Pages

Wednesday, January 20, 2016

Chinese Currency Manipulation and Price Controls

The curious claim made against the Chinese about "Currency Manipulation" is gaining momentum. Many believe that the United States are "losers" in trade relations with China.  Somehow these modern day mercantilists believe that this impacts the trade deficit with China. In reality, the United States benefits from China's "currency manipulation", at the expense of the Chinese citizens. To have a deeper understanding why this is true, "currency" must be analyzed as a good, and the Chinese government, in effect, is placing price controls on its currency. When analyzed under this light, the outcome is pretty clear: the Tax Payer class in China pays the economic cost of this action.

Economic Theoretical Considerations of Price Controls

In economics, there are two types of price controls. The first type is where the Government places a price maximum on a particular good or service. When this happens, the price maximum is above the equilibrium price. Based on the law of demand, the stock of the goods will increase, thus creating a surplus of that particular good. An example of this is the "ghost" cities in China. There are many buildings that are empty because the prices of those buildings are above the equilibrium price. The second type of price control is where the Government places a price minimum on a particular good. In the event of having the Government implements a price control that is below the equilibrium price, a shortage occurs. An example of this situation is the long gas lines that occurred during the 1970s when the Government implemented price controls.

Currency Manipulation is a form of Price Control

To move forward in this analysis, one must look the currency as a "good". Looking back at the claim that China is manipulating its currency, let us look at the ways that this falls under the two forms of price controls, as mentioned previously. When the Central Bank decides to increase the money supply, based on the Central Bank's estimates, and not what the market demands, it is placing a price maximum on the currency. This creates a surplus of currency in circulation. On the other hand, if the Central Bank decides to remove currency out of the circulation, but not based on what the market demands, it is creating a price minimum on the currency.

The Case with China 

The Chinese currency, relative to the US dollar, in this exchange, is a victim of price controls. There is an exchange ratio between the US Dollar and the Chinese Yuan. That ratio is "fixed"(sort of). When the Chinese central bank increases the Yuan supply, it creates a surplus of Yuan in circulation. Since there is an increase of Yuan in circulation, this devalues the Yuan, in terms of the US Dollar. Since the US Dollar is not commonly used by the vast majority of the Chinese citizens, and those citizens use Yuan to purchase goods and services, the Chinese citizens pay the price for the increase in the money supply. This is inflation. The Chinese citizens will see the prices, as expressed in Yuan, increase. This also usurps their savings, and it impacts citizens that are on fixed incomes. The goods they normally purchase take more Yuan to purchase, yet the dollar becomes stronger, relative to the Yuan.

Who Benefits from Chinese Currency Manipulation? 

It is obvious that the Chinese citizens are not benefiting from currency price fixing. The savers lose out, and the folks on fixed income also lose too. But, the folks who can hold US Dollars are "winners" in this scenario. Why is this true? Since the Yuan is being held to a price maximum, and a surplus is created, this drives down the value of the currency. Yet, assuming the US Dollar stays constant, this raises the value of the Dollar, relative to the Yuan.  The holders of the US Dollar, who live in China, they all benefit greater than the other residents who use Yuan.

Conclusion

This dynamic is simply an expression of Gresham's Law. The higher valued currency, drives out the lower valued currency, albeit in a "black market".  In this case, the US Dollar and Gold are held by a minority of individuals, political class and the tax consumer class--and the Chinese Tax Payer is using the devalued Yuan to use to purchase goods and services. This entire scheme is all set up by the Chinese central bank and Chinese government.




Repairing 'Mens Rea' Requirements by Robert Alt

The repair of Mens Rea is vital to our legal process. There are many regulations on the books that do not require the prosecution to establish criminal intent when a defendant is accused of a crime.


The Rise of the Fourth Branch of Government by Johnathan Turley

Monday, January 18, 2016

We're Still Haunted by the Labor Theory of Value | Steven Horwitz

Thank Goodness for folks like Carl Menger, Stanley Jevons, and others who comprised the "Marginalist Revolution". These individuals laid the ground work to have this Labor Theory of Value debunked. This theory was the foundation for Karl Marx used in his seminal work, "Das Kapital".



We're Still Haunted by the Labor Theory of Value | Steven Horwitz

The Big Short Misleads on Ratings Agencies | Robert P. Murphy

A good read: The Big Short Misleads on Ratings Agencies | Robert P. Murphy

Sunday, January 17, 2016

Judge Andrew P. Napolitano: Natural Law vs. Tyranny

The Luxury Tax: A Folly of The Consumption Tax

Introduction

Many politicians and lay persons believe the urban myth that Economics is a quantitative science, and that static analysis works with the interaction of human beings.  Politicians believe this when creating tax policy to generate revenues for the Government. These politicians sell the citizens that “taxing the rich” will increase revenue, or the implementation of a consumption/sales tax can simply be passed on to the consumer. All of these points are remarkably false.  All the costs of a consumption tax go back to the business owner, as it impacts the original factors of production: Labor, land and capital.   A glorious example of how this is proven to be true can be found in the famous Luxury Tax of 1990.

The Promise of the Luxury Tax of 1990

This tax was one part of a larger bill named: “The Revenue Reconciliation Act of 1990”.  This bill was created to generate over $140 Billion over a five year period. (Woof, 1991). For this analysis, we will simply focus on the maritime industry and the impact the firms in this market segment due to the implementation of this law. Specific to the maritime industry, any boat sales exceeding $100,000, there was a consumption (excise) tax levied.  The assumption was that consumers of yachts would absorb the increase price, as the other assumption was that the tax would be simply be passed on to consumers, and the Government would receive their projected revenues. However, this was not the case.

The Economic Impact of the Luxury Tax of 1990

The results of the implementation were not surprising for those who understand economics. First of all, the division of labor was impacted.  George Will remarks on the job losses due to this bill: “According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry.” (Will, 1999)  In the State of Florida, the luxury tax impacted the layoff of approximately 13,000 workers. (Pin, 2011) This shows how the consumption tax impacts the division of labor, as it is one of the original factors of production.  Next, the businesses took a huge hit due to this tax. The Wall Street Journal notes here the following: “Yacht retailers reported a 77% drop in sales..” (Wall Street Journal, 2003)  Since sales drops, this reduces the amount of capital that business owners can purchase, borrow and pay back. The end result with this example:  Capital is impacted. What about land? How is this impacted? One can deduce that if sales are impacted, revenues are not able to keep up with the expenses.  Many of the boat manufacturers shut down their plants, and/or filed for bankruptcy protection from their creditors. (Salpukas, 1992) This would impact the land, since the boating manufacturing plants were closed down.

Economics is about Subjective Value

Many think Economics is about stats, graphs, charts and the like. While these items play a vital role in the historical analysis of human behavior, it does not tell the entire story.  Our individual preferences, as humans, are highly subjective. This sort of subjectivity cannot be accurately quantified, nor is the analysis static.  This is the fundamental reason why these sorts of Central Planning projects always fail.  It assumes that humans do not seek alternative choices when the costs to obtain a good change or rise.  Rising prices act as a harbinger for consumers, so they can alter their ordinal goods/services preference ranking. If someone prefers eggs over toast, yet the price of eggs rises exponentially, this does not mean the consumer will continue to purchase eggs. The consumer’s resources are scarce as well, even if they are “rich”. They have other items they prefer, and may choose to plow resources into those items when the price of eggs, using our example, rises too high. This is the notion of elasticity of demand.  Each individual actor has a different preference ranking, and that ranking changes constantly. It is impossible for any human to “plan” out or predict what those rankings will be for millions of individuals.

Other Economic implications from the Luxury Tax of 1990

The Luxury tax bill of 1990 was passed into law in the hopes to generate more tax revenue for the U.S. Government. However, the tax revenues fell short.  After the first year of its roll out, the tax revenues, due to this tax, was about a few tenth of a million dollars. (Pin, 2011) This is not shocking since many of the firms went bankrupt, shut its operations down, or lost revenues.  Ironically, since there were layoffs due to this tax law, the number of unemployment claims rose during this time period.  The explicit cost to the U.S. Government thanks to the job losses from this law was approximately $24.2 million in unemployment benefits. (Will, 1999)  This shows a double whammy for the U.S. Government: There was a short fall in tax revenues, and the Government had increased cost thanks to paying out unemployment insurance to displaced or unemployed workers.
It should also be noted that during this time period, the United States was suffering from a recession. This also impacted the luxury item industry. However, the “solution” would not be raising taxes on these items during this time period. The proper “solution” would be lowering the taxes to encourage growth and economy expansion.  Raising taxes during this time period simply strengthens the argument on how taxes impact business owners.

Conclusion

The economic impacts of the luxury tax of 1990 are quite clear. This version of a consumption tax demonstrates the ill effects of a consumption tax.  Politicians will sell the citizens on the notion of a consumption tax is “better than” an income tax. Just recall the Luxury Tax of 1990 any time the notion of a consumption tax is raised.  The results will be similar, yet it will spread through the entire economy quicker, since it will impact all good/services sold.   It also will not be passed forward to the consumer, but the economic cost will be pushed backwards to the business owner. Regardless if it is a sales tax on specific items, or all items, the tax will impact those original factors of production: Land, Labor and Capital.


Works Cited

Pin, L. (2011, March 10). U.S. Luxury Tax-A Total Failure. Watching America.
Salpukas, A. (1992, Febuary 7). Falling Tax Would Lift All Yachts. New York Times.
Wall Street Journal. (2003, January 3). Good Riddance to The Luxury Tax. Wall Street Journal.
Will, G. (1999, October 28). Tax Break for the Yachting Class. Washington Post.
Woof, S. M. (1991). A Corporate Perspective on the Revenue Reconcilliation Act of 1990. Journal of Corporate Accounting and Finance.


Dr. Joe Salerno: Will Presidential Candidates Talk about Money?

Wednesday, January 13, 2016

Venezuela's Bizarre System of Exchange Rates | Mises Daily

Venezuela's Bizarre System of Exchange Rates | Mises Daily

Tax Loopholes vs Government Subsidies

Many individuals confuse the notion of Tax Loopholes and Government Subsidies. Typically, these two are confused in the conversation of "big business" getting special favors from the Government. While it is true that many larger firms rent seek, or lobby, the US Government for subsidies, this does not mean both Tax Loopholes and Government Subsidies are the same.

What is a Subsidy? 

A Subsidy is a direct payment received from the US Government. For example, some farmers receive subsidies from the US Government to operate their operation. Of course, this has adverse consequences on the economy. The subsidy is paid from the US Government. Prior to that, the subsidy is underwritten by the Tax payers. However, the farmers receive the direct benefit of the subsidy. Since the funds are re-distributed from the tax payers, to the farmers, this causes economic havoc in the marketplace. Resources are not allocated to their highest uses, as the folks in Washington DC make the choice on how resources are allocated, not the actors in the marketplace using the price system.

What are Tax Loopholes? 

Tax Loopholes are simply ways, as per the law, for individuals to keep reduce their tax liability. This simply means they are not due the same amount of tax liability, based upon the individual's use of the tax code. This differs from a Subsidy in the fact that a subsidy is a direct transfer payment, and the use of a Tax Loophole is not a direct transfer. Moreover, use of a Tax loophole is an opportunity of the individual to keep more of his/her personal property. Recall: The US Government's role is to protect individual liberty and individual property rights. Also, this allows business owners to invest more of their profits back into their operation. Reducing the economic costs allows more firms to enter the marketplace, subsequently, it provides the consumers more choice.

Conclusion

Subsidies do more harm to the economy, in the long run, as compared to Tax Loopholes. Subsides create much more economic havoc, as it can be detailed out in another article. Tax Loopholes, on the other hand, simply allow citizens to keep more of their private property. This makes more sense because individuals are better suited to make choices for their happiness.

Are We Headed for Another Bust? | Mises Daily

Are We Headed for Another Bust? | Mises Daily

Jeff Jacoby-On immigration, I've become a dissident on the right

"On immigration, I've become a dissident on the right "by Jeff Jacoby

The Myth of Chinese Currency Manipulation | Donald J. Boudreaux

The Myth of Chinese Currency Manipulation | Donald J. Boudreaux

Wealth, Poverty, and Politics

Monday, January 11, 2016

Oil Price at 11-Year Low as Economy Falls, Dollar Rises

Key excerpt from, "Oil Price at 11-Year Low as Economy Falls, Dollar Rises": "As I noted last month, once the oil price hit $40 per barrel, it was already below a ten-year low when adjusted for inflation."

Is the Auto Loan Bubble Ready to Pop?

Is the Auto Loan Bubble Ready to Pop?: "On Tuesday, it was announced that over seventeen million new vehicles were sold in 2015, the highest it’s ever been in United States history."



This is caused by the price fixing by the Central Bank. Interest rates are simply act like prices in the marketplace. However, with interest rates, when they are price fixed, they have similar consequences that take place with other price fixing schemes. With the case of interest rates, when price fixing is implemented, asset bubbles appear. The Real Estate market crash is an example of this, as this Auto Loan bubble could be another.

Top Three Policy Reforms to Grow the Economy

What Is Cultural Marxism?

Wednesday, January 6, 2016

Social Security Is A Bad Deal

Dr. Don Boudreaux opines on how "Social Security Is A Bad Deal". Here is a key excerpt:

"Now let’s further assume that employers are also relieved of the obligation of paying to Social Security 6.2 percent of their employees’ salaries. Because relieving employers of this obligation makes the hiring of janitors and other workers more attractive, employers will compete for workers by bidding up workers’ wages. Even if our janitor’s pay increases by an unrealistically small 1 percent, this raise will allow the janitor — if he adds this 1 percent pay raise to his savings [the 6.2 percent of his salary that he saves because that amount is no longer seized from him by Social Security] — to increase his annual savings by enough to yield a pension, when he retires, worth $392,045."

To add insult to injury, this same janitor could take the monies that are taxed from Social Security, work with someone like yours truly, and come out, in the long run, better than the Social Security benefit.