Posts tagged economics
Posts tagged economics
Here is a perfect real world example of malinvestment due to government stimulus. From this Bloomberg article:
China, the world’s biggest steel producer, is exporting at the highest level in two years, exacerbating a global glut…
…Chinese steel mills, set for a record production in 2012, are ramping up overseas sales to avoid a softer domestic market, where prices for the commodity have dropped to a two-year low.
China is producing so much steel, that it must export the excess to keep prices from falling. In a world not dominated by Keynesian economics, this drop in price would signal that too much steel is being produced, prompting steel companies to cut back on production. Instead…
Chinese Premier Wen Jiabao is overseeing a $23 billion investment in new mills to stimulate automaking and housing to reignite growth that fell in the second quarter to the slowest in three years. The strategy already is sparking unfair-trade charges by Western rivals.
First, it’s a stupid strategy. They are producing an excess amount of steel and thus lowering prices in the process, making it likely unprofitable were it not for the government’s money. This is a perfect example of malinvestment - resources poorly allocated (the money could be used somewhere else) due to cheap credit or in this case government stimulus.
Second, although difficult for steel mill employees and owners to see, it is actually beneficial to the markets the steel is being exported too. By overproducing and exporting the steel at a subsidized price to the United States market, U.S. consumers are likely to see the price of anything built with steel to go down. This allows U.S. consumers to either save, invest, or spend this extra money elsewhere. Savings and investment are the lifeblood to an economy.
What happens when you flood a market with government loans and subsidies - both to consumers and manufacturers? You distort the market. People take risks they normally would not because it’s not their money. Good money starts to follow bad. You create bubbles that will eventually burst. This is what is happening in solar right now.
Solar manufacturers, which expanded rapidly to meet double- digit demand growth in the past decade, are struggling with subsidy cuts in Europe and plunging natural-gas prices that make renewable energy less competitive. The largest producers in China say their profits will slump this year as shipments grow.
“Oversupply has become a problem for the entire industry,” said Ben Schuman, an analyst at Pacific Crest Securities LLC in Portland, Oregon. “China’s manufacturers have not demonstrated rational behavior.”
The best way to create green jobs, or any other kind of job, is to let the markets handle it. Politicians can not see the future. A politician - even the President - knows less about the solar market and the potential risks involved than investors who are willing to risk their own money. If they could tell the future, they would be starting their own solar companies and would be rich.
I don’t understand this thinking. Civitas (a UK “think” tank) says the pound should be devalued by as much as 25% so Britain can export more goods.
If you think about it, what this really means is they think the government should flood the system with so much money that the price of everything valued in pounds increases by 25%. Once purchasing power has been sufficiently eroded for the British consumer, foreign consumers (their currency will be worth more relative to the pound) will be able to exchange fewer of their goods and services to get the British products they want. Or to look at it another way, British citizens will have to work 25% harder in the future to buy the same things they can buy now. This also means that anyone with savings will be able to purchase 25% less with that savings after the devaluation - a particularly painful sacrifice for retired people who can not increase their savings from higher wages (wages will eventually increase as well).
The supposed “benefit” comes from an increase in jobs. But the reason more people will have to work is because Britain will have to produce more (work harder) to get what they once could before the devaluation.
Something else they seemingly fail to grasp is that the price of imported raw materials will also increase. I’m not sure what the percentage is in the UK, but in the US, about 50% of our imports are raw materials that we use to produce goods. This added cost to manufacturing will likely eat up any “profits” created by the increase in exports.
How would any of this benefit the British economy?
I think the first sentence sums things up best…
Nothing sparks spasms of poor economic commentary like rising oil prices.
Amen. This article does a very good job explaining how speculation and higher prices actually benefits society.
Speculators who anticipate that oil will be in shorter supply tomorrow than today can profit by buying oil today and selling it tomorrow. Oil is transported across time from today (when it’s relatively abundant) to tomorrow (when it will be less so). Barrels of oil that would, without speculation, have been used today when they aren’t so desperately needed are, with speculation, conserved for use tomorrow when they will be more desperately needed. Surely this result deserves applause.
It reminds me of another letter Don Boudreaux wrote a while back. One where a reporter was talking to a person filling up their gas tank. The reporter contributed higher gas prices to speculation and asked if oil speculation should be outlawed. The interviewee gave an unequivocal, “yes”. She then added that the reason she was buying gas was actually because she was afraid gas prices would go higher over the weekend, so wanted to top off her tank. Damn speculators!!! I was explaining this to my 15 year-old stepson and he saw the irony before I even had to explain it. The person buying gas wasn’t buying it because she needed it, she was speculating that gas prices would increase, thereby participating in the same market activity she thought should be outlawed.
It’s easy to blame things we don’t understand.
So many people have lost sight of this basic concept about money (money represents goods and services) that I thought I’d share this video. All Quantitative Easing will do is create inflation. If not now, then in the future.
I thought we wanted people to use solar power instead of carbon based energy.
The Commerce Department said on Tuesday that it would impose tariffs on solar panels imported fromafter concluding that the Chinese government provided illegal export subsidies to manufacturers there.
This is actually a great example of the problems with tariffs and protectionism. China may be subsidizing their solar industry, but why is that a problem? We certainly aren’t a country that should complain. We subsidize all sorts of industries, especially agriculture (see sugarcane). If China is subsidizing its solar industry, what does that mean for us?
It mostly means that U.S. consumers get greater access to solar panels at a more affordable price. It also means that Chinese tax payers are the ones footing part of the bill. It makes solar panels more cost effective when compared to other sources of energy which encourages their use and thus increases our usage of solar power. When we slap tariffs on goods, the consumer suffers and business owners profit. In this case, the environment also suffers. In truth, even the solar industry suffers because there is less competition. They don’t have to be as innovative which prolongs advances in solar technology.
This tariff is a perfect example of corporate welfare and crony capitalism. Take from the general public (a tariff is essentially a tax) and give it to a well connected manufacturing sector. The only people who win are the owners of the solar panel plants and the politicians that receive contributions from them.
A letter to Planet Money’s David Kestenbaum and Jacob Goldstein:
David Kestenbaum and Jacob Goldstein’s broadcast this morning on China’s Giant Pool of Dollars focuses mostly on what they see as positive aspects of China’s rising currency. I’m just wondering if they have considered any of the potential problems that could also occur.
As the U.S. continues to devalue its currency and China allows its currency to rise, demand for U.S. goods and services will increase. The commentators (along with most everyone else) see this as creating jobs in the United states. Dollars will “stop piling up in China” and elsewhere, and will start flowing back into the United States.
While this will likely create jobs, what is also very likely to happen is that IF the flow of money into the United States is faster than the flow of goods out, prices will begin to rise. Given the amount of money the Chinese and other countries have (the dollar being the reserve currency of the world), we may face some serious inflation.
Economists (depending on who you listen to) have been saying for quite some time that the United States has been exporting inflation. When foreign countries, central banks, and foreign citizens gobble up the dollars we print and hoard them, inflation is more or less kept in check. But if for some reason people see the value of those dollars start to decline (they can buy less with each dollar over time), they will start buying goods now instead of saving dollars to use later.
There may also be the potential for a snowball effect where inflation begins to rise faster and faster, encouraging more and more people, banks and governments to buy what they can, while they can, as fast as they can, from the United States. This kind of hyperinflation is a worst case scenario of course, but the potential is there.
Nobody ever wins arguing in internet forums, but I couldn’t help myself. The following short conversation inspired a brief essay on my part.
User 1: I think it’s stupid to talk about communism when the topic is the unhealthy impacts of Capitalism.
There you see how you’re effed by both (totalitarian) systems.
User 2: totalitarian? To quote a Spaniard, I do not think that words means what you think it means.
User 1: I know what it means and I know what I mean.
Of course not the totaltarism of a fascist regime as you may think. A little more abstract.
Me: Actual capitalism is equivalent to complete freedom of choice in what you do, what you buy, and how you use it (ie. FREE markets). How is that in any way totalitarian?
User 1: Think about.
Here are my thoughts on how can capitalism be totalitarian.
I think it would have to be through the use of force. In most societies, especially democracies, the only sanctioned use of force is through the government. The reason the government is sanctioned to use force is so it can protect citizen A from citizen B if citizen B decides to use force to get what he wants. If I as citizen B did not want to use force in fear of government reprisal, the logical step would be to petition the government to use force for me. Since governments are run by people, and people desire power, corruption is possible. The more power a government has, the more incentive there is to be in government and thus to be susceptible to corruption (provide favors - you scratch my back, I scratch yours). But it has to be relatively covert, at least at first. Again, laws (which are enFORCEd) must be used to “protect” citizens or citizens become angry and a) vote elected officials out of office or b) overthrow their dictators through violence.
Here is a real world example. At one time, banks could only loan out the capital they had on deposit. To lend out more was actually illegal. Even so, some would loan out more money then they had (greedy bastards) and people would get wind of it and want their money back. This caused a run on the bank which, if the bank couldn’t pay them all back, would be forced close and liquidate. The owner of the bank would be broke and destitute (perhaps even go to jail) until he found another means of employment. Depositors also would be hurt, so would look for banks they could trust. This kept banks in check.
Enter the power of the government. Bankers wanted to be able to lend more money than they had so they could make more money. Since bankers were usually wealthy, and officials in government need money to stay in power, they petitioned the government to legalize reserve banking (more money in the economy encourages growth and helps everyone!). So now banks can legally lend more money then they have on deposit. Runs on the bank are still possible, but since reserve banking is legal, a bank can borrow money from another bank in times of need. Unfortunately, it was still very possible for a bank to fail. And if a bank failed, it might take the other banks that lent it money with it. This still limited the risks banks could take with their money.
Enter central banking. Instead of currency being created by the free market, governments force one sanctioned currency on citizens by creating a central bank. This of course is to make things better for the citizens - one currency to avoid confusion and make commerce easier. So now with a central bank and the power to print money, banks could borrow from the central bank instead of other banks. After all, it is risky to lend to a failing bank because if it fails, you don’t get your money back and may also fail. Unfortunately, pesky gold standards can make printing money difficult. So central banks can only do so much to protect a bank. There is still the possibility of a run, and thus failure. What to do!?
The answer is simple. Protect the depositor! Create fees that banks must pay (which, btw raises the barrier of entry for new banks and reduces competition) and create a department called the FDIC. When a bank fails, depositors no longer lose their money. This removes the incentive for fearful depositors to get their money out of a failing banks. No more banks runs. Banks then are free to take extraordinary risks with little consequence. They become too big to fail. They gain undue influence over all levels of government, and the government becomes bigger and more powerful in the process. They create laws, not to protect citizen A from citizen B, but to give Corporation/Bank A power over Corporation/Bank B, C, & D. Unfortunately markets (individual people making individual decisions) always win. Even with all these protections, banks fail because of the extraordinary risks they take. Except they don’t fail because the government protects them.
So I suppose this could make people think capitalism is totalitarian. However, at this point, what we have is no longer capitalism. It is crony capitalism, where gains are kept by those in power and loses are socialized by taxing society to pay for their mistakes.
“The U.S. government has no authority whatsoever to determine to whom a company may or may not sell. This concept should be absolutely clear to anyone with at least a casual allegiance to free markets. In particular, the U.S. Constitution makes it explicit that export duties are prohibited. Furthermore, energy extracted from the ground, and produced by a private enterprise, is no more a public good than a chest of drawers that has been manufactured from a tree that grows on U.S soil. Frankly, this point from Mr. O’Reilly comes straight out of the Marxist handbook and in many ways mirrors the sentiments that have been championed by the Occupy Wall Street movement. When such ideas come from the supposed “right,” we should be very concerned.”
Peter Schiff excoriating Bill O’Reilly and like minded ilk who publicly support free markets but want America to practice protectionism when it comes to fossil fuels.
See also: Open Letter to Bill O’Reilly by Donald J. Boudreaux
For friends unfamiliar with Austrian Economics, I often compare the economy to the environment. I tell them that the environment is so complex, that when humans try to engineer a certain result (like introducing a new species of fish into a lake or river to fix one problem), it can create devastating unintended consequences (like that fish completely taking over the lakes and rivers, and moving into other lakes and rivers). There is so much we do not understand about the environment that the best solution is to let things be. The environment will fix itself far better than we can imagine or engineer.
The economy is the same way. Economics is the study of decisions, both economic and social, of billions of individuals. Think about how many decisions, good and bad, that you make every day and what influences those decisions. There is absolutely no way to accurately predict or control what will happen when one tries to direct or “fix” the economy. The result, just like when we try and control or fix an environmental problem, can be very dangerous and have very negative unintended consequences (ie. shortages of cancer drugs).
The article, “How Microbes Teamed to Clean Gulf” is a perfect example, illustrating that we know far less than we think we do. Scientists thought, “Given the enormity of the spill, many scientists predicted that a significant amount of the resulting chemical pollutants would likely persist in the region’s waterways for years.” Those scientists were wrong.
According to a new federally funded study published Monday by the National Academy of Sciences, those scientists were wrong. By the end of September 2010, the vast underwater plume of methane, plus other gases, had all but disappeared. By the end of October, a significant amount of the underwater offshore oil—a complex substance made from thousands of compounds—had vanished as well.
I’m not advocating that we ignore oil spills or that we don’t have to be careful in avoiding them, I’m saying that if we made policy decisions based on the predictions of scientists, these policy decisions would have been based on incorrect information.
Humans (especially scientists and politicians) often think we have everything figured out. We look at what we know today and compare it to what we used to know, and see such vast improvements in our knowledge base that we become overconfident. We think computer models can predict the future, until we determine they can’t. What we fail to see, and what we have always failed to see, is the knowledge we have yet to learn. Five hundred years from now, scientists may well look back on us and see us as simple minded quacks, stumbling around in the dark, just as we see those five hundred years before us who thought the world was flat and the sun orbited the earth.
The world is impossibly complex. Anyone who thinks that they understand it - or worse, can predict and control it - are probably simple minded quacks, stumbling around in the dark. The economy, just like the environment, will fix itself if we let it.