Unforeseen Contingencies

I’ve been away for a bit, and this will continue for another week or two, owing to various contingencies, foreseen and otherwise. With the end of the semester I’m really too busy to be writing this, but Hillary is crowing victory in Indiana (here’s hoping she’s wrong) and going on with her federal gas tax plan.

What are we to say of this plan, and what does it tell us about Hillary?

The plan: stop placing the tax on consumers, and put it on the producers (you know, those nasty people who do us the disservice of working to provide us with gasoline). This will give consumers a break, and punish the producers, for... umm, doing us the disservice of working to provide us with gasoline? Well, anyway...

This is a textbook example - literally. What happens when a per unit tax is shifted from buyer to seller, from demand curve to supply curve? Answer: nothing. These are identical in their effects on raising prices to consumers, reducing prices to sellers, and reducing quantity sold.

As I walked into my last class of the term, my students were discussing this among themselves and making fun of the plan; they mentioned it to me and asked my opinion.

"Look, anyone who has had Econ 101 knows this is nonsense. Rest assured that Hillary’s advisors are familiar with Econ 101, and I am pretty sure Hillary herself understands that this is nonsense."

"So you’re saying Hillary is evil?"

Good question.

Well, let’s look at it. The Econ 101 analysis isn’t the full story. Frankly, Hillary’s "plan" is more idiotic than it might seem from the blackboard econ perspective, because it is proposing the status quo! The federal gasoline excise tax is already levied on producers, not consumers. As the Congressional Research Service puts it, "the gasoline excise tax [i]s a ‘manufacturer's excise tax’ because the government imposes it at production (i.e., the producer, refiner, or importer)." People who are impressed with her plan are simply ignorant. The "Hillary plan" is already in effect.

In other words, Hillary is knowingly, cynically playing on voters’ ignorance. My students are right, and have Hillary pegged.

So here’s the correct characterization: Hillary = Evil.

Signing off for now,, but back soon!

Should it really be necessary to have to defend laissez faire from the capitalists?

Classically Liberal comments on a piece from the Wall Street Journal by Cato’s David Boaz. Both are worth reading. The gist is that Starbucks might be classifying the term "laissez faire" as offensive, politically loaded, or otherwise too objectionable to be printed on its customizable customer cards...particularly bothersome to me, since socialist slogans are apparently just fine.

CLS provides a link to Starbucks customer service, so I went ahead and emailed them. I reproduce our exchange to date below. I’ll continue to pursue this, as I spend a substantial amount of money with them, and need to find out if this is a mistake.

My initial inquiry

From: Charles Steele
Sent: Apr 9 2008 7:12PM
To: Starbucks Card
Subject: Other

Hello -- I would like to know why the expression laissez faire is considered as inappropriate by Starbucks, and banned from customized Starbucks cards? (David Boaz, Wall Street Journal, 7 April '08) This is particularly puzzling, since socialist slogans appear to be acceptable. If this is your policy, I request you reverse it. I'm a professional economist and regular Starbucks customer. I'll be happy to explain to you why laissez faire is always appropriate. I won't remain a customer if you ban the term.

Customer rep Lisa M. writes back

From: Starbucks Card [cardinfo@starbucks.com]
Sent: Friday, April 11, 2008 11:56 AM
To: Charles Steele
Subject: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Charles,

Thank you for your interest in Starbucks Coffee Company and for taking the time to contact us regarding our Customized Starbucks Card personalization policy. We welcome questions and feedback from our customers at any time.

The Starbucks Customized Card program allows our customers literally thousands of ways to create a card that is unique to them. As with almost any personalization program, there are guidelines - which are published on our website - regarding what is allowed on the cards to help avoid content that could be ether offensive or illegal. This includes things such as threatening or derogatory remarks, overtly political commentary or trademarks (including the trademarked name Starbucks).

Every card is reviewed by our vendor to make sure it meets our policies, and if we unfortunately cannot approve a card, we contact the customer by email and do not charge them until they are able to complete their design.

Acting on feedback is essential to Starbucks continued success. If this does not happen, I realize that you and others may go elsewhere for your coffee needs. I assure you that Starbucks values your comments. Therefore, I shared your comments with our Starbucks Card leadership team for review.

Thanks again for your interest in Starbucks Coffee and for giving us the opportunity to address your concerns and improve our operations. If you have more specific questions not answered at the Starbucks site, please feel free to e-mail us at CardInfo@Starbucks.com or call any of our phone representatives at 800-STARBUC (782-7282).

Sincerely,
Lisa M.
Starbucks Card Services
Starbucks Coffee Company

What? Laissez faire is potentially threatening or illegal? Well, at least they realize their continued success depends on giving a good response to my feedback. I respond.

From: Charles Steele
Sent: 04/11/2008 09:04 AM
To: Starbucks Card
Cc:
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Thanks for the reply, Lisa, but you didn't answer my question.

Does Starbucks find "laissez faire" to be offensive, illegal, threatening, derogatory, or overtly political?

I'm particularly curious since socialist slogans are apparently considered acceptable.

I look forward to your reply.

Best regards,
Charles

Lisa responds

From: Starbucks Card [mailto:cardinfo@starbucks.com]
Sent: Friday, April 11, 2008 3:50 PM
To: Charles Steele
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Charles,

Thank you for taking the time to reply to my message. Your questions and comments are valuable to us.

We apologize for any inconvenience regarding your inquiry. Please know that we do not discuss individual customer cards or the reasons they may or may not be declined. Starbucks appreciates customer feedback, and your comments have again been fowarded to our Starbucks Card leadership team.

Thank you again for your interest in Starbucks Coffee Company.

Warm regards,

Lisa M.
Starbucks Coffee Company

Not to be put off, finding Lisa rather pleasant to communicate with, and assured that Starbucks values my comments and questions, I write her back.

From: Charles Steele
Sent: 04/11/2008 03:39 PM
To: 'Starbucks Card'
Cc:
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Lisa

Thank you for the response.

Again, you didn't address my question. I did not ask about any individual customer card. I asked about company policy towards the phrase "laissez faire."

I look forward to your reply.

Best regards,
Charles

But instead of Lisa, I now hear from Keith D. I guess he’s a leader in the Starbucks Card leadership team. But apparently this is too big even for him.

Hello Charles,

Thank you for contacting Starbucks.com.

I apologize for any inconvenience experienced. Due to the nature of this Starbucks Card inquiry, it is necessary to call 800-STARBUCKS (800-782-7282) as soon as convenient and speak directly with a Customer Service Specialist. When you call, please reference Case # XXXXXXX.

Starbucks call center hours:
Monday-Friday 5:00 AM to 8:00 PM Pacific Time
Saturday and Sunday 6:00 AM to 6:00 PM Pacific Time

Thanks again for your interest in Starbucks Coffee. If you have more specific questions not answered at the Starbucks site, please feel free to e-mail us at CardInfo@Starbucks.com or call any of our phone representatives at 800-STARBUC (1-800-782-7282).

Warm regards,

Keith D.
Starbucks Card Services
Starbucks Coffee Company

OK, I will call. "Laissez faire" is a fundamental principle, and it's actually this, not so much Starbucks, I'm interested in. Free people and free markets depend on laissez faire. If it’s now considered objectionable by Starbucks, I want to hear why. And I will be happy to explain to them why their continued success, and the success of civilization, depends on laissez faire.

Let's take a quick break from economic issues and talk about something fun: sport.

The Summer Olympics, hosted by America's number 1 creditor in terms of new loans, will be underway soon. The Chinese government had an opportunity, with the awarding of the Olympics, to take big steps away from totalitarianism. Unfortunately, they chose to go the wrong way. Politicians around the world see China as "too big to irritate," and so are falling over themselves to excuse the Chinese government. Happily, non-politicians in London, Paris, and soon -
San Francisco - differ.

This is more important than it might seem. China is a model around the world for those who like the idea of strong economic growth and tight political control. Given the behavior of the Chinese government, at this point it would be good to see China humiliated by a failed Olympics (although a shame to see athletes keeling over from air pollution, and reporters arrested for reporting on things other than what the Chinese stage-managers offer.)

There is the argument, of course, that "sport and politics should be kept separate." In other words, "when we are playing, please don’t bother us with the news that our host is systematically torturing and murdering people and that our acquiescence furthers this." Ugh.

I’m also enjoying the argument that it’s a shame to spoil the beauty of the torch run with protests, since "[t]he Olympic torch is a symbol of sport and a symbol of cooperation between nations," as Lord Coe, organizer of the 2012 Olympics, puts it. Yes, what a shame to mar this beautiful tradition.

Of course, we've not gotten away from economic issues at all. Noted advocate of freedom and democracy George W. "Cheap loans from China will cover the deficit" Bush plans to attend the Olympics, including the opening ceremonies, which many suggest boycotting as a protest. And now that New Zealand has negotiated a free trade deal with China, PM Helen Clark is speaking out boldly on the importance of separating sport from mere individual rights.

If Western governments find the Chinese government's behavior acceptable, it is all the more important that citizens around the world keep freedom and sport together, and protest the Blood Olympics.

...someone else is too small to matter.

Government has three ways of paying for its current expenditures. It can tax. It can borrow. It can inflate, creating money and spending it.

Taxation is theft, but it is the most honest of the three methods. It is direct, and the payers usually have a fairly good idea that they are paying, and how much.

Borrowing is paid for, ultimately by either taxation or inflation. (Default is simply a messy way to tax the lenders.)

Inflation is arguably the worst method of financing government expenditures, from the standpoint of the citizen, since it is not uniform and is correctly anticipated only in blackboard models, and hence destructive of capital and the smooth functioning of money. Inflation is economic poison, because it distorts relative prices and confuses everyone's buying and selling decisions.

The U.S. federal government depends on all three methods of financing. Since taxes do not cover our "generous" spending programs, we borrow, primarily from abroad, and we inflate, via the easy money policies of the Federal Reserve. Keep this in mind when you contemplate the Fed’s many bailout programs - purchases of loans that are basically in default - and the federal government’s "stimulus" programs.

Martin Wolf at the Financial Times has a particularly clear account of what the U.S. bailouts mean: the mistakes and losses of private lenders and borrowers are socialized, and become public property. Those of us who did not take on ARMs, either as borrowers or lenders, will pay a substantial portion of the cleanup bill.

I'm thinking now of UC reader Jeff, who me told a number of years back that his co-workers were all taking out ARMs. He was telling them they were insane, that they were signing contracts that they'd never be able to fulfill. I agreed. Stupid us. Now we get to pay. Every politician in sight now has a scheme for us (me, Jeff, and the rest of America that stayed out of unmanagable debt) to bail these idiots out. Great...more federal debt, and inflation, inflation, inflation.

But what does "bailout" mean in a country where the government itself is also in the red? And where the average citizen has negative savings, on net? Brad Setser argues, correctly, that a substantial portion of the burden falls on lenders to the U.S. government, i.e. foreign central banks... which means ultimately upon the poor citizens of emerging economies, such as the Chinese lad pictured here.

Sorry kid. If it's any consolation, they're screwing me too.

Setser's caveat, that some others argue that central bank exchange rate losses on the dollar are irrelevant so long as the external (read U.S.) purchasing power of the dollar doesn't fall, is beside the point, in my view. Inflation Ben will see to that.

There's a good deal of irony in all this. Those who were irresponsible (borrowers and lenders) and therefore are responsible for the mess, and won't be held responsible. Those who behaved responsibly and hence aren't responsible, will be held responsible.

Nice symmetry here, yes?

The linked essays are worth reading.

We're in the midst of a classic "Austrian" business cycle. Unfortunately, Bernanke's Fed seems hell-bent on pushing us into what Mises called the "crack-up boom."

Nobel Laureate Ed Phelps agrees.

I'll be posting more soon on this issue.

I'm too busy to write much of anything at the moment, but I'm aghast at the "analysis" and proposed remedies being peddled amidst the worsening credit debacle. The left has, of course, seized the day, and blames the free market. Bush has joined in with his plan to make the Fed into GosFinBank, central planner of finance overseeing the economy. I exaggerate only a little.

Unfortunately quite a number of alleged defenders of the free market have been making even less sense, and vigorously defending...um... the Fed? Good grief!

This defense of the Fed by the usually sensible David Henderson and Jeffrey Hummel is one of the less egregious examples, and it's bad. I posted a rebuttal on Tom Palmer's blog.

I just cannot understand self-described free-market advocates arguing that the provision of a crucial economic good can only be handled by government central planning, while everything else should be a market transaction. I cannot understand how they would argue the Fed has been doing a good job with its central planning, or that we've had tight monetary policy. Look at this:



This is the MZM money stock, according to the St. Louis Fed. (Left click on it if you don't have a microscope handy.) Where's the tight monetary policy? Or try this:



This is the year-to-year changes in MZM. Where's the tight monetary policy?

Don't like these, want percent changes? OK:



Tight policy? Where? When? Not when Greenspan was saying that the housing bubble was no reason for tighter policy. It's not there. There is a shrinking of the growth rate that occurs moving towards about 2006, and then when it looked like the housing bubble might pop and the Fed began rate-cutting again, growth picked up as well.

Over the seven years of the Bush presidency, MZM grew 72% by my calculation. The seven year period prior to that it was 68%, and the seven years before that it was 47%. (My calculations using Fed data.) So where's the tight policy? There isn't any!

The financial debacle was created by the Fed, and by the proclivity of the Congress & President for spending beyond our means. By itself, this deficit spending would simply have driven up interest rates and crowded out private investment. By monkeying around with interest rates and the money supply, the Fed has added misinvestment and the destruction of capital into the mix. And since a recession to clear the malinvestments is apparently unthinkable, the Fed is now embarked on a program of accelerating inflation and socializing the losses of big investors (i.e. forcing the taxpayers to take them on), the dollar and the citizen be damned.

It's horrifying, then, to hear self-proclaimed market economists talk about how the Fed has "learned to do monetary policy right," when actually the Fed is taking us to hell.

I should close on a more positive note for change. Robert Murphy (a fellow NYU Austrian Ph.D.!) does a very nice job of rebutting one of the Fed-defenders in the January Freeman, and with colleague Lee Hoskins has a nice comment on the Fed in the 16 March Forbes. Both are worth reading.

(Graphs and data from the St. Louis Federal Reserve.)

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Ludwig von Mises

and Unforeseen Contingencies can explain why!

A good friend of mine asked what I think of the comment by Paul Krugman in today’s New York Times. Krugman is commenting on the Fed’s (allegedly temporary) taking on of mortgage debt. I think Krugman is completely wrong, but wrong in a way where he'll still be able to say "see, I told you," almost no matter what happens.

The Fed isn't buying risk. It is buying losses. The serious research shows home prices are going to fall further, and the banks know it and the Fed knows it.

The "government" will absorb the losses - the citizens will, that is - and the bigger banks will get off the hook. The announcement by the Fed a few minutes ago that it will bail out Bear-Stearns only confirms this...

"privatize the profits, socialize the losses."

Krugman doesn’t mention the moral hazard effects of the bailout. Responsible financiers who were conservative and hence took less profit suffered in the boom, and the risk takers took profits. Now that the Fed bails out the risk-takers, any financial incentive to be responsible is eliminated - at least if you’re "too big to fail."

Krugman doesn't mention the effect of the Fed's continual expanding of the money supply: the dollar continues to become less valuable, i.e. domestic price inflation and further collapse on forex markets. That is, and please excuse the strong language, the dollar is being sent to hell. Ken Rogoff (former IMF chief economist) has just pointed out that inflation is growing in the U.S. and around the world precisely because central bankers, and *especially Bernanke*, have stopped making low inflation the priority.

I have been wondering why the Fed seems to have given up on fighting inflation. I can't account for Greenspan (probably some explanation involving short range political expediency), but Bernanke seems to have said in a ceremony honoring Friedman something like "Milton, you were right about the Great Depression: we've learned this, and we'll never let it happen again."

He was referring to the Friedman-Schwartz research that showed that the Fed triggered the 1929 and 1938 collapses by restricting the money supply. So he'll NEVER restrict the money supply, because every problem is a potential Great Depression? I think that's it. He's an inflationist.

He has the "core inflation" hokum on his side in pitching this nonsense. Supposedly gas and food prices have more volatility, and hence in a time when they are bouncing around for reasons unrelated to inflation it might make sense to exclude them. But this isn't the case here. For most people food and gasoline are necessities (hard to believe it's necessary to point this out, but apparently this is omitted from Bernanke's blackboard models). Inflation is worsening, and consumers are bearing the brunt.

(As I pointed out previously, in his recent testimony before Congress Bernanke pointed out that while gas & food prices are spiraling up, prices for apparel and financial services are unusually soft -- great, "let them eat Gucci... and services of the inventors of Collateralized Toxic Waste.")

Back to Krugman, he doesn't explain why increasing the money supply can "work magic." It's only in a limited circumstance in which there's substantial unemployed resources and a liquidity dearth...Bernanke's view of every situtation, I guess. Krugman seems to have stopped explaining economics and only is interested in promoting politics - unfortunate, because explaining econ is the only thing he's good at.

In sum, I think we'll see continued Fed bailouts of the banking sector, money expansion and inflation, increasing federal deficits, credit market malfunctions, recession, and... the destruction of the dollar. The current Fed policy ought to be criminal, and the Fed ought to be eliminated and replaced with a free market monetary system. But power and wealth of the beneficiaries, I don't expect to see that happen soon. Instead - more of this planned chaos. Ugh.

On that happy note, I'll close...