If the price of oil is expected to go up, it justifies drilling deeper, or other more expensive techniques for getting to it.
• If the net income that can be earned by doctors (after paying for such things as malpractice insurance) looks like it's going down, fewer people will practice medicine. Perhaps some of them will work for insurance companies, medical schools, or malpractice law firms.

The exact amount that the quantity of the good/service produced goes up or down with the expected price thereof varies. Economists call this 'elasticity of supply'. The more elastic the supply curve is, the more the quantity will respond to increasing or decreasing prices. Economists also talk about short-term elasticity vs. long-term (it takes a long time from planting to harvest), but the general idea remains - in a few cases increasing prices will not increase the quantity produced, at least in the short to medium term (there are only so many seats in a stadium for a sporting event, but other/larger stadiums can eventually be built), but will never decrease

The Law of Demand

This one's a lot easier to understand:

When the price of something goes up, less of it will be consumed.

There are a handful of situations where a low price affects the perception of the quality of the good/service, but that's contrary to the 'all other things being equal' clause that's implicit, if not explicit, in all economic discussions. How much quantity responds to price, once again, is 'elasticity'. The more elastic demand is, the more the quantity demanded will fluctuate with the price. Once again, long-term expectations drive long-term decisions. The more the price of gasoline is expected to rise over the life of your next vehicle, the more likely you are to buy one with good fuel economy, and thus you will use less gasoline. Even short-term changes in price will produce effects such as carpooling, riding public transportation, and cutting back pleasure travel in response to a sudden gas price hike.

Equilibrium

Since the supply curve slopes upward and the demand curve slopes downward, there must be a certain point at which they cross:

At the equilibrium price, exactly the same amount is produced as consumed.

It isn't hard to understand why.

• When prices go above equilibrium, the producers want to sell more than consumers want (and can afford) to buy. After producers have already made the investment to produce a good, or build the capacity to provide a service, they naturally want to maximize the return on that investment. Parking lots full of cars that aren't selling don't make an auto manufacturer any money, so the price will have to come down to move the merchandise.
• When prices go below equilibrium, the producers know that even if they raise prices, they'll still sell the same quantity, and make more money in the process, so they do.

Whichever direction prices drift from equilibrium, they are pulled back to it....

Interference with Equilibrium

Well, they are when market forces are allowed to work.

Here's where the Compassionate come in. The market can seem cruel and harsh, so they want to help protect people from it. All sorts of government policies have been enacted to manipulate markets by force.

Artificial Maximum Price

Sometimes, a government decides that the price of something is getting out of hand, and the best solution is to set a legal maximum that can be charged for it.

If that maximum is higher than equilibrium, then it doesn't do much other than make people feel good about having Done Something™ to fix it. It may actually have the perverse effect of reducing the expectation of future price increases, and therefore discouraging people from investing in the capacity to provide that good/service. The long-term effect of that may be best described as a flattening of the supply curve; the reduction in capacity shifts the point of equilibrium beyond the maximum price...

When equilibrium is above the maximum price allowed by law, we have locked in place the situation that would ordinarily only obtain temporarily without the price control: People are willing, and have sufficient funds to be able, to purchase more of the good/service than others are willing and able to sell to them.

If a maximum price law has any effect on price, it creates shortages

Artificial Minimum Price

Sometimes, a government decides that it's unfair that the people who produce some good or service get so little for it, and try to set a minimum price. There are two ways to do this:

1. Have the government guarantee a minimum price that it will pay to producers, so they can always get that minimum price.
2. Make it illegal for anyone to pay them less than the minimum.

Either way (if the minimum is actually above equilibrium) the result is that people are willing and able to produce more of the good/service than people are willing to buy at that price, the price cannot drop to correct the imbalance. If a minimum price law has any effect on price, it creates surpluses

Here's where the two ways to set a minimum price diverge. In the first case, such as for farmers, the government has committed to actually purchase the surplus commodities that no one wants to buy, at least in the short term. Typically, those commodities eventually are distributed ("government cheese") at a later date, absorbing some of the demand that would otherwise exist at that time, or they're simply destroyed. But in the second case, such as minimum- or prevailing-wage laws, it has made it illegal for the labor to be sold for less than the specified price.

A minimum wage law that has any effect on wages creates surplus workers, also known as unemployment.

It's really obvious when you think about it. The law doesn't guarantee that anyone who wants a job at $x/hr will get one, it only says that it's illegal to make anything less. If you believe that someone is better off unemployed than making anything less than some magic amount per hour, then this may make sense to you.

Minimum-wage laws disproportionately affect lower-income, inner-city people with little education and no work experience in a particular skill (important voting blocs for the politicians who insist on increasing the minimum wage from time to time). They don't get many chances to work those low-skill/pay jobs and gain experience that makes them more attractive to employers who are willing to invest in training them to be even more productive (and therefore pay more to retain those productive workers).

These wage laws are the economic equivalent to the secure fire escape on the side of a building, where the ladder from the 2nd floor to ground level is retracted to prevent burglars from climbing it. People who lack formal education or training can't get on the ladder and begin to pull themselves up to higher rungs. The true beneficiaries of minimum- and prevailing-wage laws are the leaders of organized labor, who can win higher wages from which to extract union dues, and the leaders of minority ethnic advocacy groups, who benefit from having a societal ill to organize against.

Because the workers they represent are better skilled, and therefore more productive, the labor leaders can demand a multiple of the minimum wage for those workers. Suppose there is a job that can be done in an hour by a union worker with years of experience, or in three hours by an unskilled worker. If the minimum wage is set to $7/hr, so long as the union scale is under $21, it's actually cheaper to hire union labor at nominally higher rates. So the employer agrees to a contract at $19-20/hr. it's a good deal for both sides. The union is using the law to forbid competition. It would be an anti-trust violation if it weren't being done by the government itself, or on behalf of a union. (Anti-trust laws specifically exempt labor unions.)

The very people that the law pretends to help are the ones hurt the most. (This is a long one, so click on the title to read the whole essay, which won't appear on the front page.)

I, Pencil

We find ourselves engaged in the quadrennial spectacle of politicians promising that if only we elect them to run our government, they'll "fix things" so that, for instance, everyone will have all the health care services they want. Some of our contributors have touched upon the insanity of these promises. In future articles, I'd like to explore in more detail why they never deliver the results they promise, but first it would help to read some foundational material. Fifty years ago, Leonard E. Reed "ghost-wrote" I, Pencil, a first-person narrative of how the simple writing instrument comes to be. Our protagonist makes this extraordinary claim:

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Read the essay, and ponder the arrogance of those who think a central planner could make sure everyone has pencils, much less health care.

Gas Prices and the Minimum Wage

You and I, and everyone I know, takes home a paycheck every week (or two). We "make ends meet" with that paycheck we get versus the week's groceries and gas, the kid's clothes, the monthly rent (or house mortgage) payment, taxes, etc. We're on a budget.



So, what happens when some bozo large company, say Exxon, decides to raise prices at the gas pump? Well, unfortunately for Exxon, there are other gas stations. So, we shop around for a lower gas price.



Ah, but what happens if the Chinese economy starts booming and they bid up the price of oil, so that *all* the gas station prices go up? Well, unfortunately for us, we find a way to drive less. We *have* to get to work. We *have* to get the kids to school. We *have* to get the groceries. So we plan and scrimp and cut back on nice-to-have driving -- because we have to "make ends meet".



We'd do the same thing, scrimp and cut back, if the price went up of some other commodity we use on a daily basis -- say coffee, or milk.



Mom & Pop stores are just like us; after all, they are run by a mom and pop. Their store also has a budget. They have things to buy, and they pay rent, they pay taxes and fees (more often and to more agencies); and if they're lucky and their business doesn't go under, they get to take home a profit paycheck each week (or two).



So, what happens when some bozo large government, say ours, decides to raise prices for employing some people. That's what the Minimum Wage does; it raises the price for employing the least-capable and least-trained people. Well, Mom & Pop have a budget, so they have to scrimp and cut back -- on the least-capable employees. You didn't really think that they would cheerfully continue to employ those least-capable people, did you; and go broke doing it? They aren't running a store to go broke -- they are running it so that they don't have to work for somebody else. (There are people like that -- they want to be their own boss.)



So, what do they do? They lay off a least-capable employee, to pay for the Minimum Wage price raise that the government forces them to pay to the remaining least-capable employees. And then everyone has to work harder to get all the work done, especially the least-capable employees. After all, they've just seen one of their peers laid off, and they could be next.



Now, there are 10 times more Mom & Pop stores (some of which are gas stations), with 20 employees or less, than businesses with 100 people. And there are 10 times more 200-person businesses than companies with 1000 people. And there are only a few large companies, like Exxon, with tens of thousands of employees -- and the vast majority of those are not least-capable and least-trained considering they usually have a college diploma.



What this means is that it is the Mom & Pop stores that employ the vast majority of the pool of least-capable employees, the ones being paid Minimum Wage.



And what that means is that when the law makers raise the Minimum Wage, they increase Unemployment. Just like one and one make two; raising the Minimum Wage puts people out of work and onto welfare.



Yikes! If it puts more people on welfare, they'd better raise taxes to pay for 'em while they're at it.