I would like to continue from the last post by responding to Andrew’s statement “The whole reason we have Government is to protect the common man, right? The common man can’t always be trusted to make the most beneficial decision to themselves and their community, thus there is government intervention to aid common man’s demise.” However I would like to move that response forward and discuss the purpose of government.

I disagree with Andrew. It is the interaction of every common man with every other common man that ensures that the most beneficial decision (for everyone) is made. Remember, just because you feel one decision is best does not mean it is for everyone. The Wal-Mart conflict centers around the plight of the small business vs. discount stores’ cheap commodities. A community, as a whole, may be made better off if it has access to affordable commodities, rather than being forced to do all the shopping at small locally owned businesses. It is only your (or possibly your) opinion that it would not.

Moving on from Wal-Mart I would like to say more on the purpose of government.

My beliefs follow closely to what Adam Smith had to say in Book IV Chapter IX of his master work The Wealth of Nations. Allow me to quote:

“According to the system of natural liberty, the sovereign has only three duties to attend to … first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, so far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice, and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain…”

Paraphrasing:
The responsibility of government’s existence should be and should be limited to three duties:

1. To protect its citizens from other countries.
2. A create and enforce a defined legal system that establishes property rights and personal rights for its citizens.
3. To undertake endeavourers that are too large, costly and grand to be undertaken by the private industry.

I would argue that number three has become obsolete. In the past, infrastructure such as sewers, highways, airports etc. would never have existed unless a government built them. However, today’s private industry has proven its ability to fund any project regardless of scale or grandeur. In fact not only has private industry proven its ability to take on these endeavors, the gains from competition ensure that these endeavors are completed and maintained more efficiently. I feel recent endeavors such as The X Prize proves this fact. What capitalist venture lies before the human race that is larger, more expensive or grander than space exploration?

That leaves two purposes for government

1. An Army
2. Creation and enforcement of a Constitution that includes defined property and individual rights.

Disagree? Then justify any other purposes. Can you justify denying a business the right to open?

Clemson has five sub shops in Downtown, three of which are national chains. These chains are everyone’s favorite. I, however, much prefer going to the local sub shop. To me, it is about supporting the local guy. Of course, subs are just an example. I feel this way about other commodities. I would rather buy my bread from a local bakery and meat from a butcher, etc (and I would, if there were such things in Clemson). I think the food quality is better; and did I mention that I like to support the local guy?

I am sure this rhetoric is nothing new. You have heard it a thousand times from a thousand hippies. The point of this rant focuses on this:

Wal-Mart just opened in our small town, despite the huge movement to keep it out, involving re-zoning, legislation etc. Even though I am all for the small guy in most cases, I was on the other side of the fence with regard to Wal-Mart. If I were to join the bumper sticker/yard sign crowd I would have made a sign that said, “I support Wal-Mart’s right to open in Clemson”. Acquaintances who are sick of my boycott of fast food chains have argued with me that this stance is contradictory. I don’t think it is.

I have expressed feelings similar to the ones I have about Wal-Mart before in other rants, but felt my message was lost because the example I used was too controversial. It’s not uncommon for people to attempt to force (via laws) others to adopt their ideas. In the long run, it never works. In my opinion this “legislating beliefs” approach is the definition of anti-Americanism (more so than any person opposing a war). You can, and should, try to inform, teach, and convince others that your opinion is right. But the second you try to force your convictions on others through legislation (re-zoning) you have chosen the wrong path. Think about it: If you have successfully convinced people that Wal-Mart is bad, then you should feel comfortable with Wal-Mart opening a store near you. If you were right, then no one will shop there; it will go out of business and close. Mission accomplished. However, if people wish to shop there then it is their choice, and who the hell are you to pass laws denying them that right?

I hope more people buy from the local guy. It is a better choice, in my opinion. However, I do not think that Wal-Mart is evil and I support Wal-Marts right to open in any town in America. People, make your own choices. Inform others, but do not pass laws forcing them to conform to your opinion.

P.S. Due to my fast typing I found out that “Wal-Mart” is in my word processor’s spell check dictionary. Coffeeman’s Bakery was not.

I walked into a conversation the other day in which a lady claimed she hates economists because they or their beliefs are bad for the environment.

Think back 100 or 200 hundred years ago. We the United States cut down just about every tree on this continent. We polluted the environment more than any entity ever. We sacrificed species of animals left and right and finally caught an entire river on fire. Everybody that partook in those practices knew they were harming the environment and knew that doing so was not good. Trust me any person knows it is bad to outflow your petro waste into a river. So why did they do it?

Because they were poor! This country did not start off as the richest in the world. We started off struggling the same way many countries are today. When our forefathers were faced with the choice between putting food on the table or saving the life of a spotted owl, (logging has endangered the spotted owl yet many of our forefathers made a living through logging) guess what they choose? And probably rightly so.

Because of this exploitation and past lack of concern for the environment our country prospered and our standard of living was elevated considerably.

Similar stories can be told of any industrialized and developed country.

We, citizens of these fortunate countries, are now able to sacrifice production and economic advancement to be more environmentally aware. Our choice is no longer "spotted owl or dinner". It is more like "spotted owl or bigger SUV". We have chosen to raise awareness and pass environmentally protective laws. These laws have slowed the continual rise of US per capita income and standard of living (bigger SUV) but we have all decided it is worth it, now.

But do not kid yourself. The difference is not that we are more environmentally aware than before, it is that we can now afford to be environmentally aware. So you can thank economic development and the economist working so hard for you. Economic development is the reason we have come to be environmentally aware.

In addition, economic development is the only way to get other countries/all countries to be environmentally aware. Citizens of developed nations look to developing nations such as Mexico, African countries, and other underdeveloped nations and ask: "How can you clear-cut your rain forests?" "How can you pollute the way you do?" "Why do you not have environmental laws?" Remember that they are only asking those questions while they are sipping on their Passion Fruit and Kumquat blended juice at an outdoor cappuccino/sushi bar. These developing nations are doing exactly what we did 100 years ago. They will continue to do it until they can afford not to do it. Therefore if you want to help the environment then help these nations develop economically (become an economist).

BTW, A new McDonalds creates available jobs, which in turn raises employees standard of living, which in turn helps the environment. So save the environment and build a McDonalds in Rabat, Morocco

The previous discussion of deficit spending leads nicely into this rant about my feelings on tax cuts.

Spending that is carried out by a government is funded by two things: 1) government revenue and 2) debt financing. Capitalist governments, such as that of the United States of America, raise revenue by taxing its citizens. In my previous post I addressed the ills of deficit spending by personifying the US Central Bank and economy. I asked you what you would think about a person (in this case, the US Central Bank) who keeps borrowing more and more money every year. Lets expand that analysis: What would you think about a person who continues to borrow more money and then asks their employer for a pay cut, hence decreasing their revenue? Now consider if, with all of these ill-advised financial decisions, this individual decides to spend/buy more things then they ever have before. Wow! Welcome to President Bush’s Tax Cut 101.

President Bush’s tax cut is a reduction in government revenue. Now that is fine with me. Let the government collect fewer taxes from me and decrease their revenues, as long as they decrease their spending also. That would be the logical thing to do, right? If you lose your job/lose your revenue, you have to decrease your spending. The Bush Administration has told the American public (and the public’s congressional representatives) that government revenue (i.e. taxes) can be reduced while government spending can be increased. They must have good reasons to assert such a thing, right? Well these are the two main reasons that I have heard: 1) The taxpayer needs this tax cut 2) We need the tax cut to help our struggling economy.

The Taxpayer needs this tax cut
Everyone wants something for free. If I were to offer you a Segway for free, you would take it. Do you need a Segway? Probably not. Would you buy a Segway? Probably not. But if it is offered to you for free, you will take it. I feel that a tax cut is similar. When a politician offers you a tax cut you say, “Sure”. It is your free Segway. Did you honestly need it? No. I have not seen the American public cry for it. There are constant demonstrations, protests, marches, and rallies for numerous causes, yet I have not seen a single one for a tax cut. This indicates, to me, that the American public didn’t/doesn’t need a tax cut. Let me also mention that tax rates in a lot of other industrial nations, especially Europe, have much higher tax rates than we do*.

Its good for the economy
This one is fun. First of all, refer to my previous post on deficit spending The Bush Administration’s tax cut has increased our national deficit so all the negatives from that post can be applied here. Here are some new points. Common sense will tell you that debt must always be repaid eventually. Common sense will also tell you that cutting taxes without cutting spending will only increase the debt burden. In other words, in a few years a politician will recognize our astronomical national deficit and they will do the fiscally responsible thing: Raise taxes to balance the budget. So a tax cut today will be followed by an increase of taxes in the future. Think about it. A tax cut gives you money in hand today, but (due to steady spending levels) the inevitable tax increase will take that same money out of your hand tomorrow. Sounds like a loan. In fact that’s exactly what it is; a short-term loan. So with the “perfect” credit markets in the US why does the government need to issue personal loans? (I call the US credit market “perfect” because of its ability to assess risk and supply endless amounts of money to worthy recipients and causes.) The backbone of President Bush’s argument for a tax cut is that this tax cut will increase consumer spending. Why would it? If consumers wanted to spend more they would just take out a loan (think “credit card”). In fact, the point of all points is this: Our taxes have been cut and yet the economy still struggles and consumer spending continues along normal (not accelerated) trends. The increase in deficit spending has hurt the economy (see “Deficit Spending”).

So in other words, I see no positive effects of a tax cut, only negatives. So why, WHY would a politician push for one? Are they just malcontent? No, I do not think so. The fact is, a tax cut is always a positive thing to talk about. It is a free Segway. Remember, politicians are always looking to please or gain constituents. The tax cut topic is also a distraction from other less pleasant political issues. One of President Bush’s main goals for his second term is making his tax cuts permanent. Trust me, President Bush would much rather talk about tax cuts then his secret plans for world domination J .

Be wary when someone offers you a free Segway.

If any economist is reading this post, I know a discussion on the IS-LM curves, and the US’s floating exchange rates interaction with monetary policy would strengthen my argument but this is not an econ textbook! (But I haven’t forgotten J ).

Most agree that the value of our national debt is astronomical and should be dealt with. The debt is increase by both interest and deficit spending. So when most all people would agree that debt should be dealt with many less are concerned about deficit spending. The following are my thoughts on deficit spending.

First I would like to ask how the US can afford to run such high deficits? A deficit means the US has spent more then the revenues (taxes) it takes in. How is this possible? Well the US funds it’s deficit spending by borrowing from you the public. It does so though bonds. So for every year of those large deficits there has been large years of bond issues. A bond is an IOU which eventually has to be paid. Now if you had a friend or even a bank that was continuously lending more money than it was taking in people would begin to question the stability of that institution. Is it possible that the stability of the US economy as an institution could start to be questioned? Well for the most part that has not been an issue.

Why is there such trust in the stability of US economy? The American greenback is the foundation not only of our economy but most of the world. Many foreign countries back their currency with American greenbacks and when they maintain their exchange rates they do so with greenbacks. This adds a lot of backing to the United States economy.

So how and why is the greenback the foreign reserve currency of choice? Simple, it is because of the foreseen security in the US economy. It is the largest and most trusted economy in the world.

But has anyone caught on to the problem? This is a circle. The more we deficit spend the more we throw doubt into the strength of our economy. If we start losing that strength and hence the perceived security could the world stop using the greenback as the backing of their own economy? Well guess what:
http://www.rense.com/general27/rec.htm
http://www.eubusiness.com/imported/2003/06/111858
http://www.marginalrevolution.com/marginalrevolution/2004/12/could_the_euro_.html

This is the first signs of trouble. Never before has the US Greenback been in decline as the foreign reserve currency.

As the US losses its standing as the reserve currency and hence its perceived strength and security the circle will come full circle. We won’t be able to enjoy deficit spending like we have. But now we have a large national debt to pay without the luxury of deficit spending. Could this downward spiral continue until the US couldn’t afford to pay it bonds? Fortunately I don’t have any links to post on that question. We are still far away from that situation. But the warning is there and the trends are in place. Fiscal responsibility is a must. It is atrocious to me to think that in 4 years this country has gone from a surplus budget to a one year – half of a trillion dollar deficit (http://usinfo.state.gov/ei/Archive/2004/Feb/02-225146.html). Not to mention a 2.75 Trillion dollar deficit projection for the next decade (http://www.msnbc.msn.com/id/4401126/). The largest ever! Even in times or war and there have been many other much longer and harder times of war.

This isn’t doom and gloom. The US economy has plenty of strength and is still the majority of the world’s reserve currency. However the next time a politician sells the idea that deficit spending will help the economy, increase jobs, have limited negative effect etc. tell them to shove it. They just can’t manage their finances.

http://www.cnn.com/2004/ALLPOLITICS/06/02/south.carolina.reut/index.html

Bravo Gov, Bravo!

I have discussed this article with DRJ (who has commented on my other posts).

It is my understanding that Governor Sanford’s heavy use of vetoes and his latest shenanigans are in response to the legislator’s use of tack-ons to current legit bills. He is attempting to fulfill a promise and be a more fiscally responsible politician, imagine that. I find it noble and a strong stand to veto a bill that you proposed because the legislators tacked on special spending projects. I know that addons/tackons (whatever the correct term is) are very common and a fact of politics. However, I believe if something is worthy of tax payer funding then lets purpose it, vote on it, and pass it. Tack-ons always seem like they are trying to sneak something by. Thank you Sanford for attempting to bring accountability and trust into politics (at least in this instance ).

Pork, That is why I’m fed up, why aren’t you?

I, for one, am becoming annoyed by the media and public complaining about gas prices. We all like to pay less for more but sometimes things have to come back to reality. I believe gas prices are not too expensive but instead have been too cheap and possibly could still be too cheap. A number of points on this issue:

1) Every gas price that you hear quoted in the media today is the nominal price of gas. The media and public will then compare these nominal prices with past prices. Comparing nominal prices to historical prices is inherently flawed because it fails to adjust of the effects of inflation. Throughout the history of the United States we have experienced inflation (inflation increased dramatically after the fall of the Gold Standard which started with FDR in 1933 and finally collapsed with the end of the Bretton Woods system under Nixon in 1971). Inflation is defined as a persistent increase in the average price level in the economy. By definition this means not only that prices have increased over time but also wages. It is unfair to say that a $.89 McDonalds burger in 2002 1 is more expensive than the $.15 burger in 1956 2. For one, because per capita income was $2,016 in 1956 compared to $30,941 in 20023. However, if you adjust these burger prices for inflation you find that the $.15 burger in 1956 is equivalent to $.97 in 2002 dollars4. All of a sudden we realize that the burger has actually gotten cheaper by about $.08. The same applies for gasoline!

The Media and public keep stating how gasoline is at its record high. From the Consumer Price Index complied by the US Bureau of Labor and Statistics I gathered the average monthly US city price of gasoline per gallon from 1978 (first available date) to April 20045. I then adjusted the prices into 2003 dollars, compensating for inflation. According to this data the average gas price for April 2004 was $1.875. The all time record high occurred in March 1981 when gas cost $2.8093 per gallon of gas. The average price of gas since 1978 has been $1.7637. Feel free to look at all of these prices and data at http://www.clemson.edu/~jaredh/gas.htm. What this means is that gas prices are quite far from their record high. In fact they are only slightly above their average price. This is expected for April since gas prices are seasonal and always spike as we enter the summertime. Compare the average for 2004 (smoothes at the seasonal spikes) of $1.7585 and we are below the historical average price of gasoline per gallon!!!!!!!

So why all the belly aching? Well I believe it is because gas prices have been too low for the past few years. Consider that the all time record low since 1978 was $1.1195 (adjusted for inflation of course )and occurred just a few years ago in Feb. 1999. The reason gas prices were this low is because President Clinton, in an effort to help Al Gore get elected in the 2000 presidential race, tapped our nation’s emergency oil reserves to artificially lower the price of gas6. I feel it quite dangerous to spend our emergency reserves to play politics and to simply cause slight effects on gas prices. Especially considering that most of the oil the US depends on is provided from countries that the US has strained ties with. If we were forced into a conflict with one of these countries we would not only lose that oil source but we would be forced to use more oil because of the military efforts (tanks, fighters, and battleships use a lot more gas when in war than they do when in storage). Therefore, our emergency reserves should be just that, reserved for an emergency.

2) My second complaint regarding these complainers concerns the War on Terror and the War in Iraq (trust me I separate them for good reason, more on that in another rant). An overwhelming majority of Americans and American leaders supported the Bush Administration when they decided to declare a War on Terror and A War on Iraq. I am not arguing that choice. I am asking, what did you expect? The War of Terror is a War that is predominantly focused on Muslim nations and more importantly oil abundant Muslim nations. The war on Iraq has led to fear and instability in the entire Middle East. How naive it would be to think the US could invade or at least threaten these countries and yet expect that the prices of an export that predominately comes from these countries remain unaffected.

3) My third insight comes from a practice that I partake in but I find few others do. I like to stop sometimes and ask, “What about the rest of the world?” On this topic I hear all of the American complaints about high gas prices. So I ask “what are gas prices around the world like?” Well please, have a look here, http://money.cnn.com/pf/features/lists/global_gasprices/price.html. All of a sudden these high gas prices in the US look pretty nice. England is paying ~$5.55 per gallon, German ~$5.29, Italy~ $4.86, and Japan ~$3.84. On the bright side, if you want cheaper gas prices you can always enjoy the standard of living in any of these resorts Thailand, Russia, Kazakhstan, Tajikistan, and Azerbaijan. They are all cheaper than the US average.

In conclusion, I feel that gasoline prices are not too high. They have been artificially low and now as they return to normal they seem high. The media sensationalizes this story reporting of record highs while knowing that the data they are reporting are nominal prices, which are misleading and blatantly false. I know many news channels are aware of this because I have emailed them and told them (believe it or not I have not gotten a response). Considering we are at War and sitting pretty sweet compared to the rest of the industrialized world, I think everyone should calm down, stop believing the hype of the media, and write me a thank you letter. After all, if gas prices were that high would you not expect more of an effect on travel?7

That’s why I’m fed up, why aren’t you?

(1)I called McDonalds
(2)http://www.fiftiesweb.com/pop/mcdonalds.htm
(3)http://www.usc.edu/schools/sppd/research/casden/research/data_folder/us_pcinc.pdf
(4)http://www.westegg.com/inflation/
(5)http://data.bls.gov/servlet/SurveyOutputServlet
(6) http://www.iht.com/IHT/BK/00/bk092500a.html
(7) http://seattlepi.nwsource.com/local/175364_memday28.html