by Caleb Nelson
PRICE GOUGING
What about “price gouging”? That’s charging “too much” for something, right? Consider the following story reported in May 2006 by John Stossel and Gena Binkley for ABC News:
Mississippi Attorney General Jim Hood announced a crackdown on gougers after Hurricane Katrina.
John Shepperson was one of the “gougers” authorities arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.
Shepperson thought he could help and make some money, too, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi that was left without power in the wake of the hurricane.
He offered to sell his generators for twice what he had paid for them, and people were eager to buy. Police confiscated his generators, though, and Shepperson was jailed for four days for price-gouging. His generators are still in police custody.
So did the public benefit? Here’s the real question: What is the best way to deal with shortages after a natural disaster?
“Any time there is a natural disaster, or a hurricane, an earthquake, the price of the things that people desperately want to have—batteries, flashlights, generators, water or milk—they go up. Or they disappear,” said economist Russ Roberts.
If sellers don’t raise prices, supplies vanish. Anxious buyers line up and often buy more than they need, just in case. Those not at the front of the line may get nothing.
“More people want to buy it than there is stuff available . . . What do you do? How do you solve that problem? And how do you find out who should get those scarce items,” Roberts asked.
The answer is you allow people to raise prices—even to “gouge”—because only people who REALLY need them will cough up the money. Gouging also encourages greedy entrepreneurs to rush in with much-needed goods, or to look for more supplies.
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A man was arrested for using his creativity to try and make a profit by supplying sorely desired products to people. In the interest of “protecting” the public, the government both stopped him from providing the generators and confiscated them so that no one could utilize them. His crime: trying to make a profit doing what the government was unable to do even at a loss—providing needed goods and services to a disaster-ravaged populace.
If you were in line waiting anxiously to obtain a generator so your family could have some electricity, would you have been happy to see the man arrested knowing you would now have to go back to a dark home? Or would you be angry that the government, after failing to help you in the first place, was now making matters worse by trying to tell you how much you should value an item—that if they thought it was too expensive, they were going to prevent you from buying it at all?
There are many prices that governments attempt to control and they all have unintended consequences, whether it’s gasoline, food, rent, utilities, or one of the most controversial: wages.
MINIMUM WAGE LAWS
“Wage” is merely a special name given to the price of something: the price of labor. It is unfortunate that is has been given a different name and thus assumed by many to operate under different laws.
When a law is passed that no one shall be paid less than $5/hour, the first effect is that anyone who is not worth $5/hour to an employer will not be employed at all. He is deprived of the right to use his abilities and skills and earn the amount that he is able. The community is also deprived of the moderate services he could have provided. For a low wage, we now substitute unemployment or black-market employment.
To see if an idea is ridiculous, take it to its logical extreme. For example: If government can create jobs, then why doesn’t it hire every citizen? Because it can only collect taxes to pay those employees from people who are actually producing goods and services. In the case of minimum wage laws, what would happen if Congress passed a law raising the minimum wage to $200/hour? What happens next? Where will employers get the money to cover wages? Assuming any business could actually sustain such a cost, do you think business owners would be willing to pay for that out of their own pocket? If their costs are higher, then their prices must be as well. This means a Happy Meal is now $82. Every business must adjust its wages up and pay for them by an equivalent rise in prices. Has anything actually changed? Sure, you’re making $8,000 a week, but one gallon of gas is now $100. Actions have consequences, and any coercive meddling in markets will only cause problems. Any arbitrary increase in wages will be balanced out by an equivalent rise in prices. Minimum wage laws are the equivalent of taking water from the deep end of the pool and pouring it in the shallow end in an attempt to raise the water level.
As prices rise to accommodate the increased wages and the cost is shifted to consumers, what will happen? A higher price may drive consumers to buy less of the higher priced item, or to buy nearly equivalent imported products. On the other hand, if prices are not raised and the difference taken from the profit margin instead, marginal producers in the industry may be driven out of business altogether resulting in less production and more unemployment. In addition to these consequences, the man who is now unemployable may choose to seek out welfare rather than to increase his skills, knowledge, and relationships—his human life value. He is incentivized to remain unemployed.
THE MORALITY OF ECONOMICS
It is important to remember in all these economic issues, to never ignore or evade the moral issues underlying them all. Many will attempt to argue specific facts, causes and effects, etc. They will also always attempt to take the moral high ground in defense of government bailouts, minimum wage laws, tariffs, taxation, etc. “Don’t you want people to earn enough to have a good living? Don’t people deserve a living wage? Don’t you care about people? There isn’t any other way.”
It is imperative to never concede the moral high ground in the battle for liberty. Identify the core principles involved and the individual rights at stake. Minimum wage laws are immoral because they violate the right of personal conscience and preference, the right to enter into agreements with others without outside coercion, and the right for both the employer and the employee to determine how much they value each other in the exchange. The violation of the economic principles in this chapter by the government is immoral first and foremost because it is an initiation of force.
DEBT, DEFICIT, AND LIABILITIES
The Federal Deficit is the difference between the amount of money spent by Congress and the revenue collected by the IRS in a given year. (A difference of $564 billion in August of 2014). This budget deficit must be made up by either printing more money or borrowing more money—inflation or debt.
The National Debt is the amount that is owed to investors by the Federal Government. ($17.7 trillion in August of 2014).
The United States’ Unfunded Liabilities is all money promised to be paid at a future date, such as Social Security, Medicare, and Prescription Drugs (Medicare Part D). This amounted to over $117 trillion in August of 2014 according to usdebtclock.org.
[127] As of the same date, the total wealth of the entire planet that is produced in one year (the global GDP) was $70 trillion. In other words, you could tax every person on the planet at 100% for an entire year and not be able to pay off the United States’ unfunded liabilities.
One thing should be obvious here: the direction these figures are heading is unsustainable. Barring some major changes to the financial trends of the U.S. government and its entitlement programs, catastrophic financial collapse is inevitable. Historically, this has often included massive inflation and hyperinflation as governments desperately try to print enough money to pay their debts, followed by civil unrest when this fails.
INFLATION
“The crucial test of private property is the attitude of government toward money. Devaluation of currency is outright expropriation.”
[128] - Isabel Paterson
It may seem logical that if the government
were to simply print a lot of money and give it to everyone, we would all be a lot richer, right? All but the most naive instinctively feel that statement is wrong, but many don’t know why. Others, less naive, sense there must be a catch somewhere and so they would limit the amount of additional money the government would issue to only what is “needed.”
Still others recognize the fact that an increase in monetary supply will result in inflation, and that is exactly why they want it. They think it will improve the condition of poor debtors if the money they owe is worth less. They think it will stimulate exports or cure an economic depression.
Economist Peter Schiff described inflation as “simply a means to transfer wealth from anyone who has savings in a particular currency to anyone who has debt in the same currency.”
[129] In other words, those who are saving money hate inflation because it decreases the value of their savings, while those who are borrowing money love inflation because it makes the money they owe worth less.
It is a mistake to try and use one set of financial principles for your family and another for your nation. If your family were experiencing a financial depression—decreased cash flow and increasing liabilities and debt—would it make sense to tell yourself that you are just going to “spend your way back into prosperity” and run up your debt just to get your money flowing again? Would you give further loans to people who owed you money with the hope that they would pay you back so you could then pay your creditors? Not at all! You would decrease your superfluous expenditures, sell unnecessary assets, and attempt to increase your productivity. Instead, we are told by politicians that it’s because they care, that it’s for our own good, that it’s just an emergency, or that we’re too dumb to understand what’s at stake while they are raiding our wallets.
When the Republic of Zimbabwe was established in 1980, so was the Zimbabwe dollar, which began its life as more valuable than the U.S. dollar. In its early years, Zimbabwe experienced strong growth and development. The wheat and tobacco industries were thriving. Things were going so well (despite some modest inflation) that the government decided it could afford to try and “fix” some other things.
From 1991–1996, the Zimbabwean government of president Robert Mugabe embarked on an Economic Structural Adjustment Program, designed by the IMF and the World Bank. It should be unsurprising to you by now, dear reader, that this had serious negative effects on Zimbabwe’s economy.
“In the late 1990s, the government instituted land reforms intended to redistribute land from white landowners to black farmers to correct the injustices of colonialism. However, many of these farmers had no experience or training in farming.” Food production plummeted and the banking sector collapsed. Farmers could no longer obtain loans for capital development, and unemployment rose to 80%. The government began printing nearly infinite amounts of currency to cover its expenses.
A Zimbabwean banknote (100 trillion)
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During the height of inflation from 2008 to 2009, it was difficult to measure the hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, the highest month of inflation is estimated at 6.5 sextillion percent in mid-November 2008, or about 80 billion percent a month. Prices had to be adjusted upwards several times a day and money received was immediately exchanged for foreign currency to avoid catastrophic loss.
“In 2009, Zimbabwe abandoned its currency. As of 2013, Zimbabwe still has no national currency; currencies from other countries are used.”
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Still, some argue that the national economy is multi-faceted and complex, and that the complexity and lifespan of a nation’s finances make it different than the financial rules of a single household. Despite the differences, in the end we still have to earn income and pay bills. The current strategy is to cover our unsustainable spending addiction by taking on future debt to pay the current creditors, all while increasing our spending every year. It is a revolving door of borrowing, like getting a new credit card every year to roll the old balance over while adding to the debt.
Perhaps it is the naive belief of some economists that more debt now will buy us the necessary time to get our financial house in order. Perhaps these economists believe that somehow Congress will be wiser, more restrained, less power-hungry, and more willing to work together in the future (stop laughing). Perhaps they believe Social Security and Medicare costs will eventually decline and then we will be able to be financially disciplined. Or perhaps they are simply looking to pass the buck to the next unfortunate generation, and not caring if we last that long. Such a policy of deferment only snowballs the problem—we are destroying our future for momentary comfort. The painful withdrawals of stopping this spending addiction will only worsen, perhaps to fatal levels the longer we wait to quit. There comes a point when investors look at your income-to-debt ratio and realize you will never be able to repay them, and so they stop lending you money. But when that happens to a government they simply print more money, resulting in inflation—which means everyone just got poorer.
Thomas Jefferson said there have been nations who have had the belief or tradition “that a father might sell his child as a slave.” “We acknowledge that our children are born free,” he went on. But though “we act as if we believed that . . . an individual father cannot [enslave] . . . his son” we legislate as if all the fathers could enslave all their sons together and “oblige them to pay for all the enterprises, just or unjust, profitable or ruinous, into which our vices, our passions, or our personal interests may lead us.” Jefferson considered passing debt on to the next generation to be a horrible “stage of degeneracy.”
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Inflation is actually a form of taxation. However, it is more pernicious and dishonest than direct taxation. Instead of expropriating our money directly under a written law we can read and repeal, the government merely prints more money for its purposes. It is taxation without representation or recourse. Inflation still takes our money from us because the purchasing power of our money is now less—we essentially have less money than before. We might have more dollars but can buy less with them. Instead of taxing us now, we are being taxed in a slow creep that is only apparent down the road—at least until hyperinflation sets in.
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Representative Pete Stark from California illustrated how the concepts of debt and inflation are distorted and disconnected from reality for most politicians. This is from his interview with Jan Helfeld:
Stark: The national debt measures how wealthy we are.
Helfeld: So, the more you owe the more you’re worth?
Stark: In Federal account, in the national scheme of things, that’s quite right.
Helfeld: So should we borrow another trillion next year?
Stark: I’ll say it slowly, you are trying to make an enemy . . . out of the concept of debt, which for a nation is different than debt for an individual.
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(When confronted with the contradiction in his thinking, Rep. Stark soon got belligerent and left the interview.)
Ayn Rand warned that if you want to see when “a society vanishes . . . watch money.” Whenever “destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owner a counterfeit pile of papers.”
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Principles do not change with size or with the entity involved. Schiff stated it simply, “Just as the principles of mathematics don’t change with the size of the problem, basic economic principles do not change with the size of the economy.”
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The principles and morality of a free market are essential for the student of freedom to understand. The morality of a free market lies in how it leaves each man free to act on his own judgment. As Rand said, “Intellectual freedom cannot exist without political freedom; political freedom cannot exist without economic freedom; a free mind and a free market are cor
ollaries.”
[136] A system of private ownership and private property is the only moral economic and social system, because it is the only system that recognizes the role of man’s mind and his moral agency and personal responsibility for his own life.
Review
Q1: Why should the economy and the State be segregated?
Q2: What effect do taxes have on production, and why?
Q3: What are the effects of government assistance to private companies?
Q4: How are economic bubbles created?
Q5: What are the effects of controls on prices, including wages?
Q6: Define the following: National Debt, National Budget Deficit, Unfunded Liabilities.
Q7: What do you think will happen if we stay on our current course?
Chapter 10: Collectivism and Statism
“The greater the good, the harder the blow.” - Stephen Sondheim, Into the Woods
INTRODUCTION
The evil seeds that became the Nazis of World War II were planted decades earlier, before the Third Reich. The Weimar Republic Germans in the 1920s and 30s heard over and over that there were to be “no more private Germans,” that there was another entity whose will determined the course of their lives. This entity was the nation, the whole, the group, the volk (people). These citizens were mentally bombarded every day with the concept that has been used by dictators everywhere as a justification for their tyrannies—collectivism.