The Problem with Price Controls

And why they do not work

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On May 16th, 2013, the UK Daily Mail reported a shortage of toilet paper was occurring in Venezuela, the home of  the late “Revolutionary” Hugo Chavez. Although many Venezuelans and people around the world do not understand how this is, we will explain here. From the article:

“First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities – toilet paper.
Blaming political opponents for the shortfall, as it does for other shortages, the government says it will import 50m rolls to boost supplies.

Economists say Venezuela’s shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government’s controls on foreign currency.

“State-controlled prices – prices that are set below market-clearing price – always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union,” said Steve Hanke, professor of economics at Johns Hopkins University.

Prices of goods and services is THE basic determinant of value of a particular good or service. How do we know what value is? Some items will be valued more by some than others. For example, some people will not pay $60 for a brand new video game, but others will. Some would pay $90 for a brand new video game. Thus stores will set their prices based on what people are willing to pay, not on what the government tells them. If stores overcharge on an item, they will sell fewer units, and thus will be compelled to lower their prices in order to sell their items and stay in business. If even one enterprise charges a little less than its competitors for the same item and consumers react accordingly, then other enterprises will be compelled to follow suit. This rule does not hold true for cartels, monopolies, duopolies, or oligarchies-nearly all of which are either sanctioned by the government or actually run by it. From the article:
“President Nicolás Maduro, who was selected by the dying Hugo Chávez to carry on his “Bolivarian revolution”, claims that anti-government forces, including the private sector, are causing the shortages in an effort to destabilize the country.”

This is a classic socialist tactic. Most socialists, Keynesians, and Statists do not understand that people will act according to their best interests. They think they can run an economy from one location and everything will work well because they said so. Hugo Chavez, whose nation only made money due to oil reserves in Venezuela, “gave” people food, work, education, healthcare, affordable housing, but his people still became poorer and more dependent. The reason is obvious: The “free” goods were paid for by those who produced, and taxes went up and up until the producers either fled the country or bargained with Chavez so they could benefit from Cronyism.

Back to the accusation: as is usual for people who do not understand the problems, or who are deliberately trying to manipulate people, blame some boogeyman for the regime’s failures, so those who are less educated and informed will actually believe the government’s lies. From the article:

“The government this week announced it also would import 760,000 tonnes of food in addition to the 50m rolls of toilet paper.

Many factories operate at half capacity because the currency controls make it hard for them to pay for imported parts and materials. Business leaders say some companies verge on bankruptcy because they cannot extend lines of credit with foreign suppliers.

Merentes said the government had met the US dollar requests of some 1,500 small- and medium-sized companies facing supply problems, and was reviewing requests from a similar number of larger companies.

Chávez imposed currency controls a decade ago trying to stem capital flight as his government expropriated large land parcels and dozens of businesses.”

Instead of businesses paying for the parts and materials they needed based on a free flow of pricing, the government simply told people what they could pay for things. The problem is that if the price is unacceptable to those trying to sell, they will just walk away. They will not take a value they feel is less than they were looking for  unless forced to by government. This is EXACTLY what happens to nations with single-payer healthcare: the government dictates the prices to the providers, and they either accept it or else decide the prices paid is not equal to or greater than the services they provide. The result is fewer providers, many of whom will retire or change professions. Why do all the hard work of medical school or in this case trying to buy and sell goods or services if your value is dictated to you by people, most of whom have no experience in your field and whose goals and motivations differ significantly from yours?

This is the lesson we learn from big government supporters:Government cannot run industries because their objectives differ from those who seek profit or other compensation as reward. Free-market and free-enterprise economics supporters do not take into account the temperment of people or the intent. Rather, we acknowledge reality: that most people are incentivized to provide goods and services for an incentive, be it money, stocks, items, or whatever else that individual values, and each person’s exact values differ. There is no “one size fits all”, and forcing people to go along with that idea does not work. There is no delusion paradise which often exists in the minds of “progressives” that rich people will just pay more taxes, doctors will happily provide their services for whatever price the government thinks is “fair”, and people will all get paid high wages with full benefits.

In this case price controls did not make goods cheaper: they made goods scarce and now Madura, who most likely rigged the election over Capriles, will now have to choose between doing the right thing and eliminating price controls and government control of the economy, or doing the Chavez and blaming everyone and everything for his party’s failures.

Read the original article:http://www.guardian.co.uk/world/2013/may/16/venezuela-toilet-paper-shortage-50m

 

Get Active-Get a local ballot initiative going!

Most people focus very heavily on national issues, and then sometimes state issues. Few people are focused on local issues because they are not readily understood or available to follow unless one follows local news or happens to have a local blogger covering issues specific to one’s town, county, or even school district or neighborhood. Even fewer are aware of how to make changes at the local level. While most people who generally are involved in changing laws will protest, sign petitions, call their elected officials, write letters to the editor, among other things, few think to gather signatures and put issues on the ballots. Getting citizens educated and active is especially important at a time politicians are proposing laws to limit transparency.

The Lucy Burns Institute is one organization dedicated to making sure citizens know about their rights to put issues on the ballot. They are the backers of the website Ballotpedia.org and have a site on Delaware: http://ballotpedia.org/wiki/index.php/Delaware. You can view the different initiatives going on in Delaware, issues which need addressing, and ways to get involved.

 

Wary Small Business Owners to Delay Hiring

Key Findings:

U.S. small and mid-sized business owners plan to delay hiring new employees or seek new loans amid cautious optimism about the economy, according to the latest findings of the PNC Economic Outlook survey.

Highlights:

Waiting to Hire, Seek Loans
The survey, which gauges the mood and sentiment of small and medium sized business owners, found that only 46 percent expect their sales to increase in the next six months, significantly lower than last spring (58 percent). Profits are also expected to be lower, as only 38 percent expect an increase compared to 43 percent in the spring. Only 23 percent expect to add new employees, lower than in spring (28 percent) but still higher than a year ago (20%).

Housing Rebound to Continue
Building on the dramatic turnaround first seen in PNC’s fall survey, 48 percent expect home prices in their local markets will rise over the coming year compared to 26 percent one year ago. This expected house price rebound is reinforced by sizable house price gains in 2012.

Consumer Spending Supports Price Hikes
One-third plan to raise their selling prices and only five percent intend to cut their prices, signaling potential pricing pressures.

PNC’s chief economist Stuart Hoffman discusses the spring findings of PNC’s biannual survey of U.S. small and mid-sized business owners.

Rail Splitters Meeting on March 27 to discuss Bloom Energy lawsuits

For those of you who are unaware Governor Markell and five members of the Public Service Commission are being sued by an out of state company called Fuel Cell Inc. and a local resident John Nichols, you may want to attend the Wednesday, March 27 meeting of the Rail Splitter Society at the Ed “Porky” Oliver’s Golf Club in Wilmington beginning at 6pm. John will speak about the lawsuit and his battle against the government and Bloom Energy over their technology. This event is free and open to the public.

View the original invitation:

March 27 Rail Splitter meeting announcement

 

Car Companies get rich off of you

Please enjoy another guest post from CRI contributor and author of greenexplored.com, Lindsay Leveen.

$40 million Of Green For Gangrene

 

Folks we are not talking about the pharmaceutical industry doing some ground breaking research on the horrible disease of gangrene.  We are talking about more misguided government policy to coerce people to buy electric plug in vehicles.

Several states led by the Once Golden State enacted legislation to impose “pollution” penalties on automakers who do not sell “enough” plug in cars.  Those makers that only sell plug in electric cars like Tesla can sell offsets to other manufacturers to avoid the state imposed penalties.  In 2012 Tesla collected $40.5 million in revenues from other auto manufacturers based on these cockamamie state penalties.  This equals approximately 10% of all of Tesla’s revenue.  This is a very sweet deal for Tesla that is teetering on the edge of survival.

Now let’s see if the state enacted legislation does any good for the environment or is simply another boondoggle to screw the poor in favor of the rich.    Tesla sold a total of 2,650 cars in 2012, hence the “pollution” credits equaled over $15,250 per car.  The IRS gave a $7,500 tax credit for the car and the state of California gave owners another $2,500.  Therefore each Tesla has a direct or indirect government subsidy of over $25,250.

These subsidies were all in the name of “green”.  The Consumers Report test drive of the Tesla showed the car needs 0.38 kilowatt hours per mile of battery power.  This equals 0.42 kwh/mile of grid power.  The Royal Society in the UK in a very recent publication calculated that each kwh of battery storage needed as much as 694 kwh of primary power to produce the lithium ion battery (the worst case scenario).  This means that each 85 kwh battery pack required 58,990 kwh of energy for their production.

Let us assume that each Tesla is driven 12,500 miles per year and lasts 8 years for a total of 100,000 miles.  Dividing the 58,990 kwh needed to produce the battery pack by the 100,000 miles we have to add 0.59 kwh/mile to the 0.42 kwh/mile to get the full kwh/mile to drive a Tesla.  This is 1.01 kwh per mile.

The average emissions for power in the grid in the US is approximately 1.3 pounds of CO2 per kwh.  The tesla therefore emits 1.313 pounds of CO2 per mile.  The pounds of CO2 emissions per gallon of gasoline including oil extraction, transportation and refining, as well as on board combustion is about 25 pounds per gallon.   Therefore the Tesla is no better than a gasoline car that achieves 25 divided by 1.313 or only 19.04 MPG.

The Federal and State governments are transferring over $25,250 of poor people’s money to the super rich for each and every car that only achieves the emissions equivalent of a car that achieves 19.04 miles per gallon.  I was disgusted with the waste of money in wars in Iraq and Afghanistan.  I am not surprised by the utter waste of money in subsidizing the toys the rich buy in the name of green.  We are living aboard a ship of fools with the captain navigating using a moonbeam.

Post Script —-  I did some additional checking and the US DOE Argonne Lab states the primary power as 472 kwh not the high of 694 kwh in the UK report.  Using the 472 kwh we get hte 85 kwh Tesla battery pack will need 40,120 kwh of primary power.  Dividing by the 100,000 miles we have 0.401 kwh per mile for the production of the battery pack.  Add the 0.42 kwh/mile for the charge energy for a total of 0.82 kwh per mile.  Performing the same calculation to get the equivalent mpg for CO2 emissions the result is 23.45 MPG.  Therefore even in the best case using the most optimistic DOE data the policy still makes no sense

How the tax raise increase game works

Please read the following guest post from Larry Koch, special contributor on for the Center of Education Excellence at the Caesar Rodney Institute.

One of the reasons I retired from educational administration from a rural Maine school district was a cynical method to increase taxes that a number of my colleagues engaged in. This is how it worked:

1)        The town, usually fed up by double digit increases, would demand that the district lowered expenses by let’s say 2%. This should not have been a difficult task to do in a multi-million dollar budget.

2)        After a number of hearings (to show that they tried) the Superintendent would come out with a proposal that would cut sports, after school programming, AP classes and special education.

3)        The constituency groups for all of these programs would show up, howling for their children, at every board and town meeting, until-far too often- the proposed cut was dropped, and often a tax increase was agreed to.

The reason this scenario was so cynical was that it had been choreographed in advance, and concerned parents were manipulated into doing something that was destructive to the community, and ended up with farms being closed and people defaulting on their taxes. Education was not advanced, and the bureaucracy was engorged. School officials could have surgically applied cuts so essential and popular programs were saved, but they chose not to do so! Yes, they would have been criticized by somebody, but that is why they got those inflated salaries; to show some leadership!

Instead they turned the most active consumers of public education, the parents, in effect against the most economically vulnerable people in the community, seniors and struggling family farmers, in a conflict that leaves the community weaker and in no way improves learning. 

That is basically the scenario for the sequester debate. Our 16 trillion dollar government with some imagination should be able to absorb a cut of 2%. Instead, the administration plans on across the board cuts, highlighting the effects it will have on schools, the disabled, transportation, etc.,. The government, if it showed some leadership, could identify areas where little damage would result from reducing expenses, but refuses to do so, unless taxes are raised. This is a cynical- after the fact – grab for more money; the sequester legislation never mentioned a tax increase, but Obama would never allow an opportunity for this to pass without notice. Sequester would allow the president and departments to fine tune their cuts, as long as it came up to the required amount, but they have chosen not to do that without a tax increase.

Just like that school district, Washington’s continuing, insatiable demands for endless growth is demanding to be fed, and a cynical method has been employed to achieve that end. This was bad enough when it was done locally by petty school administrators- but now Washington has taken a leaf from their book! How pathetic!

This is a guest post from Sam Patterson over at economicfreedom.org. There is a big difference between being pro-business and being pro-market. Many people say they support businesses, especially small businesses. Unfortunately, many businessowners and employees are not “free-market”-that is, they believe it is OK and even justifiable to use the government for subsidies, lobbying, and to eliminate competition. For example, at a New Castle County Chamber of Commerce event a small business owner who sells solar panels justified his government handout by saying he “needed it to be competitive” with other types of industries. Or consider a large corporation using their power to pay off politicians and bureaucrats by lobbying them to help eliminate the competition (such as with expensive occupational licenses) or to allow them to skate by with violating rules (examples include Fanny and Freddy, Citigroup, AIG, Solyndra), often at our expense. Unions too often interfere with the process, when they demand the forbidding of workers from being employed unless they join a union, and in some cases they too move to restrict competition, such as if a businessowner wants to open a non-union business (closed-shop rules), instead requiring the owners to hire only unionized workers.

Without further ado…

Consider the following . . .

Because businesses provide jobs and make other positive contributions to communities, both “sides” agree that government should promote business. Where they differ is over how. Pro-business advocates believe the government should directly assist specific businesses or industries through subsidies, tax breaks, or other advantages. Pro-market supporters reject this.  They argue that government should simply ensure a level playing field for competition.

The truth is that intervention in the marketplace harms everyone—except those directly receiving the benefits, of course. When the consumer is no longer the deciding factor in whether a business succeeds or fails, businesses direct more and more of their resources toward securing government favors and less and less on pleasing customers. Corruption and cronyism often result. And it’s always the taxpayers who end up having to pay for it all.

 

You know you’re “pro-business” rather than “pro-market” if you believe . . .

• government should make special tax provisions for specific industries
  (pro-market position: equal tax rates for all)

• government should give out grants to individual businesses
  (pro-market position: government shows no preference to individual businesses)

• government should use eminent domain to make way for private development
  (pro-market position: eminent domain should never be used for private interests)

• government should make loans to businesses that can’t secure them in the private sector
  (pro-market position: government should not be making loans to businesses at all)

• government should impose tariffs to protect domestic industries from global competition
  (pro-market position: tariffs increase prices for consumers)

When the government supports certain companies or industries over others, the special interests unfairly benefit. Economic freedom is what can bring prosperity and opportunity to all. That’s why we must make sure we are not just “supporting business” but always upholding the virtues of the market.