The Liberal Order

An Old Stupid Game That Never Dies

Apparently the drivel espoused in the picture below is once again making the rounds. For some reason it never dies. 

This is why such nonsense should never get the play it's receiving.

Suppose that you have a job where you are paid on commission on a daily basis. For every item you sell you earn, say, 10% of the sale price. Your customers buy from you on a consistent basis and you sell $2,000 worth of the good each day. Your total annual sales are $500,000 and your income is $200 per day, or $50,000 per year. (Assume no inflation for now and that you work 250 days each year.) 

Your customers, who again, buy your good on a consistent basis every day and can't seem to get enough of it, think that you earn too much money, notwithstanding the fact that the benefits they receive from the good you sell far exceed your salary. Even still, they desire to punish you for your income and have all agreed to not purchase anything from you on April 15th. None of them have ceased consuming your good at all, only that they will not purchase anything from you on April 15th.

Let's say that in order to fulfill their demand for what they would normally have purchased on April 15th, half increase their daily purchase on April 14th, for total sales of $3,000 that day, and half on April 16th, for total sales of $3,000 that day. Your daily income looks like the following:

Without the boycott: April 14th = $200; April 15th = $200; and April 16th = $200. Total income over those three days is $600.

With the boycott: April 14th = $300; April 15th = $0; and April 16th = $300. Total income over those three days is $600.

Are you made worse off by your customers' decision to boycott you for one day? What if they did it for a week?

As long as they continue to consume the exact same amount, on which day or days they purchase your goods is largely irrelevant. Yes, it may be inconvenient that you don't have the income consistently, or that you might have to borrow on some days to tide you over until they come back to buy more of your good on the next day, but your average daily income has not changed.

In fact, I would argue that such ideas actually make the gas companies better off. If they knew for certain that nobody would be coming in to purchase gasoline that day, they could simply shut down, saving themselves labor costs and other costs or operation. Competition is what makes gasoline companies and retailers produce and sell every day. If they could collude in order to shut down one day with no cheating on the collusive agreement, gas companies and retailers are made better off at the expense of customers who want to purchase gasoline on that day. What a sham that the customers who appear angriest at the gas companies are the ones promoting the financial interests of the gas companies.

If you want to punish the gas companies, walk, ride a bike, don't go anywhere on that day and vow to not do what you would have done that day on a different day. In other words, as long as you continue to consume the same amount it doesn't matter on what day you buy it.

Actually, I agree with this. Everyone, buy all the gas you need for the next week today. DO NOT BUY ANY GASOLINE FOR THE NEXT WEEK. If you are successful and the price of gasoline plummets, thank you very much. I'll be filling up my cars one day during your boycott.

Are things really getting that bad?

Another supposed indication that the median household in the U.S. is losing ground.

[A] new study that finds median-income families in only one major U.S. city actually can afford the typical new vehicle.

For a normal good, as incomes rise people consume more of that good. The opposite is of course true if incomes are declining—we consume less of it. So if fewer Americans can afford the typical new vehicle, it must be proof that the median household in the U.S. is finding it harder to make ends meet. This of course might make for a good story, but it is lousy reasoning. (See the video below for a very good counter to the argument that Americans are losing ground.)

When we talk about the effect of changing income on the demand for a normal good or inferior good, everything else is presumed held constant. Other factors like prices of that good or substitute and complementary goods haven't changed; tastes haven't changed, and expectations are the same. 

In other words, incomes might be going up, but demand can still fall for some normal good or service if other factors are changing as well. For example, how about the changing quality of cars?

Even the most basic of today's cars are generally loaded with features that were once found on high-line models a few decades back - if they were available at all - such as air conditioning, power windows, airbags and electronic stability control, as well as digital infotainment systems.

And, more importantly:

They also have to meet ever tougher federal safety, emissions and mileage standards that have added thousands to the typical price tag.

Other factors are also changing, including the fact that other things are now available to consume our incomes that weren't available previously. Smartphones and data plans, which run upwards of $200/month for a family of four are prevalent in even households with incomes below the median; bigger entertainment systems with more programming options; more household amenities (i.e., appliances, flooring, countertops, etc.); and education with higher tuition for our children. Factors like these now consume a larger portion of our income, leaving less for consumption of cars.

What I do like however, is that this article presents an opportunity to teach two great lessons. 

First, if automobile manufacturers are truly building too many cars that are unaffordable to the median household, they soon will. Nobody—no government agency—needs to convince Ford, Toyota, GM, or any other auto manufacturer to meet this currently underserved market and stop oversupplying a market that few can afford your product. It is in their self-interest to do so and at least one of them will discover which features in are desirable to the median household, which are not, and produce the car that provides the greatest value per dollar to that segment of society. If not, they will forego potential profit, and possibly go out of business. 

The second lesson, which is truly disturbing, is actually part of the article.

According to the 2013 Car Affordability Study by Interest.com, only in Washington could the typical household swing the payments, the median income there running $86,680 a year.

When the rent-seeking society earns the highest household incomes in the country, more of the best and brightest will pursue employment in that sector rather than in other sectors. Rather than working in sectors that create value for society, they seek out jobs that transfer wealth among the working members. If median household incomes are really declining, this may be a cause. It should trouble us all that most of the highest income households in the U.S. are concentrated around Washington, DC. 

 

Why government subsidies rarely ever produce positive results.

The Chevy Volt has been a great disappointment. This shows up in the workplace of suppliers of batteries to GM for the Volt.

In a report released this week by Gregory Friedman, inspector general at the Department of Energy, some LG Chem workers were discovered to have spent their paid work time during the last three months of 2012 watching movies and playing board, card and videogames. The more civic-minded used the work day to volunteer with Habitat for Humanity, at animal shelters and outdoor nature centers. Friedman found that the amount of time spent volunteering ranged from one to five days a week. Between the cards, videogames and volunteer hours, Friedman estimates the government paid $842,189 for “questionable” labor. (It shared half of all labor costs with LG Chem Michigan.)

LG Chem Michigan doesn’t dispute the questionable labor. The subsidiary of South Korea-based LG Chem reimbursed the government for all the game-playing Friedman’s investigation uncovered. But LG Chem officials argue that the reason some LG Chem employees wiled away their time at something other than making batteries was that with production lines incomplete and demand for the Chevy Volt weaker than expected, they had no choice.

What's up with Ford Motor Co.?

I've been (not closely) watching Ford's stock for a few months. I've only been interested because it's currently trading about 2 times earnings, whereas GM is a little more than 6 times, Honda at 23 times, and Toyota at nearly 36 times earnings. So I decided to do a quick search to find out why Ford is seemingly so undervalued. I think I found the answer.

I'm not going to go through all the financial data other than total debt to equity, basically how much Ford is leveraged. 

As of today, Ford's debt/equity ratio is 6.03. What this means is that for every dollar of its assets financed from sharehold equity, the company has borrowed six dollars to finance the rest. By comparison, Honda's is at .91, GM's at .35 (thanks in part to its declaration of bankruptcy and government bailout), and Toyota's at 1.1. Ford's return on equity (ROE) is an astounding (not surprisingly) 199.47%, but if the banking problems around the world worsen, or if interest rates start going up, Ford is going to have a tough time keeping its head above water. 

Should there be an inheritance tax?

I've never been a proponent of an inheritance tax, especially one of 100%, but this pushes me towards that.

 

These two did nothing to deserve anything, and their ostentatious spending is nothing short of vulgar. In the end I reject the tax only because a) that money was the rightfully obtained property of someone who has the right to transfer freely to someone else if he or she wishes, and b) the inheritance tax would shift more savings from investment to consumption, adversely affecting long-run economic growth.

Oh, and more importantly, I believe in keeping scarce resources out of the hands of those who will waste it. Believe it or not, I do think the government will waste it more than these two are/would.  

Incentives Matter

Because of asset forfeiture laws, every druggie and John should be driving pieces of junk. From this story, it seems to be the case.

Naves met that caller and another person near Bear Poplar at U.S. 801. They were waiting in a white 1994 Oldsmobile Cutlass.

The nadir of American automobile manufacturing. It hasn't gotten much better.

Advertising when the Google car comes by.

A very funny - though grossly under-appreciated - movie was Dick, released to limited success in 1999. It spoofed the Watergate scandal, making it of little interest to younger people. But it starred Kirsten Dunst, Michelle Williams, Will Ferrell and that other guy, making it unappealing to older people who thought it too juvenile and a movie geared for a younger crowd. 

Essentially, Betsy Jobs and Arlene Lorenzo (played by Dunst and Williams, respectively) befriend Nixon and become his official dog walker. They soon discover the ways of "Tricky Dick" and turn against him. During the final scene, Jobs and Lorenzo decide to show Dick Nixon what they think about him by flying a banner from the rooftop of Jobs' Georgetown home just as Nixon passes overhead on his way out of office. The banner read, "You suck, D***." (Notice the placement of the comma.)(It shows up about the 1:53 mark in the trailer below.)

It appears that we may see more of this kind of activity thanks to Senator Chuck Schumer (D-NY). You see, Google and Apple are racing to become the leader in 3-D navigation maps for PCs and handheld devices. In doing so, the two companies, especially Google, plan to drive and fly by areas they are mapping, as well as using sharply focused satellite imaging. And in doing this, they are apparently catching people unaware.

Schumer's great idea is, along with a few other things, to make Google and Apple advertise when and where they will be imaging a specific location.

All right, maybe a nice effort to prevent me from being photographed in my pajamas while retreiving the morning paper and ultimately to protect individual privacy. I'm on board with Schumer on that count. Unfortunately, the unintended consequence is to create the incentive for morons hoping to make it into Google Maps naked or making obscene gestures or flying banners that say, "You suck, Chuck." (Wow, this doesn't have the same comedic appeal.) 

 

Can we ever have too few airline accidents?

A great test question that Walter Williams used as part of his Intermediate Microeconomics exam was, "Given that airline safety is costly, can there ever be too few airline accidents?" The answer, of course, is yes. It is a simple application of supply and demand where diminishing marginal benefits of some spending or action goes against increasing marginal costs. This applies to everything, including to airline safety. Certain safeguards and safety checks provide tremendous value at little cost, but you eventually encounter spending that provides almost zero benefit at extremely high cost. (Can you say, TSA screening?)

We know that when you spend other people's money you overspend relative to how you spend your own money. A great example of this is provided by today's News & Observer with this story on North Carolina and its push to pave every state-maintained road.

The state has spent hundreds of millions in the past two decades to blacktop 13,000 miles of roads, bringing asphalt to the driveways of nearly 200,000 homes, DOT records show.

Crews are still at it and now are reaching the bottom of the list, with only 1,842 miles still eligible for paving. They are working in the most rural and least populated spots, such as Mark Teague Road, and in hard-to-pave, mountainous terrain in the west, such as at Lower North Fork Road in Jackson County near the Tennessee border.

Crews there have nearly finished widening work and are preparing to pave a 2.5-mile dead-end road that climbs up the side of a mountain. It has about 30 houses, half of them considered “part-time” or second homes. There are no churches and, except for a bed-and-breakfast, no businesses.

Taxpayers are spending nearly $3.8 million on the project.

Granted, at least one resident who lives on this road is happy to see it paved; she obviously benefits from it. But not everyone sees the great benefits of seeing paved even the roads on which they live.

Mark Teague Road near Pittsboro in rural Chatham County is a half-mile-long strip of gravel that cuts through some woods and then dead-ends at a vacant brick ranch house surrounded by farmland.

The state road looks more like a driveway for Elizabeth Hopp, whose family lives in one of three houses off the lane. When crews showed up recently to widen the road bed, build erosion control for a pond and get ready to pave the road with asphalt, she wondered why the state was upgrading a road that goes nowhere. The cost to taxpayers: $225,000.

“I don’t really see the need for this,” Hopp said. “Maybe this is some kind of progress, but it seems sort of strange to me.”

And it's not as if even the News & Observer doesn't see the inefficiencies in all this.

The program costs have increased sharply over the past 23 years, and the benefits have diminished.

More miles were paved, on roads serving more houses, before 1997 than during all the years since, according to DOT figures. During those first eight years, the paving program served 18 homes for every mile of asphalt. DOT’s upcoming two-year work plan calls for paving roads that average 8 homes per mile.

Fast-rising prices for fuel and asphalt have pushed up construction costs for all kinds of road projects. DOT’s average cost for paving gravel roads has increased from $250,000 per mile in 2007 to $350,000 today. At that price, it would cost the state $644 million to pave those remaining miles.

Now if only the N&O's editorial staff could see that this applies to education spending as well. 

Supply and demand, Justice Scalia. It's all supply and demand.

In countering Justice Ruth Bader Ginsburg during today's Supreme Court debate over the constitutional legitimacy of the health care bill, Juscie Scalia argued:

When Justice Ruth Bader Ginsburg observed that “the people who don’t participate in this market are making it much more expensive for those that do,” Scalia interjected,“You could say that about buying a car. If people don’t buy a car, the price [that car buyers] will pay will be more.”

I'm not arguing for or against the outcome of this case, but two things are worth noting in just this paragraph.

First, Justice Ginsburg is making a valid argument for requiring everyone to purchase health care insurance: those who don't have health care insurance and then end up going to emergency rooms when they get sick or hurt impose costs on the rest of us who do have health care insurance and must pay resulting higher premiums. It is a free rider problem that seemingly is abated by requring everyone to purchase health care insurance.

Second, ceteris paribus, if some people don't buy cars the demand for automobiles decreases. If demand decreases, the price of automobiles decreases, not increases. Now to what Justice Scalia may be referring is that the automobile manufacturing industry benefits from economies of scale and therefore producing more cars drives down the average cost of producing automobiles. But given the nature of the market (i.e., oligopolistic with cars serving market niches and buyers largely ignorant of market conditions), that doesn't automatically result in lower prices paid by auto consumers. Justice Scalia needs to better clarify, and possibly correct, his argument.

Reinvented to give you "everything you could possibly want."

Check out the ad below, which is to air (supposedly) during the Super Bowl. Isn't this the beauty of capitalism? Complete strangers - the investors, the managers, the contractors, the labor, and more - toil to give me "everything I could possibly want" in a car. I don't even know these people. A tear rolls down my cheek. 

Reinvented from DTan on Vimeo.