San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, May 11, 2012

A Magnificent Example Of Government Failure

American corn farmers will produce about 15 billion bushels of corn this year. This corn is being grown on 33 million acres of farmland. In the old days the corn would be sold to companies which would use it to produce food for humans and animals. That still happens with some of the corn. However, 5 billion bushels of corn will be sold to producers of ethanol. In 2005 the US Congress made a law ruling that all gasoline had to be blended with ethanol in a vain attempt to reduce tailpipe emissions. In the seven years since 2005 the price of corn has tripled. (The facts in this posting are from an article in Forbes, April 23, 2012, pages 37-38. The conclusions drawn in this posting are mine.)
The politicians we elected to rule over us were not satisfied with their lone action taken in 2005. That legislation not only resulted in a tripling of the price of corn but it also increased the price for everything derived from corn. So they issued another ruling for us to obey. In 2007 the US Congress made a law called the "Renewable Fuel Standard Law" that ordered gasoline refiners to use ethanol produced from plant based, or "renewable" sources. The stated intention of the US Congress was to "reduce our dependence upon foreign oil" but, of course, the law really had nothing to do with its stated intention. The purpose of the law was to favor one source of ethanol over another. The goal of the law was to assign political and financial privilege to one group at the expense of another. That is, after all, what government does best.
There is a big problem with the Renewable Fuel Standard Law however. In their self-perceived omniscience the drafters of the law decreed that the use of corn based ethanol for gasoline blending would be capped at 15 billion gallons per year. Biofuels (also known as cellulosic ethanol) would be expected to supply the rest of the ethanol supply. Our omnipotent and ever wise rulers in Congress simply pulled these numbers out of the air and expected that the economy would be obedient to their commandments. The Renewable Fuel Standard Law mandated that 250 million gallons of cellulosic ethanol be produced this year. The problem is nobody is producing cellulosic ethanol.  Even with huge government subsidies it is impossible to make this stuff for a profit.
In their desire to purchase votes and pose for photographs, President Bush and President Obama combined to give $1.5 billion in loan guarantees and outright grants to their favored cellulosic ethanol producers. Today most of those companies have gone bankrupt. Very few companies remain and they combined to produce a grand total of 6 million gallons of ethanol last year. 6 million gallons is a long way from the 250 million gallons the government ordered the few remaining companies to produce. Meanwhile, who is paying for all of this? The taxpayers and consumers of course. Taxpayer dollars were dumped into the black hole of cellulosic ethanol production, never to be seen again. At the same time, anybody who has purchased a product that comes from corn has had to pay more than would have been paid if the government had not become involved in the production of ethanol in the first place. The big and splashy display of government grants, accompanied by speeches, baby-kissings, and barbecued beef was good for the politicians.  It purchased votes and good will for them. The daily grind we must bear of paying higher prices, spread out over the entire population of the country, is hardly noticeable. Responsibility for the rising prices is never assigned to government. No, we are told, those greedy corporations are responsible for the rising prices. Ignorant citizens then clamor for the government to regulate corn prices. The politicians always win. Business always looks evil.  What a system we have established.
The ethanol debacle in this country is a fantastic illustration of how our rulers really believe they are capable of dictating economic production. They believe they can wave their magic wands and, presto, whatever they decree comes to pass. They really do believe that they are able to control all the factors of the US economy and direct them to their wisely appointed ends. They really do believe they are economic gods. Sadly, the majority of the citizens in this country agree with them. The majority of the citizens in this country are more than willing to consider the members of Congress to be their moral and intellectual superiors and turn over their personal liberties to them in exchange for legislation that favors their personal sensibilities. Welcome to the Socialist Democracy of America.
One final note about this colossal failure of government needs to be added. Government became involved in the ethanol business because it was alleged that the free market had failed to produce what was necessary for clean air and energy independence. Despite massive government subsidies, the end result of the governmental action is also a magnificent failure. Government cannot do something that the free market is incapable of doing. One would expect that government would then fess up to its failure and promise to never do it again, right? Not a chance. As Forbes reports, "Amazingly, gasoline refiners are still on the hook. For failing to blend into their mix the mandated quantities of a fuel that does not exist, the refiners have gotten a $10 million bill from the Environmental Protection Agency". Amazing indeed.

Thursday, May 10, 2012

So What If The Eurozone Collapses?

This past week has seen some increased volatility in US stock markets allegedly due to renewed fears about the status of the Eurozone. In fact, the stock market has been down every day this week. After the close of the markets the primary reason given for each day's decline has been "concern about Europe." We have experienced the same worries about Europe the past two years.  One day the market is dramatically up.  The gurus tell us it is because of Europe.  The next day the market is dramatically down.  The gurus tell us it is because of Europe.  It is comical.  In light of this tremendous panic about conditions in Europoe, I have to ask, so what if the Eurozone collapses?
What is the big deal? The Eurozone was created in 1999 when most European countries (with the notable exception of the UK) decided to combine their currencies. Electronic transactions in euros took place for three years until 2002 when the euro itself was printed and all transactions became denominated in euros. The primary argument for the establishment of the European Monetary Union was twofold. First, it was believed that a common currency would simply make transactions between the member nations more convenient. Second, it was believed that a common currency would improve economic growth and stability because it takes monetary policy out of the hands of individual governments and puts it into the hands of the European Central Bank. The idea here is that all countries would experience the same rate of inflation as the ECB inflated the euro equally in all countries. The euro economy relies on all members cooperating with one another, and obeying the rules of the "Stability and Growth Pact" (SGP). Clearly that has not happened.
The problems experienced in Greece, Italy and, to a lesser degree, Spain, are all related to the fact that these Eurozone countries have not obeyed the rules of the SGP. Furthermore, the other countries have been hesitant to enforce the provisions of the SGP upon the countries that have largely ignored them. As a result, rates of inflation have varied between the various participating countries and some countries have dug themselves large monetary holes. As would be expected, countries that have not practiced fiscal profligacy (Germany and France primarily) are not happy about having to bail out those countries that have (Greece and Italy primarily). Although it is theoretically possible that the euro could work and the Eurozone could function properly, it is not likely to do so when the various member states refuse to abide by the rules. Is a Eurozone breakup likely? I don't know. What I do know is that it really does not matter one way or the other.
If the euro collapses why should that have a dramatic impact upon the economic situation of the member nations? Nobody ever answers that question. For some reason that I do not understand, it is simply assumed that a collapse of the euro would cause the Germans to stop making automobiles, the Italians to stop making suits, and the French to stop making wine. Why should this be? Rather, why would the Germans simply not revert back to the marc, the Italians to the lira, and the French to the franc? There is absolutely no financial, monetary, or economic reason why a collapse of the euro should have a negative impact upon the Eurozone. There would be a short period of monetary adjustment as the various member nations reestablished their original national currencies but that should create no more disruption than the transition from the national currencies to the euro did back in 1999-2002.
The only "negative" result that I can conceive of related to a collapse of the euro would be embarrassment on the part of the politicians who conceived of the Eurozone and the European Central Bank. Maybe that is why it is the politicians who are most strident in their assertions that the Eurozone must survive. To date I have neither read nor heard any argument that precisely describes how a breakup of the Eurozone and the demise of the euro would have negative economic consequences. So what if the Eurozone collapses?

Wednesday, May 9, 2012

Dodd-Frank Disaster

A big part of the reason companies are reticent to hire new employees is the fact that they have no idea what is coming down the pike as the ramifications of the Dodd-Frank bill spews forth from the various bureaucracies authorized to flesh out the thousands of new regulations. Financial regulation bills are always disastrous for business and the economy. Financial regulation bills are always presented by the politicians as something that will prevent a recurrence of the last pseudo-disaster that was, in actuality, created by previous government interventions. Financial regulation bills never accomplish their stated goals. Financial regulation bills result only in lower growth, higher unemployment, and praise heaped upon the politicians who created them by the dupes who believe them.
The Glass-Steggall act of 1933 was designed to prevent another Great Depression. Government had to find somebody to blame for the Great Depression. Rather than properly pointing the finger at itself, the federal government decided to blame the banks. Surprise! Who could have seen that one coming? It was the banks that caused the Great Depression, we were told. It was the unfettered, unregulated, and greedy pursuit of profit by immoral bankers that caused the Great Depression. The way to make sure that the Great Depression never happened again was to regulate banking. The 37 page bill stipulated that banks were no longer permitted to operate with branches, thus greatly reducing their ability to serve the public. It was further decreed that the banks should no longer be permitted to engage in proprietary securities trading. A regulatory line was drawn between commercial and investment banking and no bank was allowed to cross the line. Of course, the Glass-Steggal act did not prevent any of the recessions that happened after it was signed. The cycle of government caused expansion and contraction continues down to this very day. It did, however, suppress legitimate business activity and reduce the wealth of all the citizens of the United States.
The Sarbanes-Oxley act of 2002 was written to pin the blame for the technology stock bust squarely upon the shoulders of the technology companies themselves. WorldCom and Enron were two of the most public of the technology companies to go bankrupt. Unwise investors and day trading speculators had loaded up with shares of these companies, and others like them, with the expectation of 20% annual returns for the rest of history. When the entire speculative boom came crashing down in 2001-2002 there was an outcry from enraged investors. Politicians were quick to exploit investor anger and Sarbanes-Oxley was drafted. The bill claimed that the losses experienced by technology stock investors were not the result of their own foolish investment choices. No, the politicians pandered, poor victims who were duped into investing in technology stocks were actually defrauded of their money by greedy, heartless corporations intent upon amassing wealth at the shareholder expense. This bill was 66 pages long and the negative impacts of it are still being felt. A good part of the reason why investment analysts consistently underestimate future earnings for companies is because they are afraid of being too optimistic about the future of a company because it could cause them to run afoul of the Sarbanes-Oxley regulations. A good part of the reason everyone is so pessimistic these days has to do with the fact that Sarbanes-Oxley essentially criminalized corporate optimism. (If you know the story, think Joe Nachio here.)
The Dodd-Frank bill of 2010 is a staggering 2319 pages long. At roughly 3000% larger than Sarbanes-Oxley, the Dodd-Frank bill has the ability to create negative impacts upon the economy on an enormous scale. This bill, as most everyone knows, was created to punish the banks for causing the "financial crisis" of 2008-2009. The fact that the banks were the primary victims of the financial crisis of 2008-2009 does not matter. The fact that the government created the financial crisis does not matter. All that matters is the fact that there were votes available to be purchased and blame to be shifted by putting together a huge piece of legislation that blamed the banks for the government's deeds. Dodd-Frank has been signed and handed over to the bureaus for formulation. It is so large that even the gigantic federal bureaucracy is finding it difficult to understand. Bureau after bureau has asked Congress for more time to formulate the thousands of individual rules that will eventually make up the Dodd-Frank legislation. It is extremely likely that many of the rules fashioned in one bureau will end up contradicting the rules fashioned in another bureau. Lawyers are so excited at the prospects of millions of billable hours and new homes in Aspen. Businesses by the thousands (perhaps millions) are sitting on their hands waiting for the holy orders from on high. The entire business environment has ground to a halt, awaiting the impact of Dodd-Frank regulations. If you want a point of origination for the present economic malaise, look no further than Dodd-Frank.
Dodd-Frank is a disaster. It has not even been implemented and it is already destroying the wealth of US citizens. It should be immediately repealed and an apology should be issued to the citizens of the United States. That, of course, will not happen. That would require government to admit that it is the cause of our economic problems. As long as we all persist in the belief that business is the source of our economic problems and government is our protector, we will continue to be fleeced by our protectors.

Tuesday, May 8, 2012

Free Market Capitalism Is The ONLY Economic System

A recent poll conducted by Chicago Booth/Kellogg School reveals some interesting facts about people's perceptions about the economy.  62% of those polled are "angry about the current economic situation".  70% of those polled "do not trust banks".  77% of those polled "do not trust the financial system".  When asked whether "free market capitalism is the best economic system", only 59% of the respondents asserted their belief in free market capitalism.  The pollsters noted that this is down from the 80% belief in free market capitalism professed in 2003.  They also noted that the same question asked in China revealed that 67% of the Chinese respondents believe in free market capitalism, a full 8% more than US citizens.  This poll reveals something amazing about American's perception about the economy.
A great majority of Americans are angry about the economic situation and an ever greater majority of those same citizens blame the banks for the recent problems.  This anger and blame are misdirected.  Getting angry about the economic situation is like getting angry with the weather.  Lots of people talk about it but nobody ever does anything about it.  The more important question is this, what factors have contributed to our present dismal economic situation?  The answer to that is simple.  Government interference in the free market has been the sole contributor to our present economic situation.  Banks and bankers are not the cause of the present economic malaise.  Banks and bankers are victims of government interference in the free market.  See my 12/30/11 posting entitled "Banks Did Not Hurt The Economy, Government Did".  As a result of that government interference, we all suffer. 
An economy is nothing more than a bunch of private citizens going around and freely doing stuff.  People go to work.  People go to play.  Some people make things.  Some people buy things.  Some people save.  Some people spend.  Some people travel.  Some people stay home.  Some people trade things with each other.  Some people get people who want to buy and sell together in the same room so they can engage in trade.  All of these things happen every day.  Nobody organizes or supervises this activity.  It is spontaneous.  All of this activity added together is what makes up an economy.  This economic system is called free market capitalism.  People are free to do what they want to do, when they want to do it.  They are free to trade with whomever they want to trade.  The economy really is that simple. 
Notice that there is nothing to get angry about in what I just described.  As long as nobody is forcing anybody to do something that they would not normally do, the system operates perfectly.  But, we all know that the system I described above does not exist.  Government forces people to do things they do not want to do all the time.  To greater and lesser degrees, government intrudes into the free market system and forces people to do things against their will.  These government intrusions are justified as being "in the public good" and "for the public welfare".  These government intrusions are further justified as necessary for "national defense" or for "public health".  Furthermore, government loves to inform us that the "market has failed" and governmental intervention is necessary to prevent "the inevitable boom/bust cycle associated with free market capitalism".   In addition to our recognition that all of those statements are lies, we all also realize that those are just excuses that government offers as justification for its intrusion into the market place.  We all realize that the real reason the government intrudes into the free market place is to take from one group and give to another group in exchange for a vote.  We all realize that government exists to perpetuate itself and attempting to manipulate and control the fruits of free market capitalism in favor of those who support government intrusion is one of the best ways to accomplish that goal.  Most of what government does is take from one group and give to another group, in exchange for a vote that allows those in power to stay in power.  It is brute force.  It is  not an economic system at all.  No combination of the free market and government ever constitutes an economic system.  There is the free market and there is the government parasite that sucks the blood out of it.  Sometimes the parasite is huge, as in communism.  Sometimes it is less huge, as in our system of democratic socialism.  But, government is always  a parasite.
The simple fact of the matter is that free market capitalism is the only economic "system" that exists.  All other systems (socialism, communism, fascism, and a host of other isms) are simply various forms of government intrusion into free market capitalism.  Free market capitalism is the only economic system in which the participants are truly free.  In all other "systems", the participants are enslaved to the government, in one form or another.  The fact that the great majority of the citizens of this country are angry about the present state of the economy, coupled with the fact that a full 41% of the citizens of this country presently believe that free market capitalism is the problem, shows just how successful government propaganda campaigns against freedom have been.  A significant percentage of Americans now believe that a government that enslaves them is more adept at providing economic goods and services than the operation of the free market.  This belief is dangerous and paves the way for socialism, communism and fascism.  An interesting thing about democracy is that it always gives us the government we deserve.  We are presently getting exactly what we deserve.

Monday, May 7, 2012

Murderous Tree Huggers Are Ignorant About Economics

Last week I was driving in the mountains near Evergreen when I saw a familiar bumper-sticker.  I have seen this particular bumper-sticker dozens of times over the years.  It says, "Save an Elk, Shoot a Land Developer".  This morning I sat down to my morning Denver Post and was assaulted by a Letter to the Editor from Harv Teitelbaum of Evergreen, Colorado.  Harv is upset about a recent ruling in the state government that attempted to strike a compromise between those who would close the National Forest to all development and those who would sell if all off to the highest bidder.  The state decided to close some areas to development and allow other areas to continue to be developed.  This disturbs Harv greatly. So Harv tells a story about "the last tree".  In his story he recounts how "developers and exploiters have destroyed all the forest and all but one of the trees..."  I wonder if Harv was driving the large and expensive SUV I came upon last week with the notorious bumper-sticker affixed to it?
Harv is a typical example of an economically ignorant semi-environmentalist.  Allow me to explain.  Harv hates "developers".  Developers are those good folks who spend their own money to buy a piece of land from an original owner in a voluntary transaction that benefits both parties.  After purchasing the land, developers submit themselves to an endless stream of government harassment as they attempt to garner permission from the various zoning authorities to use their own money to speculate on a housing development.  They pay huge sums of their own money to these various government authorities for the privilege of risking their own money in  the marketplace.  Whether they succeed or fail in their housing development, the government will be paid.  If they are lucky, they will finally obtain permission to begin construction. 
Developers create hundreds of jobs for the local community as they begin the process of home building.  From the initial dirt work to the final trim work on the home, they creatively employ hundreds of workmen.  They pay their bills in a timely and efficient fashion.  Money pours into the local economy.  All the while they are hoping that they have actually initiated a project that the final target consumer will desire.  They are entirely at the whim of the final target consumer.  In this case the final taget consumer is a home buyer.  If they create homes that consumers want, the homes will be sold and the developers will realize a profit.  If they build homes that consumers do not want, the developers will realize a loss and likely go out of business.  That is the risk associated with entrepreneurship in the free market.  If they realize a loss they lose nobody's money but their own.  If they realize a gain they have risked nobody's money but their own. 
Note the extremely important fact that it is the final purchasers of the homes that drive the entire process of development.  If there are no final purchasers for the homes being built by the developer, the project will go bankrupt and, most likely, no other developers will come along to take up a failed building project.  In other words, homes are built because people want them, not because developers are evil people intent upon the destruction of trees.  Here is where Harv becomes an enormous hypocrite.  Harv lives in Evergreen.  Harv is responsible for the destruction of every tree that was torn down to build his home.  The driver with the bumper-sticker is responsible for the destruction of every tree that was felled in order to build his home.  It is his home that now sits in the middle of delicate elk calving grounds. These folks are the real tree and elk killers.  If they were not intent upon buying their dream houses in the mountains there would be no developers building houses in the mountains. 
I never ceased to be amazed at the extreme ignorance and hypocrisy of those who would pretend to be environmentalists.  Harv and the bumper-sticker man are both responsible for the very thing they decry.  Are they really that dumb that they are incapable of seeing that they are doing the very thing they protest?  Are they really so economically blind that they do not understand that the developer they want to murder is the same person who is responsible for selling them the home they love? 
Harv also describes those who would cut down his beloved trees as "exploiters".  What in the world is an exploiter?  I understand what a developer is but I am not sure about an exploiter.  Nobody I know has ever described his trade as consisting of tree exploitation.  I have never seen a "want ad" for somebody who is good at exploiting trees.  I have no idea how to go about starting the process of tree exploitation or creating a tree exploitation business.  Maybe Harv would define tree exploitation as using a tree for one's own selfish personal interests, without regard to the greater welfare of the tree.  If so, I wonder if Harv has ever had a fire in his home in Evergreen.  If so, he is guilty of tree exploitation for I cannot see any use of a tree that can be considered more exploitative than simply burning it for one's own enjoyment. 
Harv and the bumper-sticker guy are examples of the foggy, thick-headed thinking that characterizes all environmental speech.  They certainly have their right to free speech but if I can ever get 51% of the people to agree with me I would make a law that would declare all such ignorant speech illegal.  Our new slogan would be "Prevent a Senseless Murder, Muzzle an Environmentalist!"