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    Economics in One Lesson {Week Three}

    January 22, 2008 by Brandy Vencel

    Today is an interesting {ironic?} day on which to be discussing economics. I was watching the overnight markets last night {after my dad alerted us to the situation} with interest. Asia was off, then London, Germany, and France. One article I read said that investors were panicking and running to the “safety of government bonds.” Ah, yes, the “safety” of buying an institution’s debt.

    I think I can safely say we are seeing a bit of the downside of government tinkering in the market, rescuing irresponsible banks, printing fiat currency, etcetera.

    On to Hazlitt! What shall we discuss today?

    Parity Prices and the Great Depression

    The argument for parity prices ran roughly like this. Agriculture is the most basic and important of all industries. It must be preserved at all costs. Moreover, the prosperity of everybody else depends upon the prosperity of the farmer. If he does not have the purchasing power to buy the products of industry, industry languishes. This was the cause of the 1929 collapse, or at least of our failure to recover from it.

    I am unfamiliar with all the ramifications of parity prices. However, Ben Bernanke himself took responsibility for the Great Depression. That is, he said that the Federal Reserve caused it. At Milton Friedman’s Ninetieth Birthday Party, Bernanke said, “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

    Now watch him lower rates today. But I digress. My point is that blaming the Great Depression {and the 1929 crash} on parity pricing overlooks Friedman’s assessment that the cause was overall irresponsibility on the part of the Federal Reserve.

    I would say it was the mere existence of the Federal Reserve.

    But moving on…

    Fairness Only Sought When Prices are Unfavorable to Agriculture

    Another evidence is that when agricultural prices go above parity, or are forced there by government policies, there is no demand on the part of the farm bloc in Congress that such prices be brought down to parity, or that the subsidy be to that extent repaid. It is a rule that works only one way.

    I think this sufficiently reveals that true fairness is not being sought, but rather benefit to one industry {in this instance, agriculture}. Whenever the government tries to meddle and make a situation “fair” for one industry or special group or whatnot, it inevitably makes the same situation “unfair” for others outside said group. This is why free markets are preferable: they are natural rather than artificial.

    Rising Prices Thanks to Uncle Sam

    But what we are discussing is a rise in farm prices brought about by government intervention…Suppose the wheat which would otherwise sell at $2.50 a bushel is pushed up by this policy to $3. 50. The farmer gets $1 a bushel more for wheat. But the city worker, by precisely the same change, pays $1 a bushel more for wheat in an increased price of bread. The same thing is true of any other farm product.

    This type of situation now extends beyond food. We now have the government subsidizing the production of corn for the purpose of “encouraging” E85 fuel production. They are also giving “credit” to automakers that produce cars capable of utilizing E85. I have now read articles blaming rising food prices on the skyrocketing price of corn. This is because corn is often fed to cattle and chicken. If the price of the corn is higher, steak, milk, eggs, and chicken will all cost more. Meanwhile, the price of the diesel gas in the truck that brought you your meat and dairy is also rising. So the government, through its intervention, has actually raised the total cost, without solving any actual problems, which is fairly typical of big government.

    By the way, I guarantee you that the free market will produce a solution to the fuel problem. Government intervention slows this process down by distracting us all with corn and E85 and whatnot. The true answer, the best and most workable solution, is probably something totally different. But we will probably ignore it for at least a decade because we have so much invested in E85.

    Saving the X Industry

    THE LOBBIES OF Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy.

    As a refresher, I thought I’d mention my past post concerning the Discount Window. This is the most popular version of “Save the X Bank.” We might be seeing more of this scheme in the days to come. Remember: opening the Discount Window is a tax on us all, a tax in the form of inflation.

    Government Subsidies

    It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

    This is hard for our culture to see today, especially when most of us have our hands in the money jar in some way, even if we wish we didn’t. Let’s make this personal for a moment. How has my life taken money from the taxpayer? Did I go to a goverment school? Did I use a goverment grant or goverment interest-rate-controlled loan to pay for college? Did I use WIC when we were poor and had our first child? Did I work for a company with government grants as a primary source of income? Did I work for the government? This would include working for a government school or university, any governmental agency, and any agency contracted by the government {like social work or foster care}. Does my disabled child receive state aid and state subsidized therapy? Is my apartment rent-controlled? Do I live in low-income housing?

    I remember I once looked around my Sunday School class at church and realized that, of all the people with jobs {many of us were mommies}, only two or three had jobs that were not government jobs. We really do all have our hands in the money jar.

    My point about all of this is that if our income comes from the taxpayers, we have to realize that there is a taxpayer somewhere who is poorer because of us.

    Let Them Die

    it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow.

    I think the challenge for our generation will be to let the government schools, especially in their current form and with their current prevalance, die their natural death. But this applies to many industries, I’m sure.

    What Things Cost

    This process is the origin of the belief that prices are determined by costs of production. The doctrine, stated in this form, is not true. Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it. It is true that supply is in part determined by costs of production. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand.

    This is why Si and I are making an offer on a short sale property today that is a hundred thousand dollars below the asking price. Today is a bad day, economically speaking. There are many beautiful houses on the market in our area, and many of those are short sales {meaning the bank already realizes that the current “owners” owe more on the property than the current market says it is worth}. It does not matter that it probably cost more to build the house than we are offering. It does not matter that the owners probably owe more than the asking price, even. What matters is what Si and I, and other buyers out there, are willing to pay and are able to afford.

    This is easier to see in real estate, which is why I use the example. Now, let’s extend it to the infamous widgets. Say you and your family produce a very special widget and it is near and dear to your heart. You love your widget and you firmly believe that it is worth $20. So you build your little internet website and you list your widget at $20. Let’s say you sell a couple, and you get compliments from those customers, but you aren’t selling anymore.

    So, you do what comes naturally: you have a sale. This allows you to toy with a lower price without committing to it forever. You discover that when you put your widgets on sale for $15, you sell four {or twice as many}. So you decide to experiment with the price, knowing full well it cost you $9 to produce the widget so you “cannot” sell them for less than that. As time goes on, perhaps you discover that your widget sales skyrocket when the widget is $7.

    This means that people do not really want widgets, and you need to get out of the widget business, fast. If they are handy, you should continue to make them for yourself. Make an excess and give them as gifts. But don’t continue in the widget business.

    This is why prices rise and fall and some “good” product lines are cut from production: because, in the end, the cost of production does not dictate the market value of the widget. Or the house. Or whatnot.

    The Price-Fixing Beaurocrat

    It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.

    Never forget: the politician who wants to give you cheaper gas prices, lower your rent {but not your taxes!}, and give you a better-paying job wants to be your parent, or perhaps your messiah. This is a power play of the worst sort, and once a politician is making decisions for you, your freedom is greatly diminished on a large scale.

    Six of One, Half-Dozen of the Other

    One of the most frequent is government loans to farmers to enable them to hold their crops off the market.

    Such loans are urged in Congress for reasons that seem very plausible to most listeners. They are told that the farmers’ crops are all dumped on the market at once, at harvest time; that this is precisely the time when prices are lowest, and that speculators take advantage of this to buy the crops themselves and hold them for higher prices when food gets scarcer again. Thus it is urged that the farmers suffer, and that they, rather than the speculators, should get the advantage of the higher average price.

    Okay…so next time we hear this we need to translate it as: the government is putting a speculator out of business. The government, in its infinite wisdom, has decided that one person {the farmer} should be in the hoarding business and the other person {the speculator} should not. This is arbitrary.

    Buying Agricultural Votes

    When the government steps in, the ever-normal granary becomes in fact an ever-political granary. The farmer is encouraged, with the taxpayers’ money, to withhold his crops excessively. Because they wish to make sure of retaining the farmer’s vote, the politicians who initiate the policy, or the bureaucrats who carry it out, always place the so-called fair price for the farmer’s product above the price that supply and demand conditions at the time justify. This leads to a falling off in buyers. The ever-normal granary therefore tends to become an ever-abnormal granary.

    Since I live in a place where huge amounts of food are grown, I find it pertinent to mention that while the government is out there fixing prices and holding crops off the market, there is another arm of government that makes it nearly impossible for farmers to do business. Namely, the environmental groups are constantly battling the farmers in our area over water supply. The result is that there are many small farmers with dead orchards on their properties. They simply couldn’t afford to water them any longer.

    With one hand they buy the vote and with the other they decide a rare salmon is more important than the nation’s food supply, more important than people.

    Free Trade or Free Trade?

    Just what the government planners mean by free trade in this connection I am not sure, but we can be sure of some of the things they do not mean. They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. They do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes, to come and go at will, to settle where he pleases, to take his capital and other belongings with him. They mean, I suspect, the freedom of bureaucrats to settle these matters for him. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. But if the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life, the international controls of the future seem only too likely to follow the pattern of the past, in which case the plain man’s living standards will decline with his liberties.

    Inflation and Price Control

    It is the wartime inflation that mainly causes the pressure for price-fixing. At the time of writing, when practically every country is inflating, though most of them are at peace, price controls are always hinted at, even when they are not imposed. Though they are always economically harmful, if not destructive, they have at least a political advantage from the standpoint of the officeholders.By implication they put the blame for higher prices on the greed and rapacity of businessmen, instead of on the inflationary monetary policies of the officeholders themselves.

    This is a decoy. If politicians can blame greedy, profiteering businessmen, they can shift the eyes of the public from the Usual Source of public misery: the decisions the politicians themselves have made. Remember what I said in the Discount Window section: it is nothing but a tax through inflation. When we see inflation, we can be pretty sure our government has been printing more money. This is why they do not feel a need to balance the budget. They will simply have the Fed print any money necessary to carry on their special projects, and think nothing of the effects on the average taxpayer.

    Who is Responsible?

    The argument for holding down the price of these goods will run something like this: If we leave beef {let us say} to the mercies of the free market, the price will be pushed up by competitive bidding so that only the rich will get it. People will get beef not in proportion to their need, but only in proportion to their purchasing power. If we keep the price down, everyone will get his fair share.

    I often think that arguments like this {made by rich politicians, mind you} are made to ease the consciences of those who have much. It is much easier to say that the government must make a situation “fair” than to say that, if I have much, I am responsible before God to share with those who have little.

    However, virtue is cultivated in a culture when the people begin to care for each other. Passing the responsibility to the government is a sure way to cause warfare among the classes, jealousy, envy, strife…do we see that this cultivates sinful attitudes and behaviors?

    The Forgotten Man, Again

    What is forgotten is that subsidies are paid for by someone, and that no method has been discovered by which the community gets something for nothing.

    Rent Control

    Most important, unless the appropriate rent increases are allowed, landlords will not trouble to remodel apartments or make other improvements in them. In fact, where rent control is particularly unrealistic or oppressive, landlords will not even keep rented houses or apartments in tolerable repair.

    And then the politicians will vilify these landlords as “slumlords” on the nightly news programs. {Hazlitt actually uses this example later!} I am sure there are some landlords that are truly terrible, but how many are strapped for cash due to government intervention? Our rent recently went up, but not because our landlord got greedy. To the contrary, his property taxes were raised, which meant that our previous rent caused him to lose money on the property every month. It is hard to pay more to live here, but we know we need to pay the owner enough to be able to do small repairs as needed.

    Final Note for the Week

    This week, when you hear a politician talk or read his words somewhere, try to reason out the ramifications of what he is saying. Don’t take his word for it, and don’t assume he is telling the whole story. If Obama promises you free {mandatory??} preschool and day care, think about the impact on the family, who will pay for it, and what will really happen to those children.

    Think it through.

    _______________________

    Now go read the rest of the discussion.

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    10 Comments

  • Reply Nathaniel January 26, 2008 at 5:43 pm

    Oops, my son is signed in on Google. Nathaniel is actually Cindy at Dominionfamily.

  • Reply Nathaniel January 26, 2008 at 5:42 pm

    I knew I was missing something, of course, taxes are embedded in rent!

  • Reply Brandy January 25, 2008 at 6:00 pm

    Right now, in this market, a lot of folks here are better off renting because their home values are plummeting monthly! However, I think the benefits of ownership in our area (California has a cap on property tax, so if you bought your house for $200K, and the “value” goes up to $400K, you only pay taxes on about $200K+2%) are:

    (1)Stability. We get nervous that our landlord will lose the house or sell the house out from under us. Some folks ended up homeless nearby because the landlord didn’t pay the mortgage even though they were paying their rent.

    (2)Lower payments long term. With rent, you never pay it off. In 30 years, we would still be paying what we are paying today (or more). If we owned this place, in 30 years we would have it paid off (and hopefully sooner).

    (3)Tax is embedded in rent. What I mean is, the price we pay for rent includes property tax and insurance. The landlord isn’t going to take a loss, even in a bad market, if he can help it. So either way we pay taxes.

    (4)Control. We have (little or) no power over the fact that our landlord won’t fix the fence, but doesn’t want us to fix it ourselves. We have no control over the fact that he did a terrible job on the backyard “landscaping” so that it grows more weeds than anything else. We could do things to make it look nice, but it feels like a waste when it isn’t ours to keep.

    With all of that said (which was probably too much), buying probably isn’t a good idea if a person wants to move within 3 years. The ability to sell isn’t always a sure thing. I think of buying as a major commitment–a putting down of roots.

  • Reply Dominion Family January 25, 2008 at 5:30 pm

    Something that has always confused me: If I pay $5,000 a year in property taxes doesn’t that actually reduce my real equity in my house? In AL we pay far less than that but in NJ it almost seemed like financially we were better off renting. In the end we had money in the bank whereas if we bought we lost much of our equity in taxes.

    But I think I am looking at that wrong somehow.

  • Reply Laura January 23, 2008 at 8:11 pm

    Great post – and you covered “saving” industries! Enjoyed it a lot!

  • Reply Brandy January 22, 2008 at 11:54 pm

    MPL:

    Yes! I want to borrow your book so that there is another subject where I know more than I am comfortable with. 🙂

  • Reply Brandy January 22, 2008 at 11:53 pm

    Ellen:

    Cool club. 🙂

    If I might encourage you, it has only been in the last few weeks that we thought we might be able to afford something (at least in a safe neighborhood and with a yard). Our market tends to be ahead of the curve. So perhaps yours will follow by next fall!

    There are real estate agents that specialize in short sales, which is generally where the bank agrees to take a loss on a property because of the over-inflated prices. We have been able to find them ourselves because our local listings are searchable by internet. We look at them often, searching for key words like “bank owned”, “REO”, “foreclosure” or “short sale”. That usually gives us a list of the most negotiable properties.

    But notice we still don’t own a house. 🙂 Time will tell whether this tactic actually works. We certainly think it should. Some of the houses on our list were foreclosed on before they were ever lived in! They have been sitting there for over a year. Someone needs to admit they paid too much and let go.

    Hopefully, they will give them to us…

    Oh! And my other advice? PRAY. Hopefully God will have mercy on us both and honor our decisions not to get into something we can’t really afford. 🙂

  • Reply MountainPowerLineman January 22, 2008 at 10:57 pm

    I only skimmed your post, so far. But what caught my eye was the subject of the industrial farm complex. Corn and soybeans constitute more of the American life than most people would want to know. It’s a vicious circle. I’ll have to lend you my copy of The Omnivore’s Dilemma once I finish it. I learned a lot about farms that I didn’t know.

  • Reply Ellen January 22, 2008 at 9:30 pm

    Hi! Yup, this brings back memories of reading this book myself in college. Have I mentioned that my husband and I were once president and vice-president of the Adam Smith Club? =) About the short saling thing… how do you find out about these things? We find ourselves in the situation that even with a good down payment, it looks like we cannot afford any house in our current area in a “good” neighborhood. My frustration with the inflated prices based on ARMs is very high. Those of us who have saved and refused to use credit cards are being punished by those who paid more than they could afford and refuse to sell for less than they think they deserve, even if they have to sit for awhile. And nobody seems to get that we can’t afford these houses, since “everybody else is doing it.” We’ve run the numbers; it’s not possible. Arrrghhh! Any ideas?

  • Reply Dana January 22, 2008 at 6:19 pm

    Enjoyed your clearly written summaries. You seem to have a good grasp of the principles and I appreciate your participation.

    Blessings fm GA,
    Dana

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