Category Archives: Economic Fallacies

Boulders in the Stream

The surety of the law of unintended consequences proceeding from state legislation is as steadfast as the law of gravity. Emblematic of this axiom is the massive drop  off (down 40-60%) in book sales in Israel this past year after the passage of a law intended to bolster book sales, protect small book sellers from “big chains” and of course guarantee a “living wage” to authors.  To those ignorant of basic economics and human behavior the terms of this law might appear reasonable. It guaranteed authors 8% of the sales of the first 6,000 books sold and 10% of all books thereafter while simultaneously criminalizing the discounting of books during their first 18 months of sales. Supposedly this would help the underdogs: small booksellers and new authors. Ironically it does the exact opposite. It is the unknown author that has the greatest incentive to discount heavily in order to entice someone unfamiliar with their work. It is small book sellers that are most likely to haggle or “make a deal” when someone makes a substantial purchase.

Sadly Israel is not alone in this sort of book market meddling. Quite a number of other countries (mainly in Europe) have what are known as “fixed book price agreements” type laws. These are “resale price maintenance agreements”, commonly used in the US on a voluntary basis between vendor and customer, codified into law and backed by the state. In the US if company A wants Vendors B-Z to sell a widget for $1 and Vendor D sells it for less, then the solution is simple: company A just stops selling to vendor D. But in countries where such agreements are enforced by the state, vendor D can be fined or jailed. Let that sink in: jail time for selling goods “too low.” What monsters.

The usual defense of these laws is the same tired protectionist propaganda deployed whenever an entrenched business model is threatened by a new competitor: we need the state to protect us from “unfair” competition. “Unfair” being code for “somehow these people figured out how to sell the product I’m selling for a lot less and I can’t figure out what they are doing or I’m unwilling to change my business model to compete”. For example France has a “Lang Law” which permits book publishers to set the price of the book and then forbid anyone from selling it for less than 95% off the cover price. Fast forward to 2014 and a tweak was added to this law that was targeted at Amazon.com who was both discounting their books 5% and offering free shipping. Apparently selling books into the French market for the exact same price as French bookstores is considered “unfair” if the seller is a ‘foreign’ company.

So what we have here is a real world economics experiment, akin to raising the minimum wage to $50/hour. Israel has, in effect, dialed in the $50 option on book price fixing laws. While many countries have such economic interventionist type protectionism only Israel elevated theirs to stratospherically inane levels. From this we saw quick and clear signs of damage (just as we would if the minimum wage were raised to $50/hour). However, just as with the minimum wage laws, there still exist damaging effects in those countries with more “moderate” protectionist schemes such as France. It is perhaps apropos that a French economist (Bastiat, 19th century) speaks of the “unseen” damage wrought by market interventions.

If the demand for books is inelastic then to the extent book sellers earn more, the sellers of other goods earn less, while on net the public receives fewer goods for money spent. If the demand is elastic then book sellers earn less and other vendors earn more but the public still receives fewer goods. Indeed, the Israeli example demonstrated the elasticity of book demand. After their law went into affect, book sales went down and toy sales went up (as parents passed over high priced books for more affordable toys).

The fatal conceit of the politician is the belief that they can control nature (man) by dictate: people want they want and laws are like boulders in a stream  – it may slow, but it will not stop the flow of water.

Plugging the tailpipe

Newton’s third law of physics posits that every action has an equal and opposite reaction. From the kickback on a firearm to the lift provided by chemical propellants in a rocket, nothing in this universe acts in perfect isolation. This dictum applies equally to everything in the universe; from muon to man. Human action will also induce a feedback-based response; love begets love and violence begets violence. When the actions are voluntary and un-coerced we tend to see predictable outcomes (if I am kind, you are quite likely to be kind in return, but, if I hit you, you are most likely going to hit me back). When the actions are involuntary or otherwise unduly influenced then the results become unpredictable. Economic interventionism is like plugging a car’s tailpipe to silence it; it may bring temporary silence, but the building pressure will soon be relieved. The only question is when and where.

So just as plugging a tail pipe to silence a car is a fool’s endeavor, so too are forced attempts to mold society and the economy to suit the ideological leanings of those in power. Such attempts at societal meddling always end badly, typically in the form of increasing that bad thing one was trying to eliminate. The interventionist approach has all the logical soundness of hitting people in order to reduce violence in the world, yet the politicians continue to do such things everyday. For example, paying people to be unemployed augments, rather than diminishes, the number of unemployed. Likewise, subsidies for certain industries results in a whole array of undesirable side effects. Subsidization of corn production in combination with tariff-based protection of the domestic sugar market has distorted the economy and our health. Tariff-fueled high domestic sugar prices creates an incentive for sugar users to seek a lower cost alternative, which just so happens to be state subsidized HFCS (high fructose corn syrup). The state is simultaneously constraining supply of one product and expanding supply of another to make up for the ongoing constraint. This distortion alters the market in ways that would not exist absent this intervention. It has caused HFCS to become the dominant material used in domestic food production – pushing the somewhat healthier straight sugar out the door. That the overwhelming prevalence of HCFS has recently been implicated in the obesity epidemic (and all the costs associated with obesity related health ailments) should give anyone pause the next time a politician tells you they have the perfect solution to a problem.

Another side effect of agricultural interventionism is in of all places immigration. When the government guarantees a price floor for certain agricultural goods it creates a natural incentive to over produce those goods. The excess is then dumped at low subsidized prices into other countries (such as Mexico). Farmers there can’t compete with the low prices and soon go out of business. Those farmers are now desperate for work. So they come to the US. And then people wonder why so many “illegal” immigrants are pouring into the country. Time again for the government to fix the problem they created. You’ll never go out of the tire business if you keep dumping nails in the road.

The height of absurdity though is that when those in power are faced with the reality of the damage caused by subsidies they find it easier to expand those subsidies rather than to contract them. The most inane example of this is the fact that the US government pays Brazilian cotton farmers the same subsidies it pays US cotton farmers so that they can better compete with cheap US imports.

The moral of the story here is that economic interventionism (supported by the implied violent power of the state) will cause parties to behave differently than they otherwise would absent such threats. These differences lead others into altering their behavior so as to neutralize the effects of the initial intervention in a predictable sort of feedback loop. Plugging the tailpipe merely reroutes the exhaust. Equal and opposite reactions are on net a null.

Shortages the Spawn of Short-Circuited Prices

Although the recent drought experienced by much of northern Georgia a few a years ago pales in comparison to the ongoing drought in California, the response by each region’s government is equally misguided. The shortsightedness of the standard “solution” to a drought tends to scale with its severity. While we only suffered through time restrictions on outdoor watering, California has upped the ante to rather invasive levels in their pursuit of the “common good.” They are now all too happy to step into dear citizen’s shower and issue fines for lingering too long.

Droughts are a product of nature. Water shortages are a product of man; or, more precisely, a product of government. If a shortage is occurring in any market, it is guaranteed some form of price control (private or public) is in play. It is one simple lesson from Economics 101 that so many consistently fail to grasp: demand curves slope downward. Stated differently, prices (naturally) go up as supply decreases (all other things equal). But when part of that equation is artificially constrained (prices) the effects of the decreased supply are magnified, not ameliorated. When prices rise there is a two-fold socially beneficial effect: it (a) provides a rationing/conservation incentive (people only purchase that which they absolutely need) and (b) it sends a signal to everyone that a tidy profit can be had by supplying the market with that good. High prices are the market’s method of eliciting an economic immune response. As swarms of people respond to the wailing klaxons of above average profit, supply swells until prices begin to fall. It is this natural up/down demand/supply equilibrium that lets a market know where to devote more or fewer resources.

High prices are the market’s method of eliciting an economic immune response. As swarms of people respond to the wailing klaxons of above average profit, supply swells until prices begin to fall. It is this natural up/down demand/supply equilibrium that lets a market know where to devote more or fewer resources.

But governments don’t like the price system. It is they, not the market, who should be in control. Of course they have their image to protect and the last thing they want is to be accused of being an evil “price gouger.” So instead of allowing the price system to modulate usage, they instead impose egalitarian restrictions so that all may suffer “equally” the effects of their economic ignorance. In other words, they choose the hard way rather than the easy. They deploy sticks (restrictions, fines, penalties) that require resources to enforce compliance, rather than employing carrots (demand based pricing), that require zero resources to ensure compliance.

If prices are allowed to rise, then people will switch from being wasteful to having an incentive to use as little as possible and to seek out new water savings and new efficiencies, to boldly use less than any man before. For those concerned about how the poor would fare under rising water prices, it is entirely reasonable to expect that a base tier of minimum human requirement could exist alongside progressively rising prices for greater usage. There is little daylight between this and the progressive income tax system where the poor pay virtually nothing and the wealthy pay the most. Except with this system one’s “tax” (water bill) would be within their control. If one voluntarily uses less, they will pay less. The outcome of raising prices will be either (a) similar usage with a windfall income or (b) much reduced usage with similar income. If the former is the result, then one can continue to raise prices until (b) is achieved if that is the goal, or one can use the extra income to invest in systems that will increase the supply.

At least in California one of the reasons they are hesitant to raise prices is the crony-capitalist nature commonly found among governments. The largest user of water in the state is agricultural (83%) . The powers that be are afraid that higher water prices could disrupt the state’s economy by pricing California agricultural products out of the market. So once again the marriage between big government and big business ensures private profits at public expense (restrictions and fines). Wait, I thought government was supposed to protect the little guy? Well, while you ponder that little fantasy I’ll leave you with an apropos Milton Friedman quote – “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

Pool your own resources

It seems everyone wants a pool. But nobody wants to pay for it, because after all pools are really expensive – both to build and maintain. When I moved into my current neighborhood we were “promised” it would have a pool by the real estate agent and the builder. Our HOA dues were inflated owing to the necessity of maintaining this incipient pool. It was not to be. A mixture of the housing bust and and builder antics sealed the fate of the “free” pool. Now that our neighborhood is about 95% occupied there is increasing pressure for “we the neighbors” to build one ourselves via a self-assessed HOA dues increase. When we moved in my children were at the prime “pool” age, however they are nearly grown (college already?!?) and so we have little interest in footing the bill for something we would almost never use. But, we moved in here voluntarily, fully aware that pool expenses would be part of the deal so I have no ethical basis for complaint, merely a pragmatic one. If I don’t like it, I can, as they say, move.

That option, moving, however, does not exist moving up one territorial notch to the county level. Every county in the US pretty much operates the same way. I recently read that a swimming pool has been the number one recreational request in my county (Oconee) for many years. I find this fascinating on several levels. For one it flies in the face of the oft given justifications for government, that is, courts, cops, roads and schools. Surely government must provide these absolutely essential functions, no? Well, no, but for the sake of argument I’ll concede the point right now. However, I find it laughable that recreational amenities now too fall into the category of “essential state functions. Really? That brings me to my second wry observation: Oconee County already has a private provider of pools and gymnasiums (another common request). So, it’s not that people want access to a pool per se, (clearly there is already “access” locally), it’s that they want someone else to foot the lion share of the bill. Getting the county to provide these things means that when you utilize them a disproportionate burden of the cost is shifted to (a) all those with a higher property value than yours and (b) all those that use it less than you do. Subsidization, pure and simple. Not very conservative for a supposedly conservative county?

There is a common misconception that we need a county government to provide these sorts of things because governments can lower the cost for everyone because they don’t extract any evil profit. But think about what that means for a minute. Profit is the increase in subjective value realized when one takes a pile of resources and alters them into a more pleasing arrangement (think raw ingredients —> apple pie). If there is a decrease in satisfaction (think Ferrari melted down to make pie plates) that would be a loss. So when one argues that if a private business were providing access to a park or a pool it would be “too expensive” but that government can “make it affordable” what you’re really saying is that highly valued resources (private pool) should be rearranged into something that is of lower value (public pool). Because that is exactly what happens when money is taken from a property tax payer A to offset the cost of pool access for property tax payer B. Payer A’s funds were diverted from whatever he would have spent them on (high value to him) to something of lower value, that is, something he never would have spent them on, a pool. To argue this is “ok” is to argue that theft is justified in order to provide essential human rights like park and pool access. As they say, first world problems.

So to all those in the county that want a pool I would offer this bit of advice: put your money where your mouth is and join the private pool already here so that it can grow and expand in relation to the demand for its services, or, if you believe you can do a better job then come together voluntarily and risk your own capital (not mine) by building one yourself. I would offer similar advice to the pool proponents in my neighborhood. “Pool” your resources, buy a lot, build the pool and run it for profit. Only with a profit/loss test can anyone know if that would be a wise redirection of capital. There is no better method of plumbing the depth of a man’s belief than to ask him to risk his own capital.

Halloween Economics

Every Halloween children engage in the single largest simultaneous generation of mutual profit and yet not a single dollar changes hands. As the lights go out on the front porches the opening trade bell chimes for the time honored post-Trick-or-Treat ritual known as “the trade”. Twizzlers, Snickers, M&M’s, lollipops all change hands multiple times. The absolute quantity of candy changing hands is static, only ownership changes. Yet when all trades are complete everyone is happier than when they started out. How then can this apparent zero-sum game produce a positive output not just for some participants, but for all participants? The answer is quite simple: all value is subjective.

The Halloween candy market mirrors the real world in microcosmic fashion. Each participant starts out with a random distribution of candy; some may have more and some less, but all have something. In the same way each of us is born into this world with differing abilities that carry with them advantages and disadvantages (i.e. some are born into candy rich or candy poor neighborhoods to extend the metaphor). This process may be “unfair” but all have something to offer each other. But, what all have in equal proportion is the human propensity for general dissatisfaction with whatever they do have and therefore each has a desire to improve his or her condition. So, people have X but they want Y, and in order to achieve Y they will use X to get as much of Y as they can. Of course trade is usually never that simple. Sometimes to get X you must trade Y for T and T for R and R for U and then U for X. But the point is that with each completed trade both participants have a profit; that is, both place a higher value on the item(s) obtained post-trade then the items they had pre-trade. Profit is merely our subjective assessment of having gained an increase in satisfaction when we consider our post and pre-trade mindsets. Were there not an anticipated increase in satisfaction then naturally we would not have engaged in such a trade. Of course it is not impossible to deliberately trade away something we hold in high esteem for something we hold in much lower esteem, but it would be foolish. But do not misinterpret that as meaning that a “sacrifice” is foolish. In fact if done willingly it is not possible to “sacrifice” something. The one “sacrificing” does receive something of greater value in the exchange; the satisfaction of benefitting the one for whom they willingly “sacrifice”.

Because all value is subjective it makes it difficult (if not impossible) for a third party to judge the outcome of a trade. To use the candy example, if a parent who detests Tootsie Rolls witnesses their child trade away all of their Hershey Kisses for Tootsie Rolls, then that parent will indignantly conclude their child has been “ripped off” and may attempt to intervene. But since their child loves Tootsie Rolls and the other kid loves Hershey Kisses then both kids are now much happier because of their swap. Both children have profited from the trade but the parent believes one child has gained and the other has lost. This demonstrates the utter futility of believe a third party can “regulate” economic trade by substituting their own subjective opinion for the equally subjective opinion of the market participants. For example, imagine what would happen if a parent decreed a minimum wage of sorts. House rules say jawbreakers must trade for at least two Hershey Kisses. But, jawbreakers are so universally disliked that the market rate is actually 10 jawbreakers for one Hershey’s kiss. What do you imagine would happen to the kids with lots of jawbreakers? That’s right, no one would trade with them because no one would be willing to meet the decreed price minimum. This market intervention and subsequent distortion causes decreased profit not only for the kids with jawbreakers but for all other participants that now are barred from trading with them. Intervention robs all of the maximum satisfaction that could have been achieved.

Fortunately the state has yet to get involved in exerting control over this chaotic and unregulated candy free market. Each Halloween we are witness to the simple beauty of the natural equilibrium of increasing satisfaction achieved by those able to freely engage in uncoerced and unregulated trade.

Energy Independence (Autarky) Makes Us All Poor

If you enjoy the soft warm glow of an incandescent light bulb then you might want to head over to your local hardware store and stock up. As of January 1, the manufacture or importation of 40- and 60- watt light bulbs has been outlawed (100-watt bulbs were banned in 2012 and 75-watt in 2013).  This ban was mandated by the Energy Independence and Security Act of 2007 – a monstrosity of a bill passed with bipartisan and industry support and signed into law by a Republican president (so much for the “Republicans are for small government” myth). It is, like all such bills, predicated on irrational fears and willful ignorance of human nature. The very title betrays adherence to an economically self-destructive goal: market independence. Such independence not only makes us poorer (paying more for less) it actually encourages belligerent behavior. Withdrawing ourselves as a country from the global market (becoming “market isolationists”) by striving for independence or erecting trade barriers makes us more, not less, likely to go to war. Equating energy independence with security is 21st century doublespeak that permits the political class to con the country into following their lead. A country that depends on acquiring its goods through a global network of trade is unlikely to foul that network by killing its participants. But a country that is “independent” has free reign to attack its neighbors if it in fact relies on those neighbors for nothing.

If market independence enhanced one’s security then the state should hold the hermit in highest regard. The hermit produces all for himself and thus relies on no one. But such independence has a cost. It is not money that enhances our standard of living; it is other humans interacting freely with one another. Money is merely a ledger entry, simple bookkeeping to measure the balance of subjective value between such voluntary exchanges if we so choose (e.g. friendship is valuable, but we don’t track that valuable exchange in terms of money). If human interactions add value to our lives, then it follows that limiting those interactions will suppress such value. Government intervention in the market arbitrarily limits these potential interactions by limiting choice. Selecting only from the approved options is no choice at all. So, if government intervention always limits choice, it follows that this will always leaves us all with less value in our lives – even those that appear to benefit from such interventions are harmed, for they too exist in a world with fewer goods because of their legally permitted decreased output.

Now one might have imagined that this “bulb ban” was vociferously objected to by the evil bulb manufacturers (who just wanted to keep foisting cheap bulbs on America in order to preserve their profits at the expense of our “energy independence”). The exact opposite was the case. Industry had been trying for years to entice consumers into switching to the higher margin CFL bulbs with promises of bulb longevity (that never materialized in practice) to offset the exorbitantly higher cost (20-fold in some cases). Once industry realized they could get government to do what the free-market would not (compel consumers to buy their product by leaving them no other choice), they quickly formed a coalition with environmental groups and pushed for crony-capitalist legislation under the cloak of eco-friendliness.

What are the results so far? The consumer has less money, the bulb manufactures have more, and the public, having been sold on the idea of greater bulb efficiency, now leave their bulbs on longer, thus entirely negating one of the primary goals of the bill. That greater efficiency would lead to greater usage should have been easily predicted by anyone who has observed the human penchant to double up on a low calorie meal. Try as they might, Congress cannot legislate away human nature.

Minimum Wage: Be careful what you wish for, you might just get it

Last Friday a group known as “Fast Food Forward” (tightly affiliated with the SEIU union) led a series of demonstrations in over 100 US cities at fast food restaurants where they called for a near doubling of the federal minimum wage to $15/hour. In further news there were a number of similar demonstrations in which short people demanded to be declared as tall, the overweight demanded to be declared as thin, and the un-athletic to be declared as athletic. Oh, wait, that last bit didn’t actually happen. Sure would have seemed silly if such events had taken place wouldn’t it? Well, if you can see why a “raise the federal minimum height” rally would be silly you’re on the first step to understanding why calls to increase the minimum wage are equally absurd.

A wage is nothing more than a point system used by each of us and applied to all of us that allows us to rate how valuable we find each other’s labor. This value assessment is however tempered by the immutable law of marginal utility: the more there is of something, the less we value any one unit. Water is the most valuable material on the planet (as our day to day survival depends on it) but it sells at a mere 0.7¢ a gallon (from the tap) because of its abundance. Likewise, in any given profession, the more people capable of doing a job, the lower the wage for that job. The wage is lower, you see, not because the buyer (employer) is deciding what it shall be, rather it is the result of the numerous sellers (employees) bidding prices down in order to make the sale. If your wage is lower than you’d like, don’t blame your employer, blame your peers and yourself. You can blame your peers for being willing to work for less than you. You can blame yourself for not improving your skills or productivity so that you can distinguish yourself from your less productive brethren and thereby demand a higher price for your services. To blame your employer for paying you minimum wage when you would prefer to have double that wage is as silly as the shop owner blaming his customers for not buying his wares and opting instead to purchase from his competitor who charges half as much.

If workers latch onto sympathetic politicians (interested in buying votes) who pass laws that raises their wage then the employer is still free to explore all options that might get the job done for a lower price. Minimum wage law does not require employers to buy the product (labor), only that if they do buy the product they must pay at least the floor price. Thus enters the specter of automation: a machine that is economically unviable when competing with low wage rates will suddenly make more economic sense at much higher mandated wage rates. Those looking for a minimum wage increase are going to price themselves right out of the market. The truth of this statement is already evident today in the growing trend of automated self-checkout systems becoming commonplace. In a few years we may find the concept of a human cashier as alien as a full service gas station (and if you don’t know what “full service” at a gas station means, then all I can say is: point made.)

Whenever there is a call to raise the wages of this or that class of worker (whether it be fast food workers, teachers, or police or what have you) there is a major insight that is always lacking by those making the call. They believe that if they get what they desire they will be the ones to enjoy the higher wages. But they are mistaken. It is the more highly skilled and more productive worker that will replace them. The less productive or skilled worker can’t compete with the highly skilled worker if the mandated wage is set at the productivity level of the more skilled worker. Would you buy a Kia or a Mercedes if the minimum car price were mandated to be $70,000? Bonus question: what do you think would then happen to the Kia car company?

The Giving Tree of Debt

It’s that special time of year once again – The Giving Tree in Washington DC sheds its last few monetary leaves as fall approaches. The congressional summer recess has left the tree starving for the one thing it needs to flourish and produce those precious greenbacks: BS. As the pontificating blowhards in Congress resume their duties there is once again a renewed hope that The Giving Tree will be restored to health via the abundance of manure spewed forth by inept congressmen and a credulous media who act merely as an amplifier for Washington inspired propaganda.

That’s right, it’s time to raise the debt ceiling. I could write an entire book on what is wrong with the system (although there is little need to do so as Tom Woods’ “Nullification” leaves no stone unturned in that endeavor) and why we are in the mess we’re in. However, space constraints compel me to simply address the two most salient points of disinformation making the rounds of the mainstream media outlets.

Fallacy 1: We have to raise the debt ceiling because we as a country are legally committed to making good on all financial obligations made by our government. It’s like agreeing to pay your credit card bill after you charged the goods on it.

FALSE: No, no, no (sound of head banging desk). It is not at all comparable to agreeing to pay your credit card bill (i.e. committing to purchases AFTER funds are secured). The more apt example would be signing a contract to buy a house BEFORE you have secured the ability to pay for it and then going to the bank and demanding a loan because you “have made a commitment buy the house.”  Clearly, the only result of raising one’s credit limit every time one goes over said limit would be to instill an overriding sense of restraint and fiscal responsibility. Even if one subscribes to the flimsy moral precept that one has a duty to repay financial obligations made by total strangers who happen to reside in the same geographical region as yourself, one must agree shifting the burden of that repayment onto one’s children is the act of a coward. If you believe we have this obligation, fine, then don’t use debt to pay for it, use taxes – raise them through the roof. Because were the present generation to bear the full financial burden of the government programs they pine for they would quickly come to realize they are not so necessary after all.

Fallacy 2: If we don’t raise the debt limit then the US government will be in default and (insert scare tactic) that would undermine confidence and collapse the financial markets.

FALSE: This is the same line of fallacious reasoning employed by Obama when he compared the only possible outcome of not raising the debt limit to being equivalent to a homeowner simply deciding to not pay his mortgage. So apparently the concept of prioritization has never occurred to Obama? Naturally if one has a pay cut or loses their job their first instinct is to cease their mortgage payments so that they can continue paying their cable bill and manicurist. Duh, no, you prioritize and pay your food, housing and utilities first, then you cut off all non-essentials remaining. So if the projected 2014 budget were $1 we see that the government now collects 84¢ in taxes and can pay out 67¢ to fully fund all debt interest, Social Security, Medicare, Medicaid and defense payments. Yes, the remaining 33¢ of spending would have to be economized over the 17¢ of remaining revenue, but the point is it would not be the “essential” obligations that for some bizarre reason are perennially assumed would hit the chopping block first.

Continuing to give the addict money because you’re afraid he won’t buy food provides him no incentive to end the addiction because it insulates him from having to make the choice between the addiction or eating. With the money he can have both. Without it, a choice must be made.

Changing the Rules of the Game

September 1 will mark the end of an era, at least in Georgia anyway. This is the date that Amazon.com must begin collecting sales tax in Georgia. Some day you will wax nostalgic and regale your grandchildren with stories of how there was once a place where people could escape the clutches of intrusive government: the Internet. This was a place where anarchism reigned and yet everything worked without any rules or leaders. But slowly government began to stamp out the embers of this freedom bit by bit. First it was taxes, then it was privacy, and next it will likely be access. Internet license, please. As Nature abhors a vacuum, so too does government abhor freedom. Big Brother the busybody knows no boundaries. Big Brother demands his “piece of the action” in every transaction, no matter how small. Just as the mafia feels they have a right to a slice of any economic activity that occurs within their self-proclaimed “territory” so too does government operate upon an identical principal.

So how is it that this has come to pass in Georgia? Has Congress managed to stealthily pass the “Tax Fairness Act”? Fortunately no. This current state of affairs is the result of Georgia House Bill 386 passed on March 20, 2012. This bill follows the Orwellian mantra that if conventional definitions of words aren’t working for you, then simply write new definitions. This bill redefines a term called “nexus” in order to dragoon Amazon and similar entities into becoming uncompensated tax collectors for the state of Georgia. Nexus is a tax term which means “a connection” i.e. if a company has a physical presence (office, warehouse, employees, equipment, etc) then they are said to have a connection to the state sufficiently similar to a resident so as to make them liable for the same taxes a resident would be liable for. But this bill has now turned that definition on its head by broadening the term to the point where merely having a business relationship with an entity in Georgia will confer “nexus” upon the foreign entity. It is hard to see how those who voted for this bill did not recognize the perverse incentive buried within it, namely that companies outside of Georgia will choose to NOT establish any business dealings with companies inside Georgia lest they become entangled with the Georgia Department of Revenue.

As if loss of business opportunities and higher taxes wasn’t bad enough, it gets even worse. Nexus and residency have always had a common shared characteristic: physical presence. Not anymore. Now that nexus is based on the most ephemeral of connections to the state how long is it until the residency definition undergoes a similar metamorphosis? If the two are indeed linked in their common purpose of establishing tax liability, then a change in one will invariably result in a change in the other. Therefore Georgia may one day establish that residents of other states are also in fact Georgia “residents” for purposes of income tax. Once that precedent comes to pass then what is to stop others states from likewise inflicting such taxes upon Georgians? Perhaps some day you’ll get an income tax notice from Florida because you vacationed there once. “You enjoyed the generous state benefits of roads and municipal services while here, so certainly you should be paying your fair share” will be the justification. Each blow of the precedential ax upon the tree of freedom accumulates damage until finally one day that tree is felled.

Naturally this new sales tax collection is being heralded by the economically illiterate as a boon for the “brick and mortar” stores. The initiation of sales tax collection will have ZERO effect on expanding local sales in Georgia. Why? People aren’t ordering on line to avoid a few bucks in taxes. They are ordering online because it is convenient. The lack of sales tax is just a perk. Removing that perk is not going to change people’s behavior. It is however going to reduce what people can spend to the tune of $16 million. This will only harm the individual as well as local businesses they are already shopping at. Increased taxes reduce the individual’s capacity to spend – everywhere. This is supposed to help the economy?

 

Bangladesh Robber Baron fallacy

Just read this article about the Bangladesh factory disaster this morning. Truly terrible what happened, however the usual progressive/statist smugness comes to the surface pretty quick in the comments “oh see what the free market causes, we need government to save us from these evil people.” Here’s my response on the board to that sentiment (longer article coming this weekend):

Except that the “Robber Barons” is a progressive statist myth. Please see Tom Woods on this: http://www.youtube.com/watch?v=BbIIPtLEVbA

Basically those that compare working conditions of the late 19th and early 20th century or those in emerging 3rd world countries to those today in the US are guilty of a “ceteris paribus” fallacy, that is, you are making a comparison and drawing a conclusion that is flawed because not all of variables are held constant, namely the variables wealth and technology in a given society. Do people value safety? Sure, but value is subjective and we arrange things on our value scale ordinally (we rank them in order of preference). Do we value safety MORE than we value not starving to death? I think not. So if our choice is a) not starving to death or b)comfortable/100% certainty of safe working conditions we will choose (a) every time. We will work so that we can buy food and not starve to death and we will do so in an environment that while not ideal is the only option available and in fact is the better of all other options available.

Now I’m not excusing the owners of that building/business for building an unsafe building, but consider the alternative proposed by progressives. Government mandating to the nth degree every aspect of building design. It would cost so much to build that building there that they simply would never have built it, and thus there would have be NO jobs for anyone and they would have been left to scratching in the dirt to make a living. Is the current outcome good? No, but it is still BETTER than the alternative, where instead of 1000 people dying and 2000 surviving maybe 2500 die of starvation and 500 live through subsitence farming.

They likely built it this way because of crooked govt, paying off inspectors, and never thinking they could get in trouble. In a free market there is no one to pay off. They would have built it better knowing 100% with certainty they would go to jail were it built shoddily