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Monday, November 30, 2015

Excessive Profit Taxation

While it seems popular to speak out against companies that earn "excessive" profits, many are adding to the discussion by proposing additional taxation on firms that have this occur.  People who are in favor of this sort of taxation believe this will make things "fair" for the consumers since the corporations are earning "excessive profits" off the consumers.  How does this sort of measure impact firms and the economy? This article will explore this question.

Capital Formation of Firms

When a company is in a start up phase, capital and other input factors are organized. The founders of the firm must accumulate the capital to place in the new enterprise. This capital may come from their personal savings, or it may come from investors, or it may come a financial intermediary(e.g. Bank, insurance company, credit union, and etc). In all of these examples, someone had to defer consumption in the present, in order to use the capital in the future.  Once the capital is invested in the start up, it is used to acquire other input factors, capital equipment, and labor. 

What is profit?

Once the enterprises starts up for business, the objective is to make a profit. The firm must serve the clients, in hopes that clients will pay for the product or service. Those profits go to pay back the initial capital invested into the enterprise...net the natural interest rate.  The interest rate is simply the consumption time preference of the actor in the marketplace. Actors can consume now, or they may consume in the future. So, profit is simply the return on capital. 

Excessive profit tax: economic the impact

When the Government seeks to tax "excessive" profits on a firm, a set of consequences takes place. First of all, these taxes are not passed to the consumer. If the firms are charging the market price for their product, this is the equilibrium price. Consumers and firms agree upon that said price. Anything higher will cause consumers to seek out alternatives, or they will consumer fewer items of that product or service. Next, since firms can not simply raise the price of their goods or services, the sell fewer items in the marketplace. Economically speaking, the firms pay the cost for the tax. The tax is not "pushed forward", but pushed backwards. Since it is pushed backwards, this impacts the firms ability to make a profit, and this impacts the repayment of the capital invested into the firm. In short, the tax on "excessive profit", is simply a tax on capital...net the natural rate of interest.  This tax will eventually impact all capital markets. It will also shrink the number firms, and make it more costly for new firms to enter the marketplace. This impacts consumers as well. There will be fewer competing firms, and prices will not be competitive in those respective markets. 

Conclusion

Taxing the profits of the firm, "excessive" or not, has adverse impacts throughout the economy. It impacts the firm's ability to properly re-invest those profits back into the enterprise. Next, it acts as an additional economic cost on capital, as it can impact all capital markets. Lastly, it reduces the number firms in the marketplace. This hurts consumers, since they will not have the power of choice and benefit from more competition between firms. With more competition, consumers win each time. 


Friday, November 27, 2015

Economics Is About Scarcity, Property, and Relationships | Mises Daily

A fantastic essay on the simplicity of Economics.



Economics Is About Scarcity, Property, and Relationships | Mises Daily

$15/Hr Minimum Wage?

The Minimum Wage debate has gone to another level. Many fast food restaurant workers are making a push to have a "living wage" pushed to $15/hr. to gain more wealth. Is this an economic efficient objective?  This analysis will explore the answer to this question.


What is the Wage? 

The first step in the analysis that must be completed of the minimum wage rate, is defining the notion of the Wage rate. What is it?  The Wage rate is simply the price of labor between both parties of labor and the business owner. For example, the Business owner creates a position for his enterprise. Prospective laborers see the job posting, as the business owner provides a wage rate for prospective employees. The employee applies, and if he is offered the job, the employee is accepting the terms of the position at that respective wage rate. This is no different that someone purchasing an item at the local grocery store at the sales price. So, in short, the Wage rate is tantamount to a price.

What is Price Fixing?

When the Government, enforces a price fixing mandate, depending on how it is structured, several things can occur. In all of these scenarios, they are based on the Law of Demand. A quick review in layman's terms: If the price of the item is increased, the demand falls, if the price is lowered, the demand increases.

If the price fixing scheme is set above the agreed upon market price, a surplus can occur. This means that the price of the good or service is priced so high, that the market participants will not purchase the said good, thus leaving excess items of that good.  However, in the case of a shortage, this means that price is fixed well below the market price, and the demand has increased to the point that there is more demand than there are goods available to sell.

Price Fixing and Minimum Wage

With regards to minimum wage, government mandated price fixing, or wage fixing, simply raises the labor price above the agreed upon market price. As previously mentioned, as per the law of demand, as prices rise, and demand remains constant, a surplus is created. In this case of labor, a surplus of labor is created. This translates into higher unemployment for that specific labor class that is impacted by the minimum wage increase.

Why are these individuals pushing for the potential elimination of their positions? They assume that the business owner has an unlimited supply of capital and profits to pay the employees at the desired wage rate. However, this is not true. We are all restricted with the condition of scarcity.  The more the wage rate is increased, the larger the unemployment rate for that market segment.  Another consideration: The Business owner may lay off those higher wage employees. Or, the business owner may purchase capital equipment to do the same sort of output as these higher wage employees.

Conclusion 

Raising minimum wage acts as a price surplus on the "price" of labor, or wages. It creates a surplus of labor, as that surplus of labor translates into higher unemployment numbers for that said labor segment. Workers pushing for higher minimum wages will not benefit from this increase, as they could potentially be unemployed.

More Links on this topic of minimum wage:

From Ludwig von Mises, "Minimum Wage Rates"

Thursday, November 19, 2015

What will the Paris Attacks means for markets? | World Finance

Is an Interest Rate Hike Overdue? | Mises Wire

Is an Interest Rate Hike Overdue? | Mises Wire



"The conventional wisdom is that lower interest rates boost stock prices, and that one of the drivers of the healthy stock market since 2009 has been the Fed’s low interest rate policy. I don’t disagree with the conventional wisdom in general. Lower interest rates tend to raise asset prices. But in this case investors seem to believe the Fed maintained that low interest rate policy too long."

Wednesday, November 18, 2015

Democracy moves towards an Oligarchy

Many politicians remark that how "we must save our democracy", or "our democracy is the ideal".  In this analysis, I will demonstrate logically how it actually works against the citizens. In fact, democracy simply transfers the power of the individual to a dictatorship or an oligarchy.  Using logical economic analysis, I shall show why this is the case.

The Notion of Rational Ignorance

All of us have 24 hours in one day. We are busy with making a living, rearing our children, and enjoying life. Political issues, while important, do not rank high on our value scale. The average person does not have greater Economic benefit to pay a higher economic cost to deeply engage into the labyrinth of politics. In this case, these individuals are rationally ignorant.  Soccer moms find it more important on a daily basis to make sure their kids are in soccer practice, staying safe and the like. Fathers are focused on earning a living. Since we all live in a world with the scarcity of time, we prioritize our daily activities on an ordinal ranking that will give us the highest benefit to lowest benefit. Most of us obtain our insight on political matters from sound bites from the daily news. 

On the other hand, special interest groups are heavily invested in the political process. They study what bills are being proposed to be passed into laws. Many of these bills have a huge impact on these special interest groups' business. For example, sugar farmers are heavily invested in the political process. Their operations, investment and profits are directly impacted by the political process. In this case, they are rationally informed and involved. They will factor the economic cost of lobbying or "rent seeking" Law makers to ensure the best interest of their operation is considered when laws are being made.

Out of these two distinct groups, the former has a higher probability to not vote and get informed in all or most issues, as compared to the latter group.

Transfer votes to a Dictatorship or Oligarchy

Since many voters are "rationally ignorant", yet they still vote, the power of those votes are simply transferred to the politicians. As previously stated, the voter is not fully aware of the details of the pertinent issues, where as the special interest groups are. This leaves the power of the political process with political class and the special interest. This is a costly proposition, as theses two groups will pass laws that will benefit them, yet the rest of society covers the cost for these laws.  In short, the voters will pay for the costs of these laws, and the aforementioned groups, political class and special interest groups, will reap the benefits.  Via the voting both, the power is successfully transferred to the former group(s).

Going back to the farmers example: Farmers are subsidized by the Federal Government to support their operations, in exchange for the financial support and political support of those politicians who continue the various subsidies for the farmers. Who pays the cost of the subsidization? The citizens that are not vested in the process.  In economics, this is viewed as an inefficient transaction, and "Dead weight" losses are created. In short, the costs are dispersed throughout society and the market place: Concentrated benefits and dispersed costs. This aggregates the power to those who are in a position to distribute the benefits, at the expense of the tax payers.

The Tax payers vote for politicians that simply work for the special interest groups. Why? The politicians are seeking to stay in power, as this process requires money. The special interest groups are willing actors to pay the politicians provided the politicians pass laws that benefit the special interest groups. The transfer of Democracy to a dictatorship or oligarchy is complete.

Conclusion

Many politicians run on the notion of "getting the money out of politics", as this is an illusion. Politics is a business, as it requires the same factors of production, land, labor and capital, as any other business enterprise. The distinct difference is that it must use the rational ignorance of the average voter to vote into law things that benefit the political class and special interest, at the cost of the voters. This process also demonstrates how the Federal budget will never be balanced. What incentive is there for those who benefit directly to balance the budget? This process turns the democracy into a dictatorship or oligarchy. 

Thursday, November 5, 2015

Tragedy of the Commons: Public Ownership

Consider this quote from Economist Murray Rothbard, Phd:

"We all hear a great deal about 'public' ownership. Whenever the government owns property, it is referred to as publicly owned. When natural resources are sold or given to private enterprise, we learn that the public domain has been given away to narrow private interests. The inference is that when the government owned anything, we-all members of the public-own equal shares of that property. Contrast to this broad sweep the narrow, petty interests of mere private ownership."

In this analysis, the discussion of public vs private goods shall not be reviewed under a "good" vs "bad" framework, but through the framework of economics. This analysis will explore public goods vs private goods with the following: (1) How Capital is raised, (2) how these goods are economized via pricing and the profit and loss mechanism, and (3) how ownership is utilized with both private and public goods.

Capital

With Private Goods, goods are produced by Capitalists exercising the notion of private ownership to enhance their enterprise and make a profit. The Capital invested is raised voluntarily, as investors, banks, and the like mutual agree to invest in the enterprise. Investors seek to make a return on investment to enhance their overall livelihood.  If the enterprise cannot raise the capital needed to start up the business or maintain the enterprise, the firm may seek to shut down. The capitalist may need to reorganize his/her plans, or seek to start up another type of endeavor. The point here is that the "free market" determines if this project will be funded. 

Contrast that with a Public good. While, these goods are used by the public, the capital needed to create those goods is "unlimited". This means simply that the capital is not raised by force, but by the Government's ability to levy a tax on its constituents. While it is true that many Governments can raise capital via selling bonds and the like, the repayment of those bonds are underwritten by the current or future taxpayers, as this done by force also. There is no true "free market" mechanism that can provide feedback to the Government body to reject or take on the project. Some will state that the voters can vote for a project's creation via a ballot, but this is not a free market mechanism, as there is no profit a loss feedback on the project to allocate scarce resources.

Pricing and Profit/Loss

The use of prices, in the role of voluntary exchange is vital. Prices send signals to the participants in the market on how to allocate those goods and services.  This allows individuals to set their preference ranking according to their available resources. 
For business owners, the profit and loss system is vital. If a business turns a profit, it provides a signal for the business owner to carry on with the sale of that good. If there is a loss, the business operation is evaluated accordingly. If the losses continue, the business owner may discontinue the sale of that good, or he/she may close down the entire operation. 
On the other hand, the Government enterprise will use price to charge the patrons for the service. However, the Government will ignore the profit and loss feedback. The survival of the Government project is not predicated on profit and losses, but it's survival is predicated on political favors. This may occur dispute continued losses and deficits. Of course, these losses are subsidized by increasing taxes or borrowing more capital to "true up" those shortfalls. All of this is underwritten by the taxpayer.

Ownership

With a private enterprise, as previously mentioned, capital is raised voluntarily and via private means.  In most cases, the capital invested is accepted in exchange for some sort of "ownership" or "interest" in the enterprise. For example, if a company is taken "public" via an initial public offering, those stock shares are sold to investors. Those shares represent an ownership in the company. Another example is when investors pool their capital together to form a business entity(e.g LLC, Inc, LP, and the like) In these business entity forms, the investors have some sort of "ownership" in the enterprise. These examples represent true ownership in the business enterprise. 
With a Public Good, politicians claim that the "public" owns that said enterprise. Is this really the case? Do the citizens actually "own" or "stake a claim" of the Government owned enterprise? In review of the earlier section, Governments raise capital primarily by two means: Taxation and Debt. With regards to taxation, this is not a voluntary exchange transaction, but it is done by the force or Government fiat. There is no "ownership" given in exchange for this method. In fact, if taxes are not paid, dire consequences can occur. The other method that Governments seek to raise capital for the projects, is utilizing debt instruments, such as bonds.  With Bonds, there is no ownership claim on the Government enterprise. In fact, the repayments of the bonds are done via tax revenues. This is a contrast to a public enterprise. 

Conclusion

Based on these three categories, it is clear that Government run enterprises, or "Public Goods", are not market efficient.  Since these enterprises do not allow for voluntary exchange, with prices allocating scare resources to their highest uses, problems occur. Things are carried forward not by the notion of profit or loss, but by political favors. This is done at the expense of society. 

Video of Tragedy of the Commons: