Month: August 2024

Econ 101 – Price gouging

The good news is that the Presidential campaign has moved on to the presentation of policy positions—at least on Kamila Harris’s part–Trump’s response at a Pennsylvania campaign stop over the weekend was that “she’s gone “full communist.”

The bad news is that in addition to continuing some of Trump’s bad economic policies (tariffs, buy American protectionism, etc.) some of Harris’s economic policies are bad. Here I will take a closer look at her promise to ban “price gouging” by grocery stores.

In March of 2020 US. Broad Money (M2) growth jumped from its usual 5 to 6% per annum growth to over 25% a year later. As a result, U.S. Inflation (CPI) began to increase rapidly above its 2% target at the beginning of 2021. The Federal Reserve did not begin to tighten monetary policy until a year later when inflation had already reached 8% per annum. In addition, federal government deficit spending exploded over the same period. To fight this inflation the Fed’s policy interest rate was increased from almost zero from March 2022 to 5.3% by mid 2023 where it remains, thus ending M2 growth.

Since its disastrous late start in monetary tightening, the Fed’s management of the return of inflation to its 2% target has been as good as I could hope. Inflation has fallen below 3% without (yet) causing an economic slowdown. My guess is that the Fed is slightly behind the curve and should have started reducing it policy rate earlier this month.

So what is Harris’s ban on price gouging all about? “Perhaps Harris’s most surprising policy announcement was her plan to ban “price gouging” in grocery and food prices. While details were sparse, the measure would include authorizing the Federal Trade Commission to impose large fines on grocery stores that impose “excessive” price hikes on customers, her campaign said. Grocery prices remain a top concern for voters: Even though the rate of increase leveled off this year, grocery prices have jumped 26 percent since 2019, according to Elizabeth Pancotti, director of special initiatives at the Roosevelt Institute.” https://www.washingtonpost.com/business/2024/08/16/kamala-harris-2024-policy-child-tax-credit/

In an excellent editorial last Friday (I urge you to read it) the Washington Post asked: “‘Price gouging’ is not causing inflation. So why is the vice president promising to stamp it out?”   https://www.washingtonpost.com/opinions/2024/08/16/harris-economy-plan-gimmicks/

Stores only offer goods for sale when they can be sold for more than their cost to the story by enough to pay for their own employees, cost of their store and its maintenance and “normal” profit (return on the investment made by the store’s owners). The erratic economic events of the last few years create disruptions in these normal relationships that can produce temporary losses and/or usually large profits.

The supply and demand for a good can be matched by its price or by some other form of rationing. If a pandemic suddenly spikes the demand for facemasks, it will take a while for manufacturers to increase the supply. Until that happens demand will exceed supply.  Dr. Fauci and the government can ban sales to us common people in order to reserve the existing supply for doctors and nurses, or the market will increase the price such that only those with the most pressing need (or desire) will pay the higher price of the available supply. Rationing by prices has two big advantages. The first is that each individual (rather than government bureaucrats) determines whether their need is strong enough to pay the higher price. This makes it MUCH more likely that face masks will go to those with the highest need. Second it maximizes the market incentive to increase production and supply faster.

It the supply (relative to demand) shortage is not rationed by price, some other rationing mechanism and criteria must take its place. One is first come first served until the shelves are empty. During the wage and price freeze imposed by President Richard Nixon starting on Aug 15, 1971, gasoline was rationed by long lines of cars waiting for their turn at gas stations. It is not surprising that freely determined market prices have served us so well.

From the River to the Sea

The subtitle of my memoire is “From the River to the Sea, All should be Free.” I deliberately chose this potentially provocative statement to warn readers to expect to encounter my political views and to refuse to allow the English language to be twisted by the political views of others. In the same spirit, I always stated that “All Lives Matter” rather than the more restrictive “Black Lives Matter.”  I have always defended the rights of All people to peace, justice and equal rights.

I asked my AI search engine the following:

What different groups chant “From the River to the Sea “ and what does each group mean by that?

The reply was:

The phrase “From the River to the Sea” is used by various groups with differing interpretations:

  1. Pro-Palestinian Activists: For many, it symbolizes the aspiration for Palestinian liberation and equality across the region from the Jordan River to the Mediterranean Sea, often seen as a call for peace and justice.
  2. Jewish and Pro-Israel Groups: Many perceive it as a threat to Israel’s existence, viewing it as a call for the elimination of the Jewish state, especially when used by groups like Hamas.

“When someone says from the river to the sea, Palestine will be free, I question, ‘Where do you see the Jews going?'” said Yair Szlak, president and CEO of Montreal-based Federation CJA. ‘That is hate speech, right, because it is into the sea that they seek to send the Jews.’”

Take a close look at this amazing statement. Mr. Sziak implies that the only way Palestinians can be free is by getting rid of the Jews!!  Aside from being a absurd statement, it is sadly revealing of the thinking of some Israelis.

“Yousef Munayyer, head of the Palestine-Israel program at the Arab Center Washington D.C., has written extensively about the meaning of the slogan before and since Hamas’s attacks on Oct. 7, which led to Israel’s current bombardment of the Gaza Strip. 

“Munayyer says today, the phrase is used to reference the lack of freedoms Palestinians have in the territory between the Jordan River and the Mediterranean Sea, which includes the state of Israel as well as the Gaza Strip and the occupied territories of the West Bank and East Jerusalem. 

“’That’s what has to change. That doesn’t mean that there should be any violence against Israelis,’ Munayyer said.” https://www.cbc.ca/news/world/from-the-river-to-the-sea-palestine-1.7033881

Labor Unions

To maximize a company’s market value, it must maximize its expected profits over time (its current market price reflects the discounted present value of expected future profits). To do so it must offer products or services that the public wants at prices they are prepared to pay that exceed the cost of supplying them. These products must be produced with the quality desired and as cheaply as possible. But that requires hiring workers of appropriate skills and providing them with appropriate tools (investments in equipment and other inputs) while paying them no more than is required to attract and retain them. “Appropriate” in these contexts means cost effective (best output at lowest cost).

Unions can help a firm’s management find, train, keep and manage the most appropriate workers. The general work environment is part of what attracts workers in addition to wages and related benefits. The optimal mix of the “right” capital and the “right” labor to produce market demanded products, produces the biggest pie to split between labor and shareholders (i.e., maximizes profits). So, both labor and owners share an interest in getting it right (maximizing). When unions deal with management in this positive sum, win-win frame of mind both they and shareholders benefit. But unions that see the process as zero sum and simply seek to maximize their share of the pie, reduce the size of the pie (loss-loss). American unions too often fall into this trap.

My personal experiences with American unions have not been good. I will share the experiences of my parents and myself that have influenced my views.

During the summers of my undergraduate studies at the U of California at Berkeley, I worked in the oil fields of Kern County for Shell Oil. Children of Shell employees like my dad were given preference for such jobs (typical profit maximizing behavior). A typical summer day in Kern County was dry, with temperatures ranging from 105 degrees to an occasional 112. This was more comfortable than a typical humid day of 95 degrees here in the Washington DC area. The first summer I worked in the fields north of Bakersfield, and the second summer at the ten-section refinery fields where my dad had worked in the refinery west of Bakersfield.

The full-time Shell employees I worked with, along with two other summer hires, were all pleasant and talked about their families and such things during our lunches together in the “doghouse,” as they called it. I had no idea whether they were union members or not. Digging up leaky pipes as a roustabout in such heat was a challenge.

My second year I was promoted to working on a well pulling rig. The traditional rocker-arm wells that you have surely seen in pictures are fairly shallow and push the oil up a pipe as the rocker moves up and down. The pump is attached to the bottom of this pipe and opens to let the oil in, and then closes as it pushes it up the pipe with each rock. We pulled the pipes, with their pump on the bottom end, out of existing wells for repair.

Every now and then the pump at the bottom failed to open to allow the oil to flow out as our rig pulled it up. Those were called wet wells as rather than draining out, the oil spouted out the top and rained down on the rig platform. The first time I encountered a wet well, the guys recommended that I put on a wet suit to keep the oil off me. As I recall it was 110 degrees that day and I turned down the wetsuit. However, as I become covered in oil my sweat stopped evaporating and I almost passed out. I had to sit out the rest of the day in great embarrassment.

My third summer I was paired with the full-time employee in the supply yard behind Shell’s Kern County headquarters that provided all the parts needed out in the fields. We rode around in a forklift to load needed supplies onto trucks that delivered them to the fields. My “partner” was a union member, All he could talk about was how Shell was exploiting us. I hated it and hated him and his antagonistic rather than cooperative attitude. This added to my dislike of American unions.

Many years earlier when Shell workers went on strike, my dad had to strike as well, as he had to belong to the union to work in the refinery. After a month or two, when it was clear that the strike was about to end, several union guys came to our house and threatened my pregnant mother (with my seven-year younger brother), that it would be unhealthy for her if my dad went back to work already.

Many years later, when my mother had become an elementary school teacher, she disliked the teacher’s union as having little real interest in the kids, but spent their time protecting the jobs of mediocre teachers.

It seems to me that unions are helpful or detrimental (good or bad) depending on whether they see their negotiations with their companies in positive sum or zero-sum terms. Mandatory union membership is more likely to result in the latter, detrimental relationship.

Where have all the flowers gone?

My mornings these days are spent reading email and news reports sitting in a swing on our master bedroom balcony, from which I can view Reagan National Airport and further south the skyline of Alexandria Va. Ito serves my coffee and a cut orange to me there. Life is wonderful (age adjusted). Thankfully I am no longer faced with life defining choices—forks in the road.  Luckily most of my choices worked out well. But I am happy to no longer face them.

While reading the Post, WSJ, etc. on my iPad, I listen alternatively to Opera areas and my favorite folk singers of my youth.  This morning while listening to Peter, Paul and Mary sign “Where have all the Flowers Gone,” I broking into tears and thought I would share with you why. https://www.youtube.com/watch?v=ZgXNVA9ngx8

I believe that the hearts of most young people seek to “do good”– to prosper by or while making the world a better place, which is the essence of capitalism. There are, of course, a few bad apples, but most of us are born with good hearts and a desire to prove themselves worthy. Over too much of history young men too often proved their worthiness by going to war to defend their country, or, at the instigation of those bad apples, to expand their empire. So, the impulse to reach out and help others has often been subverted in our youth to standing up to kill them instead, dying themselves in large numbers. World War II, alone killed 70-85 million people and injured multiples of that. Where have all the flowers gone.

My tears flowed from the sadness that we have failed and still fail to nurture those good hearts into an even better world to the extent we could. The enterprise of our fellow man once liberated to pursue their dreams has lifted the wellbeing of the average person to unbelievable heights. But every young person knows that a good life consists of more than material wealth. We are again (or still?) in a period when far too many people can only think of dealing with our fellow man by beating them down in war.  What a sad misuse of our potential. Where will all the flowers go?