Category Archives: Free Trade

E-mail to GM President: “It’s time to pay for your [own] sins, Detroit”

My apologies to those who have already read this, but for those who haven’t this is just too good not to share. Since December 2008, the Knox e-mail to GM has been making its way to inboxes all over the world; I learned of it only yesterday when listening to Neal Boortz yesterday. Within an hour of Boortz reading the now infamous e-mail, Knox himself called the show to verify the authenticity of the letter. The letter has also been verified to be “correctly attributed” to Mr. Knox by Snopes.

First, the abridged letter from Troy Clarke, President of General Motors North America

Dear Employees & Suppliers,

Congress and the current Administration will soon determine whether to provide immediate support to the domestic auto industry to help it through one of the most difficult economic times in our nation’s history. Your elected officials must hear from all of us now on why this support is critical to our continuing the progress we began prior to the global financial crisis […] As an employee or supplier, you have a lot at stake and continue to be one of our most effective and passionate voices. I know GM can count on you to have your voice heard.

Thank you for your urgent action and ongoing support.

Troy Clarke
President General Motors North America

Knox wrote the following e-mail in response and had originally sent a cc to his mother who then asked if she could forward it to her friends. Shortly thereafter, the e-mail went viral (and after reading it, you’ll understand why).

Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big Three automakers please consider the following, and please pass my thoughts on to Troy Clark, President of General Motors North America.

Politicians and Management of the Big 3 are both infected with the same entitlement mentality that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation, awaiting our new “messiah”, Pres-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep “living the dream”… Believe me folks, The dream is over!

This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded “laborers” without paying the price for these atrocities…this dream where you still think the masses will line up to buy our products for ever and ever.
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Congress Transparently Shilling For Unions

The desire of the NEA to kill the DC Voucher program is well-covered, including by my co-contributor Doug here.

Now it seems that Congress has snuck in a provision for the Teamsters, to restrict Mexican truckers:

Buried in the $410 billion catch-all appropriations bill now before the U.S. Senate is a provision that would end a program that has allowed Mexican truck drivers to deliver goods to destinations inside the United States.

A provision in the original North American Free Trade Agreement of 1994 was supposed to allow U.S. and Mexican trucking companies to deliver goods in each other’s country. But opposition from the Teamsters union and old-fashioned prejudice against Mexicans has derailed implementation of the provision.

Under current restrictions, goods coming into the United States from Mexico by truck must be unloaded inside the “commercial zone” within 20 miles or so of either side of the border and transferred to U.S.-owned trucks for final delivery. U.S. goods going to Mexico face the same inefficient and unnecessary restrictions.

The Bush administration established a pilot program that allows certain Mexican trucking companies that meet U.S. safety and other standards to deliver goods directly to U.S. destinations, while the Mexican government has agreed to allow reciprocal access to its market. But the Democratic Congress and the new Democratic president have vowed to finally kill the program, and the provision inside the appropriations bill will probably deliver the final blow.

As I argued in an article in 2007, the Mexican trucks that have been allowed to operate in the United States under the pilot program have actually had a better safety record than U.S. trucks.

It’s not about safety, and the added inefficiency of transferring everything from one truck to another 20 miles inside the border shows that it’s not about reducing prices for consumers. So this is nothing but bald-faced protectionism to reward unions.

I guess someone in Congress didn’t read that Hope and Change memo, eh?

ChIndia Won’t “Beat” Us, Because We’re Already Forfeiting

Many people have worried about the threat that China and India post to America by moving towards first-world economic powers. After all, they have, between the two of them, somewhere in the realm of 2.5B people, and if the same proportion of their students become engineers and scientists as we see here, they will be able to assume the dominant economic place in the world by sheer size.

I think the “threat” is overblown. As a fellow engineer, I welcome those people to the workforce. Human progress is driven by technology, and the addition of that many engineers and scientists to the global workforce will improve standards of living worldwide. Heck, I want to go to space before I die, and if we have thousands more engineers trying to make space travel (or just space tourism) a reality, it’s a lot more likely to occur in my lifetime than if only Americans pursue the goal. In addition, perhaps some new technological breakthroughs can extend my lifetime beyond the 75-100 years it’s currently likely to last, improving the quality as it extends as well.

But some people see China and India as a threat. They see the world as a zero sum game, and if China and India become more wealthy, they will do so by making America less wealthy. Those people are wrong, but it doesn’t stop them from being heard.

And they’re heard — which is why I say that while I’m not worried that China and India will “beat” us, I am very worried that we’re forfeiting the match. The only entity that can stop us is us, if we restrict our own freedom to excel in the name of foreign protectionism and a domestic democratic welfare state. Or, to put it more simply, if we follow Europe’s example.

And it appears that we’re doing so:

Some recent work by the Kauffman Foundation underlines how dumb the Obama administration and the Democrat-controlled Congress are to use America’s economic woes as an excuse for restricting skilled immigration. Americans have always assumed that skilled immigrants would do anything to get a bite at the American dream. But other countries are producing high-tech clusters that offer bright people plenty of opportunities. They are also putting out welcome mats for the talented rather than building bureaucratic obstacle courses.

Kauffman points out that a growing number of educated Chinese and Indian immigrants are returning home, in response to growing economic opportunities. The repatriation of these workhorses, combined with innumerable decisions by other immigrants to try somewhere more welcoming, could have a devastating impact on the American economy.

Engineers are a pretty multicultural bunch. In fact, my first 5 bosses in 7 years of post-college employment (through my first two jobs) were foreign-born. I’ve worked with native-born Chinese, Taiwanese, Japanese, Egyptians, Persians (aka Iranians), Pakistanis, and quite a few Canucks (among many others, of course). In the grand scheme of things, it’s a pretty colorblind society, because it’s very easy to determine who’s technically capable and who’s a seat-warmer, and it rarely has anything to do with country of origin. It’s not always easy to lure a talented worker away from his family, his culture, and country, but if you do, he can become a very valued asset.

In fact, given the social ostracism that most American engineers endured through primary schooling (let’s just say we’re not typically drawn from the most ‘popular’ social groups), American engineers are potentially more likely to seek alternate shores if better opportunities arise. While my personal family situation doesn’t allow for it, I’d definitely consider relocating overseas if the opportunity was right. The last thing we need to do in America is to close our doors to the most talented of the world, and at the same time introduce policies which force our own most talented to consider leaving.

America won’t be “beaten” by other nations. We may — if we remain free — be joined by other nations, but that’s to our mutual benefit If we turn away from our freedom and capitalism and are then surpassed, though, we have nobody to blame but ourselves.

The Root of the Mexican Drug Cartel Violence Spillover Into the U.S.

For those of you who believe that Libertarians focus too much on the War on (Some) Drugs, perhaps it’s time to pay attention to the escalating violence in Mexico which is spilling over into the U.S.

PHOENIX (Reuters) – Hit men dressed in fake police tactical gear burst into a home in Phoenix, rake it with gunfire and execute a man.

Armed kidnappers snatch victims from cars and even a local shopping mall across the Phoenix valley for ransom, turning the sun-baked city into the “kidnap capital” of the United States.

Violence of this kind is common in Mexico where drug cartel abductions and executions are a daily feature of a raging drug war that claimed 6,000 lives south of the border last year.

But U.S. authorities now fear that violent crime is beginning to bleed over the porous Mexico border and take hold here.

“The fight in Mexico is about domination of the smuggling corridors and those corridors don’t stop at the border,” Arizona Attorney General Terry Goddard said.

Execution style murders, violent home invasions, and a spiraling kidnap rate in Phoenix — where police reported an average of one abduction a day last year linked to Mexican crime — are not the only examples along the border.

This is so disturbing on so many levels. In a time when SWAT teams conduct midnight no-knock raids (sometimes on the wrong home) on unsuspecting occupants, its especially distressing to think that even if the occupants comprehend an announcement and see that the intruders are wearing police gear that the occupants must then determine if the intruders are in-fact who they say they are. Either way, all parties involved are placed in a dangerous situation.

What is a resident to do?

To surrender is to take the chance that the intruders are the police. If s/he is wrong, s/he risks kidnapping, robbery, raping, torture, and/or death.

To stand one’s ground and take the chance that the intruders are not the police escalates the situation which can result in death and/or loss of freedom (imprisonment).

This potential for confusion in itself suggests to me that all SWAT drug raids should be immediately halted at least until this spillover along the Mexican border is under control. The question is: how?

Conservatives suggest building a fence or wall along the border. While this approach might slow down the flow of drug and people trafficking, this in itself does not deal with the root problems and would not stop the spillover. If drugs can get past the walls of a maximum security prison, how is it possible to believe that a wall would prevent drugs from making their way into our country?

Some on the Left believe that greater gun control measures would make acquiring firearms more difficult for the drug cartels. Besides the obvious infringements against the Second Amendment, the bad guys always manage to get their weapons of choice. This approach also does not deal with the root of the problem.

This brings me to the root of the problem:

While some Americans may feel victimized by the spillover of violence, others are contributing to it. Americans provide 95 percent of the weapons used by the cartel, according to U.S. authorities. And Americans are the cartels’ best customers, sending an estimated $28.5 billion in drug-sale proceeds across the Mexico border each year.

As long as there is a demand for these drugs, there will be someone willing to supply these drugs. In the days of Prohibition, Al Capone supplied a particular demand; today this demand is supplied by Jack Daniels, Anheuser-Busch, and many thousands of others. When Anheuser-Busch has a dispute with competitors or customers, the dispute is settled in a court of law rather than the streets. There is every reason to believe that lifting drug prohibition would work the same way.

Václav Klaus Addresses the European Parliament

Václav Klaus gave a speech that U.S. politicians would do well to listen to:

The citizens of the Czech Republic feel that the European integration has an important and needed mission and task. It can be summarized in the following way:

– removing unnecessary – and for human freedom and prosperity counterproductive – barriers to the free movement of people, goods, services, ideas, political philosophies, world views, cultural patterns and behaviour models that have been for various reasons over the centuries formed among the individual European states;

– a joint care of the public goods, existing on the continental level, meaning projects that cannot be effectively carried out through bilateral negotiations of two (or more) neighbouring European countries.

….

This is closely connected with the question of prosperity. We must say openly that the present economic system of the EU is a system of a suppressed market, a system of a permanently strengthening centrally controlled economy. Although history has more than clearly proven that this is a dead end, we find ourselves walking the same path once again. (my emphasis – tarran) This results in a constant rise in both the extent of government masterminding and constraining of spontaneity of the market processes. In recent months, this trend has been further reinforced by incorrect interpretation of the causes of the present economic and financial crisis, as if it was caused by free market, while in reality it is just the contrary – caused by political manipulation of the market. It is again necessary to point out to the historical experience of our part of Europe and to the lessons we learned from it.

Predictably, his speech calling for less political centralization and more economic liberalization was poorly received, with a substantial portion of the parliament walking out on his speech after booing him:

Read the entire thing.

H/T Lew Rockwell

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

“How bad is it going to get?

Yesterday, a reader wrote me and asked:

“I have been wondering how bad the current economic “crisis” will get. Depending on who I talk to I have been told everything from “this is simply part of the normal cycle of economics” to being told to invest heavily in ammo”

Ok, here’s my take on it.

Short term? Not too bad. Unemployment and the credit crunch are going to creep up a bit more; but for the most part the recovery has actually already started.

Though, if the government (Democrat and Republican) continue their spending spree, they could double hump this recession…. actually, I think there’s a very good chance of it at this point.

The “stimulus” and “bailout” won’t be doing any real stimulating (except maybe in the auto industry); and could very well end up pushing us into the doublehump recession by preventing the efficient allocation and reallocation of capital and labor resources.

I have said from the beginning, this was a manufactured crisis. The banking shock and housing crash would have been serious, but relatively minor bumps; if they weren’t blown up all out of proportion by the media and government.

Through this deliberate manipulation (and yes, it was deliberate), the sectoral recession became a self fulfilling prophecy of general recession.

This was done intentionally, to create political opportunity for a plain and naked power grab (Rahm Emmanuel publicly admitted that much); and an explosion of graft, “legitimate” bribery, and vote buying not seen since Tammany.

In the long term, there could be some serious repercussions to our economy as a whole. Partly, it depends on how successful the democrats are at pushing us into socialism; or at the least, their manipulation of markets, and incentive structure.

Mostly however, it really depends on what the Chinese do.

Yes, we’re going to see an inflation hit from all this (should be a big one actually, though not 1979 big); but our RELATIVE inflation is actually far less than most other currencies around the world (and considerably less than the euro). Because of this, even with our mess right now, we’re actually gaining in value against most major currencies (excepting of course the Yuan).

The Chinese are holding the line on relative currency valuation by buying up as much of our debt as possible, because their trade and current accounts depend on the value of the dollar; but they can’t do it forever, or THEIR economy will tank from the other side of things (especially if we keep inflating, and accumulating debt; which is the current Democratic “plan”).

A debt sell off (unlikely, because it would destroy their economy as well), or a recession in China (much more likely) would stop them, and us, flat; and then the entire world will go into a true depression.

We need to avoid that at all costs; but it’s not something we have much control over; and the current government in this country seem hell bent on pushing us over that cliffs edge.

What needs to happen here to allow us to rebalance and make a true long term recovery, is a massive deleveraging, and moderate deflation for a year or two.

If we allowed that to happen naturally (and it’s too late to do so really, given the stimulus and bailout, but we could still salvage something); it would mean perhaps two years of negative growth, and a spike in unemployment, with a lot of bankruptcies, mergers, consolidations and writedowns. However, it would be followed by a period of rapid growth and expansion as capital gets more efficiently reallocated.

It’s called the business cycle, and it works, and it’s historically proven.

Unfortunately the government is actively and aggressively preventing that natural rebalancing from happening. We should be trying for a short sharp shock, and instead they are trying to move us into the European/Japanese style social protectionist stagnation.

If China holds strong, we will slowly recover, and Europe will slowly sink. If China falters, everything goes into freefall for a while, but we come out on top because of our structural strengths (again, presuming the government doesn’t try to destroy those strengths through more socialism and market distortion).

…That may take 20 years though; and what happened in the mean time would be unpleasant.

Oh and that’s not even taking into account the coming “retirement bomb” for Social Security and Medicare… that one makes this one look like a minor hiccup.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Managing to Fail

The alarmist, emotionally manipulative tone, and shallow nature of this report offends me; but I have to say, if anything, the picture they paint of DHLs operations is actually nowhere near bad enough. They’re only focusing on the impact of the closure here without ever asking why.

I know from the inside.

I was a contractor at DHL for over a year (and excuse me if I’m a bit vague. I have to be careful what I say and how I say it, so as not to violate my confidentiality agreements). During that time, I and my team re-architected their entire security infrastructure; along with much of their data warehousing operations, and the open systems components of their dispatch and tracking systems. We made several hundred million dollars in capital expenditures, and spent well over a hundred thousands man hours (at anywhere from $75 to $150 an hour) in doing so.

At the end of the project, what we had was 4 or 5 times more efficient and effective than what they had before, and would have saved the company hundreds of millions of dollars; and they scrapped it, because it would have cost several hundred jobs in Germany and the EU.

Instead, they took a special inter-EU deal with the Czech Republic, and started over from the beginning; spending several hundred million more dollars to redo the work we had already done (and several billion dollars in total), only with mostly EU workers, in Prague.

DHL took a profitable, growing, fortune 500 business in Airborne Express; and they ran it into the ground from the beginning.

I don’t believe I’m violating my confidentiality agreements to tell you that DHL was the worst managed company I have ever seen; and that’s really saying something, as I’ve worked primarily in financial, medical, defense, and government.

The essential conflict was that at all times, DHL was managing to the interests not of making the American operations successful (or rather keeping those operations successful, as they had been originally); but of protecting the jobs of German workers, in Germany.

I’m dead serious. Every single decision management made was expressly in the best interests of German workers (or to a lesser extent Swiss workers, formerly of Danzas overocean); not for the company as a whole, not for profit, not for any benefit to the American operations.

During the time I was there, it was entirely acceptable to spend a million dollars to protect a single German job. We constantly had to work around the systems they had in place, and go through these arcane rules for finance, staffing, personal interactions… everything.

On the other side of things, we couldn’t EVER do anything more efficient if it would threaten a single German job. The company would rather lose ten million dollars, than a single German job; and that is no exaggeration. We presented management with many such opportunities, and in every case, the decision was made to protect German jobs rather than the company.

In the process, all the contracts and relationships that Airborne had built up over the years in the fulfillment industry, in the computing industry (EVERYONE used to use Airborne for their RMAs), in the film industry, in heavy shipping; all of them were flushed down the toilet.

Every interaction DHL had with its major customers, and its major vendors, was loaded with arrogance and condescension. Everything was slow and ponderous and loaded with red tape and doubletalk. Everything had ridiculous reams of paperwork and layers of approval and huge convoluted contracts associated with it.

Why?

Because DHL is a division of the “Private” (private in name only) German company Deutsche Post; who assumed the German postal monopoly. I say private in name only, because controlling interest in the company is held by the German state owned “development bank”.

The entire ethos of the company was that of a civil service, semi-socialist, state sponsored monopoly. All major decisions were made by German (and other EU) bureaucrats, guided by that ethos. They managed not as businessmen running a business, but as politicians pandering to their constituents.

This is what happens when the state controls private businesses. Every time. The state acts in the interest of the state, not of the business; and that business will fail, in this case taking an Ohio town down with it.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Obama For Pittsburgh Steelers and American Steel

From the USA Today:

There’s no more doubt: President Obama says he’s rooting for the Pittsburgh Steelers in Sunday’s Super Bowl.

“I wish the (Arizona) Cardinals the best,” the president told reporters at the White House, “but I am a long-time Steelers fan” and a friend of the Rooney family that owns the team.

And his bailout bill (c/o Cato):

None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States.

I’d claim McCain is a Cardinal’s fan, but I’m not sure they exist.

No, No, Not Roquefort!

Some midnight regulations need to be rolled back, and quickly:

The quintessential French blue cheese found itself the unlikely focus of a trade war after the Bush administration took punitive action for the European Union’s ban on imports of US hormone-treated beef.

America imposed a 100 per cent import duty on a long list of EU products on Thursday, but singled roquefort out for a 300 per cent tariff.

Producers of what the French hail as the “king of cheeses” for its salty tang and creamy finish are furious at the move. They claimed that the action was a parting shot by a Bush administration still piqued by France’s opposition to the Iraq war and that President George W Bush had taken his final revenge against a nation once maligned by Americans as “cheese-eating surrender monkeys”.

“Roquefort is a French symbol and we’re paying for its fame,” said Robert Glandieres, president of producers of the cheese, which is made in the Midi-Pyrenees region from sheep’s milk according to a 1,000-year-old tradition.

But don’t worry, in this economy Obama’s going to provide us with all the government cheese we can eat!

Why Is This Upbeat News?

So, reading an article about weak earnings and Wall Street’s concern over what January will bring, do you get the sense that this was thrown in there without thought?

There was some upbeat news. The Commerce Department said Tuesday that the trade deficit fell to its lowest level in five years. The deficit narrowed 28.7 percent to $40.4 billion in November from $56.7 billion in October as demand for oil dropped by a record amount.

For the sake of argument, one can stipulate that the mercantilist understanding of economics, where trade deficits matter quite a bit, is correct. In that case, a bit of upbeat news would be either that the trade deficit shrunk due to increasing American exports, or that it shrunk due to replacement sales of foreign-made products with American-made products.

A negative spin on this news, though, would simply be that Americans are unable to consume, and that consumption (and likely production) of all goods and services has declined, which is an indication of a shrinking economy. After all, the fact that Americans are able to buy a lot of foreign-made products is a sign of our affluence (and for worldwide demand for US Dollars), and if that has disappeared, it is not a positive development.

A neutral spin, of course, would be to recognize that– in nominal dollar terms– the price of oil has fallen sharply. Thus, even if we were importing the same amount of oil as a few months ago, the nominal value of the trade deficit would likely fall. That is a positive development for American consumers (because less of our money must be spent on oil/gas), but is not as meaningful in the trade balance discussion because it doesn’t signify that we’re producing more oil domestically.

So this line is nothing more than a throwaway “trade deficits are bad, and they are shrinking” statement. And they wonder why journalism is in the shape its in.

Another Permanent State of Emergency

Many people have expressed a hope that Barack Obama will be an improvement over George Bush and that he will roll back some of George Bush’s excesses.  They see in Obama a man who understands nuanced argument, who at least acknowledges that those who oppose his policies can have good reasons and arguments for doing so.  However, those who are so hopeful are doomed to have their hopes dashed.  Barack Obama may give of good vibes, but a review of his policy papers show nothing more than a few crumbs of freedom thrown to the people.  Make no mistake, under Barack Obama’s leadership, the federal government will seize more wealth, violate more liberties and wreck the economy more thoroughly than George Bush did.  The Obama administration will permit, nay encourage, the looting of the treasury by their cronies to a degree that not even the Bush administration dared to.  Reading his policy aims, I see that he offers us no quarter, no accommodation.  He demands that the American people hand over more of the wealth they create, and threatens them with more pervasive monitoring and violence in order to ensure their compliance with his edicts.  He wishes to rework society – to impose his vision of how society ‘ought’ to be organized – using the state security apparatus to impose his dreams.

In every policy proposal, one sees the same theme, the expansion of government, in size, in scope and power.  Typical is his proposal as to how the government will begin respecting civil liberties:  rather than ordering the justice department to respect civil liberties in the court system by voluntarily complying with historical precedents governing government power, rather than announcing his intention to rip out the listening rooms used by the NSA to eavesdrop on the communications of the citizenry, he announces his intention to create a ‘civil liberties board’, with subpoena powers.  If the attorney general of the United States lacks the power to enforce respect for civil liberties, or even worse, is disinclined to respect them, how will the addition of this board alter the calculus?  No, this board will provide sinecures to political allies and something to point to when questioned about his respect for civil liberties while allowing the Justice Department, the Defense Department and the Department of Homeland Security to continue the business as usual, that of exercising their powers lawlessly and without limit, in furtherance of the public and private aims of the officials staffing them.

Nowhere in his policies does he announce his intention to relinquish control of anything that the government currently controls.  That which the Federal Government controls today, the government will continue to control under the new administration.  Much of which is currently out of its control today they will seek to bring under its control.

According to the Obama administration, the current economic crisis warrants expanding government spending well beyond George Bush’s record-breaking levels.  Only in passing does he acknowledge the need to raise money for this spending, which will have to be either through increased taxation, borrowing or via the printing of new money.   The U.S. economy will not provide enough in taxes or in loans to pay for this spending.  It is incapable of it.  Thus, we will see the Federal Government borrowing from anyone who will loan it money, and when those sources of funding dry up, from the Federal Reserve, which pays for the bonds it purchases with newly printed money.  The ‘inflation rate’, so called, already near 10% according to the calculation method in use in the 1970’s will rise to much higher levels.  In the meantime the standard of living will stagnate, and in all likelihood decline.  Nor is there any plan to end this spending once the economy exits the crisis.  This, like the Global War on Terror, is yet one more open-ended emergency.

And when these policies fail to have their intended effects, as unemployment continues to soar and prices continue to rise, it is inevitable that the Obama administration will blame people who it sees as standing in the way of their policies.  The Obama administration will be tempted to go after bankers, intellectual opponents, industrialists, and corporate offices in exactly the same manner as when FDR excorciated bankers and industrialists.  And, like Wilson, FDR, Nixon, Clinton, and many others, the Obama administration will be tempted to use the state security apparatus against these enemies, citing the economic state of emergency to justify it. So now the U.S. will not only be under a permanent state of emergency against external enemies, it will be in a state of emergency.  This time the enemy won’t be people living a continent away…  It will be us.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

A Primer on Money

Money is critical to civilization. Without it, the capital improvements and complex economic processes are impossible, and there will be a very weak form division of labor. Money allows humanity to rise above the savagery of stone age existence. Yet most people don’t understand what money is, how it is created and how it can be abused by elites in a society to plunder the common men.

What is money?

Imagine you are a farmer. You want to purchase some shoes. You grow grain. To purchase shoes in a barter economy, you must find a shoemaker who wants some grain. If you want to purchase some eggs, you must find an egg farmer who wants grain. If you want to make a tractor, you have to find a tractor maker who wants to be paid in grain, or failing that, you have to find the tools and materials you need to build the tractor from scratch, finding suppliers who are willing to be paid in grain.
Of course, grain is perishable, so you can’t amass too much grain with which to pay for really expensive stuff. And of course, you are not likely to find a supplier who is willing to be paid in large amounts of grain since they fact the same problem. As a result, you will be limited to purchasing small items that are worth small amounts of grain.

All of these problems can be solved by trading your grain not directly for the stuff you want to consume, but for something that is
a) more long lasting than your grain
b) in wider demand than your grain

Whereas you might only find one shoemaker who is willing to trade shoes for your grain, you might find three shoemakers who are willing to trade shoes for this mystery substance. This allows you to chose the lowest cost supplier of shoes, who is willing to trade the most shoes for the least amount of your grain.

Additionally, you can stockpile this substance, storing it for later consumption, allowing you to save years of productions in order to purchase some very expensive item like a tractor.

Finally, if this substance is popular enough, you will be able to find many people willing to buy your grain by trading you this substance. This allows you to maximize the payment you get for your product.

Of course, given a choice between two substances that have these qualities, you will naturally choose the substance that has the best qualities you are looking for, choosing the more popular substance over the less popular one if you are looking for something to trade in the near term, and choosing the more durable item over the less durable one if you are looking to stockpile it.

If you are not a farmer, but a tractor maker, selling one tractor every few months, but needing to buy food daily you will of course have an additional quality you demand: you want something that is divisible.

Any human society where people engage in trade, some substance or small group of substances that are
a) homogeneous or fungible
b) durable
c) in wide demand

will come to dominate the trade. These substances are what we call money.

Inflation in a free market

Since money is merely a commodity that is widely demanded for trading purposes, it is produced like any other commodity. Farmers grow tobacco. Distillers distill whiskey. Chemists produce cocaine paste. Miners produce gold. The production is dictated by the demand for the commodity.

Of course, the larger the supply of money that is available for trade, the lower the price of the money in terms of other commodities. In other words, if the supply of gold expands, everything else being equal, the number of bushels of grain an ounce will purchase will go down. Of course, to a persons seeking to purchase things with the money, they see this as each bushel of grain having a higher price.

Rising prices erode savings. The faster the supply of a money commodity is increasing, the less useful it is as a way of saving. This reduction in the usefulness of the commodity translates into a reduced demand for it. The reduction in demand means that people will be less interested in trading other goods for it, which again results in a rise in prices, since a a grain seller will want even more of the stuff before he is willing to risk a trade.

There are two outcomes of rising prices due to inflation in a free market. The first is that production is reduced. As the money commodity becomes worth less, its production becomes less profitable. The production eventually slows until the effort involved in producing money is once again justified by the profit earned by selling it for other goods and services.

The second is that people look for more stable substitutes, and start switching to using alternate money-commodities for their transactions.

Deviation From Free Markets

Money standards
Of course, the producer of the money commodity would prefer that this not happen. Many would see an opportunity for great profit if they could produce the commodity as rapidly as possible without having to worry about people abandoning the money.
So they call for laws to force people to do business in that commodity. These laws are known as legal tender laws. These laws force people to settle debts in the commodities whether they want to accept them or not. The force is to the detriment of consumers and money users, who are forced to forego a better money in favor of the standard.
Taxation
Taxation can confine people to using a particular commodity just as legal tender laws do. If the government routinely levies taxes that are to be paid in fish-heads, for example, people will have to procure a certain number of fish-heads annually to pay the tax. The fish-heads being in wide demand, naturally they are used in indirect exchange. Other commodities are at a substantial disadvantage as far as their usefulness as a money.
Discriminatory Taxation
A government can also make alternate commodities even less popular by taxing transactions or saving in other commodities more heavily than the government approved money commodity. Her in the United States, for example, if you keep your savings in gold rather than in U.S. dollars, when you trade the gold for something else, you are levied a capital gains tax on the difference between the prices in dollars of gold on the day it was traded away and the day you acquired it.

The dangers of government control of the money supply

There are two properties that make governments especially destructive:

1)Governments are able to seize resources by force and to compel people to do buainess with them allowing them to continue economically unprofitable activities for far longer than free market enterprises.

2)Governments, being controlled by people who have little incentive to take a long term view, and a great deal of incentive to use their offices for short-term personal gain

When governments seize control of the money supply, the result is usually disaster. They overproduce money, usually by debasing coinage. They force people to use the state approved currency to the exclusion of all else. In extreme cases they wreck the economy so badly that saving because impossible, and the economy reverts to a barter economy.

Today, the United States government has engaged in massive amounts of spending. They are not getting this money through taxation. Rather they are borrowing it, and a good porioin of what is being borrowed is money created by the Federal Reserve. The production costs of U.S. dollars being almost nonexistent, the Federal Reserve can continue to create money profitably through a Zimbabwe like hyperinflation. The Soviet Union and Nazi Germany were founded upon the ruins of nations whose economies had been strangled by government mismanagement of money. Will the United States similarly succumb to tyranny? Time will tell.

Recommended Reading

What has government done to our money? by Dr Murray Rothbard

Milton Friedman and the Case against Currency Monopoly by G Selgin

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Pricing And Politics

I firmly believe that many political problems are born of the average Americans inability — and unwillingness — to try to think and understand the world around them rather than accept conventional wisdom. This is clearly evident in peoples’ lack of understanding of pricing; it is disturbingly evident in the political policies they seek as a result of this lack. It’s clear enough when you hear about “price gouging”, and every economic argument that prices must rise to avoid shortages falls on deaf ears. But it’s the same principle when folks rail in favor of “windfall profits taxes”, as if businesses have the power to just arbitrarily select the level of profits they’ll earn.

Someone should really tell Ford, GM, and Chrysler, because they seem to be having some trouble with this concept!

Given that this is such an important concept, and given that it’s really quite simple, it’s surprising that the simple rules of pricing aren’t more apparent. But it’s not something that most people regularly have to think about. And sadly, because it’s so simple, it is not often explained — which I’d like to change.

The misconception of pricing is obvious. Most people think that prices are determined by a simple formula:

Price = Cost of materials + Cost of labor + Overhead + reasonable profit

It sounds so axiomatic that it is taken at face value. It’s so often true (but for a different reason) that it seems correct. But it’s not that clear.

Pricing is actually determined by the following equation, with a second equation added for clarity:

Price = whatever the market will bear
Profit (or loss) = Price – Cost of inputs – Cost of labor – Overhead

Note the difference between the two. Price is not a PRODUCT of the equation of material/labor/overhead/profit. Price is determined through a wholly different process, and profit or loss is the product of the pricing equation.
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Why Nationalization Damages Liberty and Prosperity

Many progressives are looking forward to increased government oversight over the auto industry. They see this as a chance to influence the types of vehicles that are produced and to dictate that production be turned to socially beneficial uses, including the manufacture of green cars that auto manufacturers are not manufacturing. These vehicles are not manufactured presently because car manufacturers see bigger profits in continuing to produce SUV’s and more cheaply built sedans. Viewing this judgment as short-sighted, progressives are overjoyed at the prospect of including non-monetary considerations such as ecology or social needs in deciding what to produce. We who oppose the nationalization are viewed either as being too stupid to recognize the benefits of introducing considerations other than profits to production decisions, or as being wed to outdated economic theories or to be apologists for fat-cat capitalists.

This is incorrect. Rather, the progressives who support nationalization are being very short-sighted and are threatening to return society back to feudalism and are threatening to destroy the development of new technologies, technologies that will be vital to improving our standard of living while reducing the amount of pollution and natural resources needed to maintain such comfort. This not hyperbole but rather simple fact.

The problem, which has plagued all fascist and socialist economies throughout history, is that nationalization destroys the ability of the economy to rationally allocate capital goods and invest in the future. It is this incapability that is behind the phenomenon where communist countries seem to become mired in the past with stagnant technology, bare shelves in shops and factories that routinely fail to meet production quotas. » Read more

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Roubini Advocates Nationalization Of Auto Industry

You know, Nouriel Roubini is smart. I’ve long believed that we should never treat those in opposition* like dullards, because that leads to sloppiness in fighting them. But I just don’t know how a smart person — an economist — can advocate the nationalization of our auto industry with a straight face.

“We’re spending $2 trillion to bail out financial institutions,” the economist notes. “What’s the fairness of not giving say $50 billion of low interest loans to automakers to help them restructure?

But Roubini is no ally of the auto industry CEOs currently making their case in Congress. He says any government aid must be “highly conditional” and only occur after a prepackaged bankruptcy that includes:

  • Replacement of current management
  • Concessions from both the UAW and automakers
  • A wipeout of existing equity and debt-holders
  • Temporary nationalization of the auto industry

The appointment of a “car czar” is clearly a touch subject but Roubini says those worried about moral hazard and issues like free enterprise are fighting the last war.

“There’s already massive amounts of government intervention in the economy, we’ve [crossed] that bridge,” he says. “The question now is, what are we doing to do right? If it takes an auto czar to really structure these firms, so be it.”

Have our “drug czar” or “poverty czar” or “education czar” ever solved a damn thing in their respective fields? No? So why think that an “auto czar” would actually improve things. Who’s to say that — once they get their hands in the cookie jar — the nationalization of the industry would be “temporary”? While it may not be a de jure nationalization in the future, I could see the industry going the way of the GSE’s, nominally private but publicly regulated.

Roubini seems to be offering the argument that only nationalizing some industries while letting others fall is “unfair”, as if nationalizing anything is fair. He wants the government to come in and bail out the automakers — throwing their owners [the shareholders] out the door — and take over… Just like Fannie… And he actually thinks this is a good idea?!

I’m sticking with my original instinct — let them survive or fail, hit bankruptcy if necessary, and go through the painful but required reorganization according to market economic principles. If you put an auto czar in charge, the reorganization will be done according to political principles, and we taxpayers will be saddled with these industries — and all the protectionism that goes with state-owned industries — for perpetuity.

* Of course, I wouldn’t necessarily consider Roubini in “opposition”, as an academic economist. He was rather prescient about not only the cause but the shape of our current financial meltdown. However, when someone suggests that we should have Washington appointees try to fix our ailing auto industry, I consider that a point worth opposing.

Oil Is Too Cheap

No, not for the reason these guys think:

Venezuela will back repeated cuts in OPEC oil production until prices stabilize, Oil Minister Rafael Ramirez says, and Russia is proposing closer cooperation with the oil cartel.

Ramirez said Wednesday that his country will back a proposed 1 million barrel per day cut when OPEC meets Saturday in Cairo. If that doesn’t halt the price slide, “We will keep cutting until the market stabilizes,” he said during a visit by Russian President Dmitry Medvedev.

Oil prices fell below $54 a barrel Thursday as dismal U.S. economic data and rising crude inventories outweighed the possibility of production cuts by OPEC and non-member Russia.

Russia, the largest oil producer outside OPEC, produces around 11 percent of the world’s oil and it could be eager to seek new customers to shore up its suffering economy. OPEC output is estimated at about 31.5 million barrels a day — about 40 percent of daily world demand.

Venezuela’s President Hugo Chavez has said OPEC should work to keep global oil prices in a “band between $80 and $100.”

I normally explain price moves using conventional terms of supply and demand. In this case, though, the rules are somewhat different*. There is certainly some demand destruction that has reduced the price of crude oil, but I hardly think it’s a large enough change to move from $147/barrel to $50/barrel oil. At this point, the price of oil seems artificially low, considering the fact that fundamental supply and demand forces haven’t changed.

Yet the response from OPEC, Venezuela, and the big oil companies is the same as if the price decline was natural — they reduce production. This is not only true of the state-owned oil companies, but areas such as Canadian tar sands and some of the more difficult offshore fields have stopped production or shelved new exploration projects. This only makes sense, of course, as the marginal cost of production of many of these projects is well over $50/barrel, and they don’t want to lose money.

This causes a major problem for two reasons, assuming that the fundamentals haven’t changed:

  • It takes supply offline in the short-term, and due to the nature of drilling, shutting down existing fields may reduce the ability to pump oil from those fields in the future. I.e. if a field is pumping 500,000 bbl/day before being shut down, it may only reopen with the capacity to produce 460,000 bbl/day. Thus, taking oil offline in the short term reduces potential oil recovery in the long term.
  • Reduction of exploration projects reduces oil supply in the future. While this may only push out exploration projects 2-3 years, current IEA projections of decline suggest that we should be searching for oil right now — and fast.

What does this mean for future oil prices? They’re going to go up, and they may be going up faster than before. This isn’t a return to the norm, this is the swinging of a seesaw. We’re at a low point right now, but an 800-lb gorilla just got on the other side.

Of course, to hear that oil prices are too cheap is not a common theme these days, as here in California gas has dropped under the $2/gallon mark. From a personal level, of course, I’m enjoying the reprieve. But now may simply be the best time to jump out and buy yourself a gas-saving auto, because these prices will not last.
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IEEE and U.S. Hegemony

In IEEE‘s flagship magazine, Spectrum, there is a fairly idiotic editorial warning Europeans against buying natural gas from Russia.

Why can’t the European Union just adopt a strategy of energy independence and wean itself from Russia and the “stans”?

Of course, there is no way for Europe to be “independent” with respect to natural gas. There aren’t sufficient reserves in Europe to meet the current demand. A reduced supply of natural gas will necessarily result in higher prices for energy. Higher prices for energy translate to reduced economic development and everybody being poorer. Why should the Europeans impoverish themselves?

Of course, the writer of the editorial, William Sweet, is not really opposed to Europeans purchasing gas from non Europeans; he praises a pipeline being developed to ship it from Nigeria.  Rather, he seems upset with people buying gas from Russian suppliers. Why?

Russia has repeatedly shown its willingness in recent years to cut off gas supplies for political reasons, basically to bring countries it considers its satellites to heel, notably Ukraine. Of course it wouldn’t dare cut supplies to a country like Germany, which gets about half its gas from Russia. But where German and Russian interests and values collide, Russia could manipulate markets to get its way and use the threat of its market power to ward off diplomatic or military action.

In other words, if Europeans are trading with Russians, they might refuse to back some third party who is contemplating some intervention targeting Russia. Hmm, I wonder who this unnamed party might be?

A recent survey by London’s Financial Times found that European mistrust of Russia has increased sharply in the past six months: the proportion of respondents who consider Russia the greatest threat to world stability rose from just a few percent in July to nearly 20 percent in September, putting it well ahead of Iran and almost as high as China. It may come as a shock to many American readers, however, that the United States still ranks in European minds as the greatest threat to world stability, scoring over 25 percent in September.

And here we see the problem. If Europeans are trading with Russians, they might not side with the U.S. in a dispute with Russia.

This article highlights why I have mixed feelings about my IEEE membership. The work it does in developing and maintaining standards is wonderful. But their consistent support for the American military-industrial complex gives me pause. Like IBM supplying Hollerith tabulators to the Nazis with no concern for what they were being used for – there is no U.S. military or security program, no matter how abusive of civil liberties or vulnerable to tyrannical misuse that IEEE won’t support. Normally the IEEE leadership concerns itself solely with the technical problems that are needed to enhance U.S. government power.  In this case, the Spectrum editorial board is going further and demanding that European politicians adopt policies solely for the benefit of the U.S. government (and to the detriment of people living in Europe).

Yes, the Russian government has imperial ambitions. Yes, Putin’s government is a fascistic one. However, if Russians are trading with Europeans, if the Russian economy integrates with the European one, the likelihood of of a Russian millitary attack of Europe is much lower.  Increased economic integration between Europeans and the people living in former Russian satellites will also reduce the likelihood of conflicts between Russia and the satellites as well (especially since it would lead to greater Russian/former satellite integration as well).

Bastiat’s dictum applies:

If goods don’t cross borders then armies will.

The U.S. government’s global hegemony is ending. If IEEE wishes to retain its technical leadership in a multipolar world, it should stop viewing itself as a unofficial arm of the U.S. government and stick to its valuable work in developing standards.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Credit Crisis News — Pay Attention This Weekend

Over the last few months, I’ve been trying to devote time to the credit crisis and bailout. Unfortunately, the news cycle is often so short that it’s difficult to keep up. Today I was lucky to be able to catch the bailout modification. With the busy times ahead, though, there’s something that needs to be monitored very, very closely:

The Group of 20 nations is prepared to act “urgently” to bolster growth and called on governments to cut interest rates and raise spending as the world’s leading industrialized economies battle the threat of a recession.

“We stand ready to urgently take forward work and actions agreed by our leaders to restore and maintain financial stability and support global growth,” the group said in a statement released yesterday following a meeting in Sao Paulo. “Countries must use all their policy flexibility, consistent with their circumstances, to support sustainable growth.”

Those measures include “monetary and fiscal policy,” it said.

The G20 nations will be at a summit in Washington beginning this Saturday.

Something tells me that nothing good for us “plebes” will come of this. We’ll end up paying dearly for this.

Third Party Debate

The City Club of Cleveland extended an invitation to the top six presidential candidates*. Of the six candidates, Libertarian Party candidate Bob Barr, Constitution Party candidate Chuck Baldwin, and independent candidate Ralph Nader participated; Democrat Barack Obama, Republican John McCain, and Green Party candidate Cynthia McKinney were no-shows.

Unlike the debates we have already seen in this cycle, the candidates in this debate actually debated the issues!

*The candidates who could theoretically receive the requisite electoral vote to win the presidency

One Congressman Stands Up For Sanity

Ed Schafer, US Secretary of Agriculture, seems to think we need to bail out the ethanol industry:

Agriculture Secretary Ed Schafer’s statement on Oct. 17 that the U.S. Department of Agriculture could provide ethanol companies that got into trouble by speculating on corn with up to $25 million per company in refinancing has caused a firestorm of criticism among ethanol critics who say he is favoring one segment of agriculture and might waste taxpayer money.

According to a report on Agweb.com, Schafer said at the World Food Prize symposium in Des Moines, Iowa, “There’s going to have to be some credit applied to companies to buy some lower-priced corn to blend with their higher-priced corn. This is important public policy for the country because corn-based ethanol is a stepping stone to energy independence through cellulosic ethanol. We’re going to continue to support it as much as we can. We have the responsibility to make sure we cement in the infrastructure of rural America and ethanol production has increased the economic opportunities, the jobs and the building of rural America.”

One can’t claim that these companies are “too big to fail” or that their failure will endanger our entire economy. One can’t claim, with any sense of honesty, that the ethanol experiment has really done much positive for America. In reality, one can’t say a good word about this mess.

Which just proves, once again, that government is more than willing to engage in theft of tax dollars and redistribution to industry in order to satisfy the politically-correct goal of the day. And nobody will stand up to them… Scratch that– nearly nobody:

Ethanol plants may be the next beneficiary of a federal bailout and Mesa congressman Jeff Flake is among those opposed to that idea.

Flake, a fiscal conservative, panned the plan Wednesday saying federal promotion of ethanol production is the problem. “The federal government’s ethanol policies have driven up the price of corn,” said Flake. “But rather than reforming the policies that have caused a spike in corn prices, the federal government wants to bail out ethanol producers who speculated on the price of corn. Only the U.S. Department of Agriculture could dream up a policy like this.”

Flake said tax breaks and credits for ethanol producers should be repealed. “The high price of corn has had a ripple effect over our entire economy. Instead of trying to bail out every industry hurt by it, the federal government needs to take a serious look at reforming our ethanol policies,” said the East Valley Republican.

I’m never one to look to Congress to solve my problems; nor do I think that elections are likely to improve our collective lot. But it’s good to see someone who wishes to stand athwart the tide, and I can’t say I’d mind seeing a few more like him.

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