The Fiscal Cliff

I'm sure we've all been hearing about the fiscal cliff lately.  This is a confusing issue, and I thought Dr. Tracy Miller's blog post "What Should be Done about the Fiscal Cliff"contains excellent and very clear analysis.  I highly recommend that you take the time to read it.  

I also appreciated Donald Schanzenbach's piece entitled "Mission to Restore America: Fiscal Cliff Follies."  Writing from a Christian worldview perspective, he makes the point that we've already gone over the cliff, and much more needs to happen to bring us back than for some sort of compromise to be worked out in Washington.  He believes that through financial disaster of our own making we may see a return to wisdom and back to God in America.  Let us pray that he is correct. 

"Price Gouging"

In the wake of Hurricane Sandy and at the risk of sounding insensitive, I want to link to this excellent piece the Mises Institute re-posted from 2004, called "Price Gouging Saves Lives in a Hurricane."  I almost shared it on Facebook, but feared the wrath of those who wouldn't take the time to read it.  Give it a chance, and you'll see it's not as ridiculous as you might think at first.  It's just sound economics.

Mutually Beneficial Exchange

...the only kind of exchange that happens in the free market.  

"If an exchange between two parties is voluntary, it will not take place unless both parties believe they will benefit from it.  Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another."
 ~ Milton Friedman

"What pays under capitalism is satisfying the common man, the customer.  The more people you satisfy, the better for you."
~ Ludwig von Mises

Austrian Economics in a Nutshell

The Foundation for Economic Education is kicking off Austrian Economics Week (which until now I didn't know existed) on their Facebook page with 10 ideas that define Austrian Economics from Peter Boettke: 

1. Only individuals choose.
2. The study of the market order is fundamentally about exchange behavior and the institutions within which exchanges take place.
3. The “facts” of the social sciences are what people believe and think.
4. Utility and costs are subjective.

5. The price system economizes on the information that people need to process in making their decisions.
6. Private property in the means of production is a necessary condition for rational economic calculation.
7. The competitive market is a process of entrepreneurial discovery.
8. Money is nonneutral.
9. The capital structure consists of heterogeneous goods that have multispecific uses that must be aligned.
10. Social institutions often are the result of human action, but not of human design.

For more detailed information on each of these points, check out the article by Dr. Boettke at the Concise Encyclopedia of Economics. I thought this was a great summary of ideas that, while difficult to pin down, are essential to solving the current economic crisis we are experiencing.  

The Minimum Wage Kills Jobs

I was appalled this week when Bill O'Reilly had John Stossel on his show to discuss minimum wage laws. O'Reilly actually said he believes the minimum wage should be $16 an hour, and he would not be reasoned out of it. He even proposed some kind of system in which the government would give businesses a tax credit to enable to them to pay a minimum wage of $16. Basically, the government pays peoples wages. Unfortunately I am unable to find a video of the interview. Apparently, according to O'Relly, Stossel had called him a "loon." I'd have to agree.

While I disagree with O'Reilly on many things, I tend to respect many of his opinions. I thought he was intelligent and reasonable enough not to support something as basically flawed as the minimum wage. Unfortunately, while many economists recognize that the minimum wage kills jobs (see the following video), much of the American public does not understand.

Watch the video for some excellent analysis of why the minimum wage is such a flawed idea. In addition to the points mentioned in the video, with a minimum wage business owners are more likely to automate systems which they would have paid a worker to operate had there been no minimum wage. That's one less job for entry-level and low-skilled workers (especially teenagers) to gain valuable work experience, helping them move up in the world and eventually use those skills to earn even more money. Not to mention some business owners might be forced to move jobs and even their entire business overseas where the labor comes at a lower cost.

What does QE3 mean for Main Street?

So what's the big deal about QE3? Dr. Jeffrey Herbener, chair of the department of economics at Grove City College, and Lee Wishing of the Center of Vision and Values shed some light in this video:  
Main Street USA and the Fed from Center for Vision and Values

The Locavore's Dilemma

Certain current food fads (all organic- though I realize there can be legitimate health reasons in some few cases- and locavorism) are among my biggest pet peeves. In fact, I have to be careful whom I talk to about them.  I get frustrated because people who should know better seem to think these are the best ideas ever thought of, and they don't think of the bigger picture problems that could result.  

Ever since I watched Food, Inc. I have been hoping someone would write more to refute it.  Even internet searches for articles with sound economics arguing against these dangerous ideas didn't yield much.  If I could have I would have written more myself, but all I could manage were a couple blog posts.

But recently I came across The Locavore's Dilemma.  I haven't read it yet (I placed a library hold immediately), but based on this review I'm hopeful it includes some good, sound economics on why current fads in food thought are unsound and even dangerous, and the real path to success in truly free markets.

Testimony before sub-committee this week

Dr. Jeffrey Herbener of Grove City College and the Ludwig von Mises Institute (also a former professor of mine) is testifying before the Subcommittee on Domestic Monetary Policy and Technology which is chaired by Ron Paul (Committee on Financial Services) tomorrow.   Dr. Peter Klein of University of Missouri is also testifying.  Both are excellent economists and should say what needs to be said.  I can't say as much for their colleagues who will also be testifying before the subcommittee, including James Galbraith.

Dr. Shawn Ritenour over at Foundations of Economics has more details, including links to Dr. Herbener's and Dr. Klein's written testimony.  I encourage you to take a look at the written testimonies if you can!      

A little wisdom from the 18th century

"The statesman, who should attempt to direct private people in what manner they ought to employ their capital, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

~Adam Smith in The Wealth of Nations, Vol. II (quoted in Basic American Government by Clarence Carson)

Locavorism

The local food movement has long been one of my pet peeves. This is a great article from Freakonomics that discusses some of the economic principles (division of labor, specialization, economies of scale...) that the push towards small, local farms seeks to ignore. It also applies these issues to climate change.

"From roughly 1940 to 1990, the world’s farmers doubled their output to accommodate a doubling of the world population. And they did it on a shrinking base of cropland. Agricultural productivity can continue to grow, but not by turning back the clock. Local foods may have a place in the market. But they should stand on their own, and local food consumers should understand that they aren’t necessarily buying something that helps the planet, and it may hurt the poor."

Ok, I guess I'm not finished being cynical for today.

"The Government Can"
by Tim Hawkins

Peter Schiff Testimony Before the House

Here are a couple excellent videos of excerpts from Peter Schiff's testimony and answering questions before the House committee on the jobs bill and the economy.

Here is the text of his testimony entitled "How the Government Can Create Jobs." If more politicians and inviduals were listening to this well-reasoned and intelligent businessman and others like him we would not be in the mess we are today.

Boom-Bust Cycle Explained

Dr. Thomas DiLorenzo testified before a House subcommitee yesterday. Although Congress likely isn't listening, I thought his explanation of the boom-bust cycle was too good to pass over. The text of his testimony is below. It's a bit long, but I hope you can read to the end. Unfortunately many people do not have a good understanding of the economics behind our monetary system, including many politicians.

________________________
Testimony of Dr. Thomas DiLorenzo
Professor of Economics, Loyola University Maryland
Committee on Financial Services, Subcommittee on Domestic Monetary Policy and Technology
Wednesday, February 9, 2011
2128 Rayburn House Office Building

Mr. Chairman and members of the committee, I thank you for the opportunity to address the issue of today’s hearing: "Can Monetary Policy Really Create Jobs?" Since I am an academic economist, you will not be surprised to learn that I believe that the correct answer to this question is: "yes and no." Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy. Why this is so is explained in three classic treatises in economics: Theory of Money and Credit by Ludwig von Mises, and two treatises by Nobel laureate economist F.A. Hayek: Monetary Theory and the Trade Cycle and Prices and Production. Hayek was awarded the Nobel Prize in Economic Science in 1974 for this work. I will summarize the essence of this theory of the business cycle as plainly as I can.

When the Fed expands the money supply excessively it not only is prone to creating price inflation, but it also sows the seeds of recession or depression by artificially lowering interest rates, which can ignite a false or unsustainable "boom" period. Lower interest rates induce people to consume more and save less. But increased savings and the subsequent business investment that it finances is what fuels economic growth and job creation.

Lowered interest rates and wider availability of credit caused by the Fed’s expansionary monetary policy causes businesses to invest more in (mostly long-term) capital projects (primarily real estate in the latest boom-and-bust cycle), and there is an accompanying expansion of employment in those industries. But since the lower interest rates are caused by the Fed’s expansion of the money supply and not an increase in savings by the public (i.e., by the free market), businesses that have invested in long-term capital projects eventually discover that there is not enough consumer demand to justify their investments. (The reduced savings in the past means consumer demand is weaker in the future). This is when the "bust" occurs.

The economic damage done by the boom-and-bust policies of the Fed occur in the boom period when resources are misallocated in the ways described here. The "bust" period is actually a necessary cure for the economic miscalculations that have occurred, as businesses liquidate their unsound investments and begin to make decisions on realistic, market-based interest rates. Prices and wages must return to reality as well.

Government policies that bail out businesses that have made these bad investment decisions will only delay or prohibit economic recovery while encouraging more of such behavior in the future (the "moral hazard problem"). This is how short recessions can be turned into seemingly endless ones. Worse yet is for the Fed to create even more monetary inflation, rather than allowing the necessary economic adjustments to take place, which will eventually set off another boom-and-bust cycle.

As applied to today’s economic situation, it is obvious that the artificially low interest rates caused by the policies of the Greenspan Fed created an unsustainable boom in the housing market. Thousands of new jobs were in fact created – and then destroyed – giving an updated meaning to Joseph Schumpeter’s phrase "creative destruction." Many Americans who obtained jobs and pursued careers in housing construction and related industries realized that those jobs and careers were not sustainable after all; they were fooled by the Fed’s low interest rate policies. Thus, the Fed was not only responsible for causing the massive unemployment that we endure today, but also a great amount of what economists call "mismatch" unemployment. The skills that people in these industries developed were no longer in demand; they lost their jobs; and now they must retool and re-educate themselves.

The Fed has been generating boom-and-bust cycles from its inception in January of 1914. Total bank deposits more than doubled from 1914 to 1920 (partly because the Fed financed part of the American involvement in World War I) and created a false boom that turned to a bust with the Depression of 1920. GDP fell by 24% from 1920–1921, and the number of unemployed more than doubled, from 2.1 million to 4.9 million (See Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America). This was a more severe economic decline than was the first year of the Great Depression.

In America’s Great Depression economist Murray N. Rothbard demonstrated that, once again, it was the excessively expansionary monetary policy of the Fed – and of other central banks – that caused yet another boom-and-bust cycle that spawned the Great Depression. It was not the Fed’s subsequent restrictive monetary policy of 1929–1932 that was the problem, as Milton Friedman and others have argued, but its previous expansion. The Fed was therefore guilty of contributing greatly to the massive unemployment of the Great Depression.

In summary, the Fed’s monetary policies tend to create temporary and unsustainable increases in employment while being the very engine of recession and depression that creates a much greater degree of job destruction and unemployment.
__________________________________

Thoughts on Food, Inc.

I had the chance recently to watch the documentary Food, Inc. The film-makers traced what they see as a change in the way we eat and the way our food is grown. They described the increasing distance between consumer and consumed, noting that the traditional farm is a thing of the past. The film outlines the rise of fast food. According to the film it arose partly as a result of corn subsidies that led to increased and inexpensive corn supply and made corn a primary feed for beef and other meat animals, in turn making meat production much less expensive than it would otherwise have been. The corn lobby influences legislation and also led to the discovery of innumerable ways to use corn products, which can be found in many processed foods (such as high fructose corn syrup). The film also discusses the growth and centralization of the meat industry and how “big business” now runs most large farms instead of farmers. It discusses poor feedlot and chicken house conditions for both animals and workers and it blames those conditions and even a high proportion of corn in animals’ diets for the rise of a dangerous strain of E. coli virus and other contaminants. The contributors describe how fast food diets have led to poor nutrition and diseases such as type 2 diabetes. They trace the rise of organic production in response to the mainstream industry’s problems. The film discusses genetically modified seeds and abuses by the companies that own the patents, in addition to the connections between these companies and regulatory agencies and political administrations. The film closes with a list of actions viewers can take, including buying organic or locally grown produce and meat from those who respect both animals and workers.

I will readily admit that I did not expect to find much of value, but I had heard various things about the film and decided to watch it myself. In some ways my fears were confirmed, but I felt some of the material was good. I expected that it would be a biased portrayal of a controversial issue. I expected the scary music and footage. I also expected that I would have to research afterwards to determine the whole truth. I will continue to research some ideas and may write further in future, but here are some thoughts.

First of all, viewers should realize that the film has an agenda. By all means watch it, but realize that you will be unable to take the information at face value. If it makes you think and research to find the answers, your viewing time will not have been wasted. One of the aspects I disliked was the lack of documentation for the numerous assertions made. I would have appreciated seeing both sides of the story and deciding for myself, but I don’t believe this was the way the film-makers handled it. If the film-makers want to promote their agenda they should at least give the studies, the research, and the reasoning that led them to these conclusions.

I am still researching various issues discussed in the film. I saw a significant bias against big business, and even against capitalism (one of the individuals featured was clearly anti-capitalist). The discussion of E. coli contamination implied that organic produce was safer, when in fact the FDA has questioned this and has recalled organic produce in the past due to contaminants.

Subsidies
I did appreciate a very significant topic covered in the film, the issue of subsidies in agriculture. The film focused on corn subsidies and their effects on meat production. I wholeheartedly agree that subsidies to agriculture are a significant problem and one that is commonly overlooked by those who are otherwise politically conservative. I believe the film did well in describing how they have affected the industry overall. It described how the subsidies have resulted in a great amount of corn being produced very cheaply, which led to its becoming a primary meat animal feed and enabling the cost of meat production to fall as well. It has led to an industry that looks for ways to use corn in processed foods (HCFS, and many others). The film also discussed how US corn subsidies forced Mexican corn farmers out of business and forced some to illegally emigrate and work for US corn producers. The film attributed the rise of the fast food industry to corn subsidies, which enabled beef to be inexpensive enough for chains to sell it at a very low price.

The film did not follow through with this valuable store line, however. In the closing thoughts the writers made no mention of subsidies and how change in this area of agriculture might improve the system. One of the instructions was to contact the USDA. I think the implied meaning was that viewers should ask for more oversight and regulation of the industry. In fact less government involvement and removing subsidies to agriculture would benefit the market and consumer even more by removing unfair advantage (subsidy created artificial prices) and making the industry more responsible to the consumer.

Factory Farms
The film was very critical of factory farming. While I agree that subsidies have artificially affected prices and in the process have affected industry growth, much of the rest of the discussion was counter to good economic reasoning. The division of labor and the standardization that results increases efficiency in any area. The problem with factory farming is not that these operations follow the factory system, but that the subsidies have led to growth that would not have been sustained in a regular market. Use of the division of labor and factories has made innumerable products affordable when otherwise their cost of production would have made them prohibitive for many people (for example assembly lines used to produce Ford cars). Without division of labor our society would not be nearly as economically advanced as it is today.

There is nothing inherently wrong with organic farming or the idea of a self-sufficient farm, and you may choose to buy from such an operation. Realize, however, that you will be paying higher prices due to the higher cost of production. By nature that farm cannot produce as much food as efficiently as a more specialized farm. Location is another aspect of specialization, as some areas are more conducive to certain kinds of agricultural production than others. A small farm that grows all kinds of products may be able to do it, but it will be less efficient. The film profiled a family whose budget and time constraints forced them to eat mainly fast food and avoid fresh produce. They were already seeing ill health as a result. Unfortunately I doubt that the grass-fed beef, free-range chickens and eggs produced by Polyface Farms (featured in the film) are a viable solution for this family. The farmer himself mentioned that his products cost more than the mainstream. One would expect this and it is fine for consumers who are willing and able to pay, but this family is not in that category.

If it were not for the large, specialized factory farms, food would be much more expensive and there would be much less of it. Those who believe that only organic production is moral should seriously think about the repercussions such a belief would have if put into practice. Small, self-sufficient and organic farms are not a practical way to feed the world. Specialization and standardization allows products to be much more plentiful and affordable. Given the number of people struggling economically and the many who cannot afford to eat, whether in the US or elsewhere, I believe that any increased efficiency in this area is wholly positive. This does not mean that there should be no change in the factory farming system (halting agricultural subsidies would be a good start), but the system as a whole is not the problem.

Conclusion
I do not intend this to be a full discussion. I mainly want to provoke more careful thought about these issues and encourage viewers to research before making judgments based on this film. I encourage you to read the following excellent article “The Omnivore’s Delusion: Against the Agri-Intellectuals,” by Blake Hurst. In evaluating Michael Pollen’s (a Food, Inc. contributor) book The Omnivore’s Delusion, Hurst discusses many of Food, Inc.’s claims from a farmer’s perspective. He also outlines some of the reasons for the supposed cruel conditions like those described in Food, Inc.