Category Archives: Economics

Here’s The Inevitable Article

…on “price gouging” (otherwise known as the law of supply and demand) in the wake of Hurricane Charley. The Mises Institute preemptively responded to this, but it never slows down the economic ignoramuses at the New York Times:

Janet Snyder, a pharmacy technician in Cape Coral, said several men in two pickup trucks spotted her roof damage and offered to lay down a temporary covering of plastic sheeting. They wanted $600, about four times what she figured was the right price, based on 15 rolls of plastic that usually sell for $10 each.

OK, so Janet is clearly no business major, but how dumb is the reporter to pass this on without comment? She seems to think that the men’s labor should be free, and that she should only have to pay for materials. In the real world, even with no hurricane, she wouldn’t get free labor. She certainly can’t expect it when there is so much to be done.

Here’s The Inevitable Article

…on “price gouging” (otherwise known as the law of supply and demand) in the wake of Hurricane Charley. The Mises Institute preemptively responded to this, but it never slows down the economic ignoramuses at the New York Times:

Janet Snyder, a pharmacy technician in Cape Coral, said several men in two pickup trucks spotted her roof damage and offered to lay down a temporary covering of plastic sheeting. They wanted $600, about four times what she figured was the right price, based on 15 rolls of plastic that usually sell for $10 each.

OK, so Janet is clearly no business major, but how dumb is the reporter to pass this on without comment? She seems to think that the men’s labor should be free, and that she should only have to pay for materials. In the real world, even with no hurricane, she wouldn’t get free labor. She certainly can’t expect it when there is so much to be done.

Here’s The Inevitable Article

…on “price gouging” (otherwise known as the law of supply and demand) in the wake of Hurricane Charley. The Mises Institute preemptively responded to this, but it never slows down the economic ignoramuses at the New York Times:

Janet Snyder, a pharmacy technician in Cape Coral, said several men in two pickup trucks spotted her roof damage and offered to lay down a temporary covering of plastic sheeting. They wanted $600, about four times what she figured was the right price, based on 15 rolls of plastic that usually sell for $10 each.

OK, so Janet is clearly no business major, but how dumb is the reporter to pass this on without comment? She seems to think that the men’s labor should be free, and that she should only have to pay for materials. In the real world, even with no hurricane, she wouldn’t get free labor. She certainly can’t expect it when there is so much to be done.

Economic Confusion

Stories like this, about how much owners of intellectual property are losing to piracy, always bug me, because the industry press just accepts the figure without criticism or comment.

They claim that they lost almost thirty billion dollars last year to pirated software. They derive this number by estimating the number of pirated software installations, and multiplying by the price of the product. But it’s almost certain that their losses aren’t that high. The only amount of money that they’re out is the amount that the people using the software would have been willing to pay if they hadn’t been able to get it for free.

This kind of disingenuous story occurs because people don’t understand the difference between price, cost, and value. For software, the marginal cost (resources required of the seller to produce it) for the software is almost zero, while the price (the amount asked by the seller) may be very high relative to its actual value, which varies from individual to individual. No rational person will pay more for a product than they value it, so if they can’t get it for free, the only amount of money that the vendor is out is the sum of the value of it for all potential buyers. Clearly, it wasn’t worth the full price to many of those individuals, or they would have paid it, and I think that the amount of loss is vastly overstated–many of them would have simply gone without, rather than pay full price, so the revenue in that case would still be zero.

Taxes Are A Drag

There are many infuriating things about the current federal tax rules, but the one that I find the most egregiously unfair and potentially damaging to the economy is the situation with deductability of interest.

In 1986, individuals were no longer allowed to deduct loan interest, except in special cases, and for their home mortgages. The arguments for this change were simplification, discouraging installment borrowing and more revenue for the government. The only valid argument is the first one, since it’s not clear that discouraging installment borrowing is a good thing for either the economy or the individual.

But it did indeed simplify taxes–there’s no longer any need to find all of your interest deductions, and add them up, since they’re no longer relevant to your return. Of course, in exchange for this “simplification,” most people pay much more in taxes than they did prior to the change. This has resulted in the growth of “mortgage lines of credit” since now the only way to make the interest deductable is to borrow money against your house.

This change was outrageously unfair, because they now get you coming and going. You still have to pay tax on interest earned, but you’re not allowed to deduct interest paid. So interest counts only when it’s incoming–not when it’s an outgoing expense, unless it’s going into some other investment (not consumption). (Thanks to Carey Gage for pointing out my previous erroneous statement, now down the memory hole).

But the situation has a more problematic effect (speaking personally)–it discourages small business formation. Suppose someone has an idea for a business startup, but limited access to capital. Well, one way to do it, if one has a good credit rating, is to do “venture capital by Visa.” Borrow the money from your credit card, and pay it and the interest back from the proceeds of the venture.

Now most financial advisors would say that this is insane. Of course, those same financial advisors would probably also say that starting your own business is insane as well, given the rate of failure of startups. So given that you’re going to be an entrepreneur anyway, it’s not that much nuttier to borrow the money to do it from Mastercard, instead of Aunt Nellie.

And therein lies the problem. Clearly, the interest that you’re paying on the loan is a business expense. But if the main thing that you need the money for is to cover your personal bills (rent or mortgage, groceries, gas, etc.) while you’re getting the business going, there’s no way to deduct it under the current rules.

Well, wait–there is one way. You can borrow the money, then relend it to the business startup, and then pay yourself a salary from the loan. This allows you to deduct the interest for the loan to your business. But there’s a big problem–it also means that you have to pay federal income taxes on it, including FICA, and possibly even things like unemployment insurance, because it’s now taxable income to you.

So that’s the choice you have. You can simply borrow money to support yourself, but you can’t deduct the interest because it’s not considered an allowable business expense, though clearly it should be. Or you can borrow the money and lend it, in which case Sam takes a huge percentage off the top before you can get it to pay your bills.

Either way, I suspect that there are a lot of businesses (including space businesses) that don’t get started because of this financial catch-22, which could be eliminated by simply returning fairness to the tax system, by either excluding interest income from taxes, or restoring the interest deduction.

Why?…Why?…Why?…

Perhaps this is so obvious that someone else has already mentioned it, but it seems to me, upon further reflection, that there is an answer to Megan’s question about why Enron (or any B2B) was advertising to a market that was in a position neither to purchase, or influence the purchase of, its products.

Was it trying to boost market? Obviously not. Was it trying to boost profits? How would that be accomplished with expensive and opaque ads? Was it trying to hype stock price?

Bingo.

Let’s See If I Can Fit Both Feet In Here

Senate Majority “Leader” Daschle is having trouble getting his followers in line. No other Democrats want to sign on to his latest demogogic campaign to convince people that tax cuts cause recessions. Sounds like they’re running a little scared.

[Update at 10:36 AM PST]

Tony has a couple comments on this and the previous related post from last night.

My response to his comment on this post is in the comments section for it. As to the previous one, I’ll move it “above the fold.”

I don’t think that you fairly represented what I argued – again, nobody is claiming that “tax cuts cause recession”. The assertion was that “lack of confidence” in the fiscal policy “probably”(D’s word), or “mau have”(my words, had an adverse impact – neither of us say “definitley did have”. That’s precisely Daschle’s stated argument, though few people – except myself E.J. Dionne (in todays WP)- choose to read it that way.

Well, “choose to read it that way” is exactly the right phraseology. Very few others conversant with the English language would “choose” to do so. As I said in my comment in this post, I “choose” to read it the way it was obviously intended–to blame the tax cut for the recession, or at least the depth of it. As I said, if there’s a “lack of confidence” in the Administration’s fiscal policies, it’s not because of the policies themselves–it’s because of their mischaracterization by the Democrats and their willing accomplices in the press.

You refer to “talking down the economy” – when I threw that back at Bill Quick in re Mr. Bush doing the same to sell the 2001 Act, Bill argued that “mau-mauing” the economy wouldn’t have an effect, either.

There’s a more fundamental difference. When Bush was “talking down the economy,” he was simply describing objective reality–all the economic indicators had been heading down even before the election. Of course he was making the case for a tax cut. When the economy is heading into a recession, as it obviously was, it makes sense to cut taxes, and to develop a public consensus for that.

Mr. Daschle, on the other hand, is not so much “talking down the economy” directly, as attempting to talk down the people’s confidence in the Administration policy with errant nonsense (which he perhaps hopes will have the desired effect of prolonging the recession until after the election). Fortunately, it doesn’t seem to be working.

So – which is it?

As I said, you’re comparing simply describing economic reality on the one hand, with raw unfounded propaganda on the other.

In re Hoover – read over the history again: Hoover’s initial reaction was DO NOTHING, everything will be OK, the economy is FUNDAMENTALLY SOUND.

As indeed might have been the case, had he not panicked with Smoot-Hawley, and had money been looser (something over which he had no direct control, though a little jawboning might have helped).

Hoover didn’t act until after it was too late to turn things around.

As I said, it was not the timing of his actions that was the problem–it was the stupidity of them.

Finally, the argument that tax cuts spur investment is good theory, but companies are telling us what they would do with a tax cut that comes NOW – they wouldn’t use it to “invest”, they would use it to “recoup”.

What does that mean, exactly–“recoup”?

Does it mean that the money will not get spent, or invested, in something? How can that be?

Do you think that it will just sit in a vault somewhere, so that the greedy corporate executives can swim around in it a la Scrooge McDuck? I don’t really understand this comment.

As far as the causes of the depression – ask yourself why monetary policy was tightened.

Because the people running the equivalent of the Fed at that time were economic ignoramuses, and didn’t understand the problem.

Could it possibly be that when everybody tried to “cash out” it was discovered that nobody could cover the debt, and pumping the requisite number of dollars into the economy would have resulted maybe in hyper-inflation?

Nope, though it’s possible that they thought that.

[End Update]

Let’s See If I Can Fit Both Feet In Here

Senate Majority “Leader” Daschle is having trouble getting his followers in line. No other Democrats want to sign on to his latest demogogic campaign to convince people that tax cuts cause recessions. Sounds like they’re running a little scared.

[Update at 10:36 AM PST]

Tony has a couple comments on this and the previous related post from last night.

My response to his comment on this post is in the comments section for it. As to the previous one, I’ll move it “above the fold.”

I don’t think that you fairly represented what I argued – again, nobody is claiming that “tax cuts cause recession”. The assertion was that “lack of confidence” in the fiscal policy “probably”(D’s word), or “mau have”(my words, had an adverse impact – neither of us say “definitley did have”. That’s precisely Daschle’s stated argument, though few people – except myself E.J. Dionne (in todays WP)- choose to read it that way.

Well, “choose to read it that way” is exactly the right phraseology. Very few others conversant with the English language would “choose” to do so. As I said in my comment in this post, I “choose” to read it the way it was obviously intended–to blame the tax cut for the recession, or at least the depth of it. As I said, if there’s a “lack of confidence” in the Administration’s fiscal policies, it’s not because of the policies themselves–it’s because of their mischaracterization by the Democrats and their willing accomplices in the press.

You refer to “talking down the economy” – when I threw that back at Bill Quick in re Mr. Bush doing the same to sell the 2001 Act, Bill argued that “mau-mauing” the economy wouldn’t have an effect, either.

There’s a more fundamental difference. When Bush was “talking down the economy,” he was simply describing objective reality–all the economic indicators had been heading down even before the election. Of course he was making the case for a tax cut. When the economy is heading into a recession, as it obviously was, it makes sense to cut taxes, and to develop a public consensus for that.

Mr. Daschle, on the other hand, is not so much “talking down the economy” directly, as attempting to talk down the people’s confidence in the Administration policy with errant nonsense (which he perhaps hopes will have the desired effect of prolonging the recession until after the election). Fortunately, it doesn’t seem to be working.

So – which is it?

As I said, you’re comparing simply describing economic reality on the one hand, with raw unfounded propaganda on the other.

In re Hoover – read over the history again: Hoover’s initial reaction was DO NOTHING, everything will be OK, the economy is FUNDAMENTALLY SOUND.

As indeed might have been the case, had he not panicked with Smoot-Hawley, and had money been looser (something over which he had no direct control, though a little jawboning might have helped).

Hoover didn’t act until after it was too late to turn things around.

As I said, it was not the timing of his actions that was the problem–it was the stupidity of them.

Finally, the argument that tax cuts spur investment is good theory, but companies are telling us what they would do with a tax cut that comes NOW – they wouldn’t use it to “invest”, they would use it to “recoup”.

What does that mean, exactly–“recoup”?

Does it mean that the money will not get spent, or invested, in something? How can that be?

Do you think that it will just sit in a vault somewhere, so that the greedy corporate executives can swim around in it a la Scrooge McDuck? I don’t really understand this comment.

As far as the causes of the depression – ask yourself why monetary policy was tightened.

Because the people running the equivalent of the Fed at that time were economic ignoramuses, and didn’t understand the problem.

Could it possibly be that when everybody tried to “cash out” it was discovered that nobody could cover the debt, and pumping the requisite number of dollars into the economy would have resulted maybe in hyper-inflation?

Nope, though it’s possible that they thought that.

[End Update]