Category Archives: Economics

1963 Economic Report of the President

Some of you may have read Art Laffer’s excellent op-ed in the Wall Street Journal today and wondered, did President Kennedy say what Mr. Laffer quoted?

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.

—President John F. Kennedy,
Economic Report of the President,

January 1963

Well, I wanted the original Economic Report of the President (ERP) to read it for myself. I’m in no position to doubt Mr. Laffer, but I figured that people might doubt me if I use this great quote from former President Kennedy, so I needed proof.

I searched long and hard to find the ERP this morning from 1963 on the internet, and had a difficult time. I called the Kennedy Library, but eventually found it myself. My local librarian got me a copy of the Joint Economic Committee’s meetings on the matter, but not the ERP itself.

In case any of you have use for it, here (pdf) is the original 1963 ERP from Kennedy. He did say what Art Laffer quoted. Case closed.

UNOS, Cleveland, My FFX Taxes, and Insurance!

Always fun times here on the blog. Here’s a brief update on life in my world.

Today marks the debut of the United Nations of Sound (UNOS) premier album. The group’s lead singer is former Verve lead Richard Ashcroft. My favorite song of all time is Bittersweet Symphony by the Verve, which is famous for its quasi-legal sampling of a Rolling Stones song. Ashcroft doesn’t disappoint with further sampling of the Rolling Stones’ “Sympathy for the Devil.” We have to keep the lawyers employed, right?

Well, this album debuted today in the UK and other English speaking countries — just not here. I am getting conflicting reports that it’ll be available tomorrow, and Amazon.com new informs me that it will be available within 8 days. We’ll see in about 6 minutes whether it debuts here tomorrow…  Well, I couldn’t wait, so I bought the album from a vendor in Australia (thanks globalization + internet!). The last time I waited for an Ashcroft song to be released in the United States that I really wanted — it never happened. I had to buy the extended version of Bittersweet Symphony off Amazon 13 years after the fact. I just got sick of waiting. Maybe it’ll come out on iTunes or be available in stores, maybe it won’t. All I know is that I am going to get a copy of it.

Cleveland! Mary, Betsy, and I visited Cleveland this weekend. As you can imagine, it was chock full of fun. Indians game with fireworks (we won, and swept the Tigers at home for the first time since around the 1940’s) and had food at Winking Lizard, La Dolce Vita, White Castle, and Melt — with a round of golf at Shaker Country Club. Mary enjoyed the White Castle trip, a requisite for any girl I would date, but Mary loves WC, too, which is one reason why she has dated me for 11+ months! She enjoyed the fare at Winking Lizard after the game on Friday, as far as I could tell, and had a blast in Little Italy. After all, how could she not enjoy “Murray Hill?” Our Sunday Brunch at the new Cleveland Heights location of Melt was great, because the food was good and we didn’t have to wait 3 hours for it.

On the way back, Mary and I endured traffic both leading into and out of the famed town of Breezewood, Pennsylvania, a town more dependent on government decisions than Cleveland or Detroit. It was painful. Part of it was some ass-clown who flipped his semi after getting off of I-76. I usually do not patronize Pennsylvania any more than I have to, but Mary and I decided to try the new “Doublicious” at the Breezewood KFC, quite possibly one of the worst in the nation. As a YUM! shareholder, I worry that their quality control is akin to Wendy’s which doesn’t bode well for their brands, if you ask me, but I digress. Long John Silvers has unfortunately suffered because of it, and I love their food. My sandwich was OK, but Mary’s was lacking, and it showed in her dismal ratings of the restaurant on the $1,000 contest, which nobody I know has ever won. At SLU, I loved getting the original sandwich with American cheese and potato wedges. Not sure why they got rid of such a good thing.

Capitol after the rain

Went to work on Monday, had a late night and avoided the rain storm by way of the Capitol. Provided a good opportunity for a picture of the mall from outside the Dole balcony.

The FFX Fire Dept

I got back to find that my Condo building was again evacuated for a false alarm — thanks Kettler! Glad to know that the Fire Department at least shows up. Tax dollars well spent, except I am quite sure they are fining our condo building. I thought, erroneously, that the letter in my mailbox from Fairfax County’s Watershed Project Evaluation Branch was about the recent water main break we had. I was wrong. Turns out that FEMA is not going to recertify our building for the purposes of exemption from federally mandated flood insurance for government-backed loans. Thankfully, the unit my sister and I occupy was never part of a mortgage backed by the geniuses at our GSEs Fannie and Freddie, or by the Federal Housing Administration. We may be off the hook, so to speak, but the rest of the building will now have to buy federal flood insurance. We’re looking into it whether now that our unit is owned free and clear whether we have to buy the flood insurance.

I understand the point of flood insurance, but I have scruples about the government mandating insurance of any kind, and disagree with the Bush administration about flood insurance. Especially when most floods in the Huntington area are likely caused by expansion of the I-495 Beltway / Woodrow Wilson Bridge. Eat your heart out, I say, to fellow  conservatives fighting HCR with regard to the commerce clause. Just try and make sure we get some relief, too with regards to flood insurance. The Army Corps of Engineers puts us in the “1% annual chance flood plain (100-year floodplain) and are at risk of flooding again in the future.” Call me crazy, but forcing all of us to purchase insurance to insure against a 1% annual chance of flooding is bullshit. Court challenges, to some degree, have failed to prove that flooding was not due to nature. The timing is a bit suspect to me, as well. More on this as the situation progresses.

Anyway, here is the letter.

Lastly, this incident got me thinking about an article I ready today in The Weekly Standard that talked about looters in Oakland, and how looting will lead to higher insurance premiums for Oakland businesses. It just kind of confirmed to me Sowell’s contention that prices for goods are higher in poorer areas due to higher insurance costs — all passed on to consumers. Insurance rates rising because of looting is a good example of this.

The Weekly Standard also spoofed Cleveland in the same issue, describing my native Shaker Heights as having:

“broken the national record for per capita consumption of anti-depressant pills…”

Obviously hilarious, but not maybe too far from the truth.

Full photo album of my Cleveland trip is here. Enjoy.

Banking in D.C.

I love my banking institutions. So, let me tell you a bit about each of them. If you’re looking for a good bank in the D.C. area, let me know.

The first is ING. Co-workers and friends really liked their service, I invest through their Sharebuilder arm, and have checking, savings, and an IRA with them. To deposit money, you pretty much have to have a local account you can use to make deposits. You get free withdrawals at 7/11s, which are all around D.C. They are an online bank, so no branches. Their online site is excellent.

The second is the United States Senate Federal Credit Union. This is the credit union I joined through work. Each credit union has different membership standards,  but this one is great because their ATMs are all around work, they have a branch there, and their home office is on Eisenhower Avenue, literally 3 minutes away from my condo. If you don’t know of a credit union near you, check out the credit union finder. Most other credit unions’ ATMs are free for withdrawal. USSFCU’s online site is well above average.

Third is Burke & Herbert Bank and Trust. Based in Alexandria, this is Virginia’s oldest bank. They have locations all throughout Old-Town and Northern Virginia. Their online site is average, but their customer service is unparalleled and their mailed statements are immaculate.

I highly recommend all of these institutions, but also suggest that you take the time to learn about financial institutions in your area and determine which one is best for you.

Cleveland Stealers: How Ohio protectionism hurts America

Cleveland is a town known for its loyalty. In the 1990s, we were noted for our loyalty to our football team, the Browns. More recently, we were loyal to LeBron James, the self-dubbed “King” our championship-bereft city. Over the past few decades, we were loyal to our breadwinner: steel.

There is a connection between LeBron James leaving and the decline of the steel industry in Cleveland. Whereby LeBron left us because we couldn’t facilitate a city that his buddies Wade and Bush would come to, Cleveland similarly experienced the exodus of the steel industry because we couldn’t make our city a place where that industry could compete at a national and international level.

Unlike many of my fellow Clevelanders, including the owner of the Cavaliers Dan Gilbert, I never made the argument that Cleveland deserved or had a special claim to LeBron. Like a business or any individual, he can leave Cleveland for any reason, just like I did. (My gripe was how he shamed his home region on national television.) Economic actors, be they companies or people, can move freely for a variety of reasons. If for some reason, their growth or success is impeded by local constraints, they can move. Individuals like Rush Limbaugh and other relatively wealthy individuals can leave New York if that state “soaks the rich” with higher taxes. Similarly, companies can leave California if their climate becomes an impediment to their future success.

Therein lies the secret to why Cleveland is regarded by many as a dying city. Our denizens wrongly thought Cleveland deserved LeBron, just like they deserved a portion of the world’s steel industry. In a market economy, either domestically or internationally, you don’t deserve anything — you have to earn it.

In the 1960’s, 1970’s, and even during President George W. Bush’s tenure in 2002, the U.S. either slapped import quotas or tariffs on steel from other countries. All of these actions were economic malarkey that ultimately harmed Cleveland, Ohio, and the United States as a whole.

For one, much of the information that allegedly justified either import quotas or tariffs was based on the reports provided by domestic companies. In many cases, the government does not do its own detailed research as to whether or not their foreign competition were really “dumping” products on our market below cost. Supposedly, domestic producers would have us believe that the foreign competition would run our industries out of business and later raise prices once they’ve achieved a monopoly.

Aside from the fact the fact that steel is made throughout the world in countries like Japan, China, Russia, Trinidad/Tobago, Venezuela, Mexico, and Brazil — the fact that most of the data that the International Trade Commission uses is often provided from the domestic industry seeking so-called “protection” makes this a total ruse.

How can the government possibly ascertain what the cost differentials are for a foreign steel company that might have weak domestic demand in their home country, where costs are higher for smaller orders, versus international demand where costs are lower as a function of economies of scale? The unfortunate fact is that our government, along with other governments, have not done their due diligence to determine whether prices for steel were/are “below cost” or just lower due to economies of scale and larger aggregate demand in foreign markets like ours.

Well, from the late 1960s to present, American steel producers have gotten their wishes fulfilled — protection. Well, what happened?

Regardless of political action, employment in domestic steel production declined from 521,000 in 1974 to 151,000 in 2000. As Cleveland natives know all too well, steel companies went under right and left.

Why couldn’t protectionism save Cleveland? Well, even after import quotas and tariffs, foreign steel was still more affordable than steel made in Cleveland and other parts of the United States. Cleveland could not compete.

Sadly, Cleveland’s protectionist nature reared its ugly head, and the failed attempts to keep our steel industry limping along had other repercussions. In 2002, when President Bush made the poor decision to levy such tariffs, The Wall Street Journal noted:

New steel tariffs would cost about eight American jobs for every one steel job protected, according to a study last year by economists Joseph Francois and Laura Baughman of Trade Partnership Worldwide.

Some of the biggest losers would be the steel-belt states that tariffs are supposed to help. Illinois would lose ?ve jobs for every one protected, Ohio three for every one and Pennsylvania and Indiana two for one. New tariffs would even hurt parts of the steel industry itself, and thus some steel-workers, too. AK Steel of Middletown, Ohio, has invested more than $1 billion to use imported steel slabs and now employs 11,600; what would Mr. Bush tell them? And all of that damage is before any foreign nation decides to retaliate against U.S. exports, as they probably will.

The Francois/Baughman report also found that:

  • The Bush proposal would protect between 4,375 steel jobs and 8,900 steel jobs at a cost to American consumers every year of $439,485 to $451,509 per steel job protected.
  • Higher prices and other inefficiencies imposed by the Bush administration’s actions would increase costs between $1.9 billion and $4.0 billion a year on consumers, and decrease U.S. national income by $500 million to $1.4 billion a year.
  • Steel-consuming industries would face greater competition from foreign manufacturers, as foreign manufacturers would have access to more competitively-priced steel inputs than U.S. steel users. The tariffs imposed on steel imports would raise the price of these inputs for U.S. steel-using manufacturers but would not raise prices for foreign manufacturers of steel-containing products. As a result, imports of finished steel products, like electric motors, construction materials, appliances and autos, would increase.

Throughout the 1990s, over 30 U.S. Steel companies went bankrupt. “Legacy costs,” which are the inflated costs incurred by industries for their retirees in industries that are heavily unionized were bogging down steel producers. GM and Chrysler experienced a similar fate, having legacy costs significantly add to the price of their products, which in turn, made them less competitive.

Even after decades of political stunts to protect American steel, in the end the market determined which entities won and lost. No thanks to our government. And, to make things worse, the quotas and tariffs harmed our economy, with little to show and net job losses.

A 1984 Federal Trade Commission study estimated that steel quotas cost the U.S. economy $25 for each additional dollar of profit of American steel producers. A negative multiplying effect of $1 : 25!

Also intriguing to point out is that, on average, the U.S. steel industry supplied no less than 70% of U.S. steel during the period of 1990-2001.

Back to LeBron. He left Cleveland because we could not facilitate a team that could win championships. As the Plain Dealer pointed out, winning regular season games doesn’t amount to squat if you cannot win in the playoffs. In a similar vein, it does not matter how much of the steel you supply at any given point if you cannot compete with other economic actors, as evidenced by the increase in imported steel depicted above. If you lose that competitive edge, your competition will gain market share, and it is up to you to cover that ground.

In my earlier post on the fallacy of buying local, I questioned why anyone would intentionally make himself poorer to keep an inefficient economic actor in business. This applies here also. But, in this instance, the government stepped in and prevented consumers from choosing whether or not to buy locally made steel. The imposition of import quotas and tariffs is a direct affront to the right of consumers to make their own decisions about from whom to purchase components. I realize that the “right” I speak of is not codified in law, but it should be.

An example of why import quotas and tariffs are unjust. There are two gas stations across the street from one another corner.

One is a locally-owned filling station that is not part of a major chain. It charges $3.00 per gallon and all of its components, like ethanol, are made in the United States. Let’s call this station “LTZ Gas.”

But, across the street is another gas station that gets its gas from abroad, does not have the government-mandated ethanol (Just let me dream) and is $2.25 per gallon. This gas station is called “Gas Importers.”

If you were in need of gas, which station would you choose? Certainly, most would pick Gas Importers because their price is lower. The imposition of import quotas and tariffs is like a police officer parked at the intersection who pulls you over before you make your choice. If you choose “LTZ Gas” the officer lets you pass. But, in an effort to be “fair” he informs you that the law will only let you buy one gallon of gas at “Gas Importers” at the lower price and then you will pay a .75 cent per gallon tariff on each additional gallon you purchase, just so LTZ won’t go out of business because their component inputs and cost of labor are higher.

Is that fair? No. But this is what happens, with tariffs and import quotas and American business are hurt by it. Consumers are forced by government decree to either buy from LTZ or pay artificially higher prices on gas from Gas Importers. Obviously, if the consumer’s business is dependent on gas, like a pizza delivery guy, he becomes less competitive because his cost of doing business goes up through higher prices, and that cost gets passed along to you in the form of more expensive pizza. As a result, the pizza delivery guy is routinely stiffed on tips, and is ultimately poorer. All because LTZ could not compete with Gas Importers.

To jump back in to steel briefly, the 2002 tariffs were estimated to raises prices on U.S. consumers between $2 and $4 billion, decreasing national income between $500 million and $1.4 billion.

Just like gas prices fluctuate, so do steel prices. What tends not to fluctuate as much, however, are the costs of labor and taxes. This is why some producers in other countries will have a comparative advantage in steel production. But, as we all know, comparative advantage isn’t just limited to countries. Some states have a comparative advantage over Ohio, which is why we lost a lot of tire manufacturing to southern states like Georgia.

Back to steel, the tariffs President George W. Bush imposed allegedly would protect between 4,375 and 8,900 jobs — at the expense of an estimated 35,000 to 71,200 jobs. Now, if you were one of those 35,000+ workers who lost their jobs, you might not realize the connection between tariffs or import quotas and why you lost your job. Similarly, you might not realize that because of these protectionist actions, your golf clubs, new car, or house now costs more. Sadly, President Obama is headed down the same road, but at a faster pace.

What it boils down to is thievery, thus the title of this post. Forcing consumers to pay higher prices is akin to the direct taking of your wealth, depriving you of the decision to buy items at lower prices or forcing you to pay a tax to equalize competition between two unequal competitors.

Everyone reads with shame the stories of progressive communities structuring soccer games where nobody loses. It’s pathetic, I know. But on a smaller scale, forcing St. Dominic’s to accept a goal for every goal they score on Gesu is no different than taxing the products of more efficient economic actors to make things “fair” for the poor souls at Gesu who suck at soccer.

I commented on the Cleveland.com article about “buying local.” It should be no surprise that advocates of “buy local” would also support these tariffs. Heck, if they had it their way, you’d be forced to “buy local” which is often the effect of tariffs and import quotas. One commenter decried imports and said “import buying will lead to a very weak recovery in this area.” As if Cleveland has ever really experienced a recovery. Since generally accepted rate of “full employment” is 5.0%, you can see that Cleveland has rarely been at or near full employment for more than a few years.

(Click to expand.)

Cleveland’s problem is that we are overly dependent on too few industries. Just like nobody would expect you to invest all of your savings for retirement in a single stock, Cleveland expects that economic growth will magically appear if they do this. Obviously, this has not been the case. Cities should not rely on one industry, hoping they’ll somehow gain a comparative advantage. We can ask those in Flint, Michigan how well that experiment worked out for them.

To succeed, Cleveland needs to diversify. Given the area’s government corruption and stagnant political atmosphere with near complete Democratic control, it seems very unlikely that things will turn around. Taxes are too high, the government is way too involved with zoning, and education is  just plain horrible. Unions in schools, the public and private sector all play a very large part in this, too. However, Cleveland’s elected officials are clueless when it comes to finding answers.

ReasonTV did a recent feature entitled “Reason Saves Cleveland.” They interviewed a local official whose perspective is indicative of the backwards economic thinking of Cleveland:

Cimperman went on to explain that the city council’s role was to help business owners and residents “thread the needle” of endless regulations and mandates and edicts. (Cleveland has more than 20 zoning designations alone.) He boasted of helping a linen company—the last one of its kind within city limits—that had been trying for the better part of a decade to get variances allowing it to expand. With Cimperman’s help, the company managed to navigate the paperwork in a mere 18 months. When I talked with him about Houston’s less restrictive land use policies and wide-open approach to new businesses, he scoffed: “Houston is a joke.” If that’s true, the painful punch line is that during the last 50 years, Houston became the country’s fourth-largest city while Cleveland was sliding down to 41st.

Councilman Cimperman, who ran against Rep. Kucinich views the role of city council member as a facilitator for businesses to thread the needle of our archaic laws. That approach is backwards and wrong. Cimperman obviously doesn’t realize that it is he, as a member of the City Council who writes the laws. If it takes 18 months for a business to expand, what business is going to stay in Cleveland? Rather than have business be forced to “thread the needle” why not just get rid of the needle all together? This climate needs to change if Cleveland wants to diversify and attract jobs.

We’ve had two Republican mayors since World War Two. Cleveland Democrats won’t take on unions, because they represent the power base that gets them elected in what remains of Cleveland. What Cleveland needs is a Michelle Rhee to take on the Cleveland Teachers Union, paired with a Chris Christie as mayor. However, even with the formation of the new Cuyahoga County Council, I doubt much will change and Cleveland will slip further into the economic oblivion, if we let it.

FURTHER READING:

Protectionist Welfare for Steel

The Ailing Steel Industry Needs Less Government Intervention, Not More

LeBron James, Loyalty and the Economic Future of Cleveland

The Fallacy of Buying Local

Below is a letter I wrote to the Editor of the Cleveland Plain Dealer.

To the Editor:

In your July 8th article about “buy local” week, you sold readers the fallacy of “buying local.”

I suppose that the theory is, if Clevelanders “buy local” as much as possible instead of buying from national chains, that Cleveland will be better off economically.

It’s a nice thought, but it’s simply not true that buying local is necessarily to Cleveland’s economic benefit.

Take the example of the guy who bought a remote control boat. He bought from a locally owned store because he wanted to keep the money in Cleveland. Buying from a big-box chain store would have had the same effect — supporting the livelihood of people who live in Cleveland. While local retailers may benefit from this concept (which is why they are among its biggest supporters), Clevelanders working at the big-box stores would suffer.

If Cleveland residents bought into this theory en masse, they would pay higher prices for goods, consciously making themselves less wealthy, with less discretionary income to spend at restaurants and other stores. Local retailers are often behind the curve when it comes to having incentives to improve their efficiency, which keeps costs low. Broad adoption of “buy local” wouldn’t change this.

As a transplanted Clevelander in Virginia, I buy Great Lakes Brewery beer, which is now sold in my area, for many reasons. Of course, I buy it because it is a Cleveland beer, delicious, and I went to St. Ignatius a block away. However, in transporting the product here, it becomes comparatively more expensive in price, which might deter me from buying it. If a comparable beer is more affordable, I buy that one.

Clearly, my decision to purchase Great Lakes helps Cleveland, even though I am removed from the Northeast Ohio marketplace. What if I adhered to buying local, and only bought beers brewed in Virginia? Of course, the employees at Dominion Brewery would benefit, but at the expense of Great Lakes’ employees. Whether the beer is sold at a big chain or a small grocery in D.C., my decisions are guided by price, which is the result of how efficient or inefficient both the brewery and the store are at making a product or service available to me.

In the grand scheme of things, the degree to how efficient companies are is generally represented through their prices, which help me determine what goods I buy. Clevelanders should not make purchases solely because a business is located here. A business should earn your hard-earned money because they offer the products you want at competitive prices you’re willing to pay — not because they are located in Cleveland.

Why should I make myself poorer to keep inefficient economic actors in business? Let’s hope Cleveland will not end up like Detroit and artificially keep inefficient businesses around longer than they should be. In the end, businesses that aren’t competitive in the market either fail or close their doors. And when we perpetuate unsustainable business practices, we as consumers not only suffer in the short term, but our region suffers in the long term. All while wasting our scarce resources through higher prices. This is the fallacy of buying local.

Jim Swift
Shaker Heights, OH / Alexandria, VA

Fractional Reserve Banking

I wanted to take a moment to talk about fractional reserve banking with you.

Seems to me that this is one area where you might see the term, and go “what the heck is that?” Well, it’s actually quite important in our economy. So, I wanted to take a bit of time and explain it in layman’s terms.

Banks do a lot more than transfer accumulated wealth through loans to young people like you and I seeking to buy a car or house. In fact, banks serve a vital purpose doing this.

Recently, the President and some in Congress thought it was dandy to nationalize student loans (as a ‘pay for’ for health-care reform.) Frankly, as a government, we don’t have the money to do that. This is a bad idea because it is open to political gamesmanship, and as it stands, we don’t have the necessary cash reserves on hand to finance it. It will likely be financed through borrowing, or worse yet, “quantitative easing” (i.e. printing money.) In my view, nor is it a proper role of government to get involved in lending, because politicians will start exempting certain classes of individuals from repaying their loans, thus transferring the burden to others. The recent health-care bill also takes interest earned from repayment to fund the new health-care scheme. A reassuring thought for students, I am sure, using the interest they repay from borrowed or created money to funds others’ health-care. But, I digress.

Anyways, banks earn a return on the loan they give you for a car or house and keep a portion of that interest for researching the feasibility of repayment and facilitating such a loan. They also pay interest to people who put their money in instruments like savings accounts and consumer deposits (CDs).

At some point, you may have met somebody whose name is “Goldsmith.” Similarly, like people whose names are “Brewer, Smith, and Carver” — the origin of this last name is tied to the career of the person who initially bore the name. Goldsmiths were artisans who made jewelry and items out of gold. Like any prudent person, they would protect the components of their trade (gold) in safes. In the olden days, not everyone had a safe, so people would frequently ask to store their gold with a goldsmith, who would issue a certificate redeemable for that specific item, or, if it were straight gold, that value in gold. He or she might also charge a premium for its safekeeping, but as we’ll see later, those fees likely disappeared if individuals agreed to the goldsmith’s terms of keeping it. Plus, it is worth pointing out that it was rather cost-prohibitive to either build or purchase a safe in olden days, as it is today.

People could then treat these certificates like currency, and trade them for goods or services. Goldsmiths soon realized that people tended to put their gold in their safe for long periods of time, and rarely would people all at once ask for their gold back.

Goldsmiths came to the point where they figured out that they could use the gold for other purposes, like making items for sale or lending the gold to others. They would make profit on the product they sold, or made interest on the lending of some of the gold.

Since the gold was protected in their safe, and they could lend the gold with some reasonable assurance that not all of it would be claimed at the same time, there was in effect, two types of the gold in existence. The value of that gold on paper, and the gold that goldsmiths could lend to others for interest. Naturally, this increased the value of the “money” supply.

This, of course, enabled people to generate more economic activity with the loans they received, and also led to the betterment of society as a whole through increased investment.

Of course, problems arise from this concept. What about unscrupulous goldsmiths who kept practically no reserves? What about inflation in the money supply?

In today’s banking system in the United States, two entities exist to address both of these concerns. First, the Federal Deposit Insurance Commission (FDIC) exists to guarantee deposits at banks. Banks pay a premium into a fund that exists to pay for their potential failure. The FDIC, in turn, insures your deposits up to a certain limit (which changed recently because of the economic crisis from $125k to $250k.)

The other entity exists to ensure (in theory, at least) that inflation is not rampant and, thus, a silent thief of your wealth, is the Federal Reserve. The Federal Reserve also determines the percentage at which banks have to keep certain reserves relative to their total holdings. They also lend money to banks at a fixed percentage (federal funds rate, set by the Open Market Committee) to lend to banks, and thus, individuals/businesses.

A bank may be perfectly sound, but a run could ruin it because loans (like mortgages) are not liquid to the degree where the bank could force you to repay your loan instantaneously. Banks cannot legally breach contracts like this. This is why both the FDIC, the law set by Congress, the Judicial system, and the Federal Reserve, our central bank, exist.

Through the laws of the country and the policies of both entities, a balance is meant to be struck to ensure the safety of bank deposits, their holdings, and the greater money supply, which the Federal Reserve oversees.

Just something to think about when you get your next loan, or you open up an investment instrument through a financial institution.

SOURCE: Much of the content for this blog post was adapted from Thomas Sowell’s book, Basic Economics: A Citizen’s Guide to the Economy, pages 268 and 269. This is an excellent book to purchase if you’re looking to gain a good understanding of the fundamentals of economics, or to brush up on them.

Water Main Break

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Say, is that a beautiful river in the middle of suburban Alexandria? No, it is my street, which I discovered was closed tonight due to a water main break.

Lucky for me, I had a growler which will keep 2 liters of water safe until Betsy and I have time to visit a store that isn’t already sold out. Actually, I’m kind of glad I have an empty growler sitting around, for once.

It’s a good exercise in how scarcity of a good affects prices, I bet we’ll see. Maybe I can do a study: How scarcity of water affects prices in supermarkets, a study. Reminds me of when Mrs. D’Orio let me out of homeroom at St. Ignatius to run to Dave’s Supermarket to stock up on water for my class as main broke near St. Ignatius and we couldn’t use or drink water and the vending machines were quickly sold out.

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Metro to start rationing services

Come one, come all. Public transportation advocates. Health Care Reform advocates. Let’s sit around the table and discuss the latest and greatest in one of the country’s most heavily subsidized systems, WMATA, and how they’re about to ration their services to the DC area.

My sister posted a link on her facebook page, saying:

“so wmata, you propose cutting service btw king street and huntington on the weekends as well as after 9:30 on weekdays. great effing idea.”

One of her liberal friends commented “that sucks,” so I responded “Wait, you mean that the government can ration services? Who knew?” I was just trying to make a pointed remark alluding to health care, but given my hatred of WMATA, this got me thinking that I had to delve further.

Sorry, Vice President Biden, we can talk about how AMTRAK has never made a profit another day. But let’s ride the rails of metro down memory lane.

First off, I took a brief look at the history of metro fares since metro was created. They’re behind the cost of inflation on most fares. If you’d charged us correctly the entire time, people would be less likely to bitch about a dime increase, even if they’re not paying for it. People usually assume they’re being ripped off. But I guess we’re being ripped off when a bunch of dipshits are running our public transportation system and aren’t charging riders adequately, thus increasing the cost to taxpayers who may/may not use the system.

I looked at the history of metro fares, and used the first and last years for comparable data. 1984 and 2008. In its infancy, WMATA was pretty much just the red line and a few small versions of the current lines. They’ve expanded their services dramatically, at great taxpayer expense, and they haven’t done a good job at pricing. Maybe they hired too many people from AMTRAK?

As you can see, metro has only had fare charges above the 1984 charge’s inflation adjusted numbers in boarding charge, maximum possible fare, and maximum possible fare to metro center (a no longer relevant statistic I am sure). Metro drastically expanded service and didn’t keep fares consistent with cost. I am not an expert on their historical ridership, but even I know this is a bad idea.

On metro’s webpage, their response to “What are the economic pressures on the Metro operating budget?” is…. (get ready for this)

It’s very important to understand that virtually no transit agency in the country, or in the world, makes a profit or even breaks even. Each year, Metro customers pay only a portion of the actual cost of each ride they take. The remainder comes from state and local government, often referred to as a local subsidy, and other revenue such as advertising. Metro and the state and local governments have kept fare increases below the inflation rate for more than a decade, and even with fare increases, customers still do not pay the full cost of their transportation.

Yes. That’s really their answer. Well, nobody seems to make a profit with this whole public transportation scheme, so why should we? Break even? Ha! I do not give two shits about whether you’ve kept costs under inflation. I know you have. I did the math myself. My question is, why did you do that? Were the local governments not burdened enough, so you thought they could use the extra expenses? Jesus.

Some other observations from their FY10 budget. Metro has more than half of a billion dollars in bond debt, in addition to their current budget shortfall! Each year, they spend over $1 billion dollars on labor costs.  $1.03 billion, in fact.

The average annual pay for metro employees is $66, 756. This is higher than the average pay every state in the country and the national average.

Metro bus’s cost per passenger is $3.62. $2.50 of that is subsidies. Average passenger fare for buses is $.86. There is something wrong with that. Every time I hope on a metro bus, cha ching! $2.50 disappears, just not directly from my wallet, but from the federal subsidies and local government “contributions.” My friend who walks to work, my friend who drives to work, my friend who bikes to work, in effect, are paying that $2.50 through their taxes.  (I don’t actually take buses, though.)

Metro needs to charge the passengers more, plain and simple. They’ve been screwing this up for far too long.

Here are some ideas for how metro can raise money, and maybe even break even.

  1. Charge more for general fares. People value consistency, and if they’d been paying the right price all along, you wouldn’t have to propose massive cuts to the system.
  2. Charge more for parking. $4.50 a day at Huntington equals about $90 per month. My dad pays more for parking in Cleveland.
  3. Sell more ads. Let people sponsor entire metro cars. I’ve seen enough stupid political ads for the rest of my life. Call me crazy, but letting the National Resources Defense Council run their stupid polar bear ads isn’t going to allow you to bring in a lot of money. Let Google pimp out entire cars with wifi or something. All of these non-profits are probably getting a huge deal, you can get better people to increase revenue in ads. Plus, we’re all sick of political ads.
  4. Get rid of unions. I’m sick and tired of reading how the local transit union is pushing for second chances for drivers who have messed up left and right. Plus, union labor costs more. The average full time station manager makes $27.65 an hour. I see them sleeping all of the time. King Street has 2 station managers. I see that’s on your proposal to close some entrances. Good. Do that, and get some non-union labor to do the work.
  5. Fire people. More over, fire the entire escalator fixing department. One of the main escalators at Gallery Place China Town was fixed this week. Only, it had been closed since November. Look, I get it. Overtime costs more money, these employees are unionized and cost a lot of money. Fire all of them and hire contractors. You’ll save a boatload of money.
  6. Fine the bejeezus out of people. Not once in three years have I ever seen somebody fined. I see people eat, spit, and play music without headphones all of the time. Why not give the ability to fine people to every WMATA employee? I saw a kid at Gallery Place throw about 50 twizzlers onto the tracks. Fine that kid $100 for every twizzler. People drinking coffee. Every morning, every train. Nobody gets fined. Similarly, kids love playing music aloud through their cell phones. It annoys all of us. Please fine them the most.
  7. Eliminate discounts / free rides. Students, disabled people, and seniors all get discounts. Metro employees, law enforcement, and metro retirees ride for free. Nobody should ride for free. Nobody should get a discount. It’s like at McDonald’s, during your shift you typically get a free lunch, but you don’t get free food when you’re not working. If you’re not taking the train or bus to work, you’ll pay like the rest of us. Many airlines don’t even give unlimited free travel these days.no one rides for free
  8. Fine people who take up two seats. I am serious. The dude who takes up two seats should have to pay for two seats. Airlines do it. Ask Silent Bob. If you’re too big to fit in a single seat, find a good place to stand. Otherwise you get fined. Similarly, the person who feels he/she deserves both seats should be fined. I don’t care if you think you are important, if that you have space issues. You’re riding in a telescoping death trap with up to 150 of your closest friends. If you really cared about personal space, you’d drive.
  9. Charge more for people with large bags. Oh, you bring your entire office to and from work every day? That’s your fault, not mine. Can’t carry a normal backpack or satchel like the rest of us? Have to have a roll bag that takes up space. Double fare for you. Traveling? Same thing. Double fare for you. Hey, it’s still cheaper than a cab, and you’re utilizing more space than a commuter. Seems fair to me.