Poverty, economic growth and unconventional thinking

With the economic crisis there has been increasing inequality and increasing poverty.  Poverty is something we should be addressing.   I believe we should have a collective responsibility to ensure everyone has the opportunity to have a reasonably comfortable life – the same level as most other people.

Conventional thinking says we need economic growth to provide jobs and relieve poverty. This article is an example.

It may be poverty is now being caused by a situation we have not experienced in our collective memory and that unconventional thinking is required.

johnny_automatic_startled_bearsThe probable cause of the economic crisis is that we have used up most of the easily accessible energy, mineral and topsoil resources.  As it takes more work and energy to harvest the remaining resources further economic growth is difficult if not impossible.  We may even have to cope with negative growth.   Trying to force economic growth will only consume more resources and make things even worse.

Even if the resources for growth are available we have so much technology there really is not the need for everyone to be producing more.  Back in the Middle Ages there were three classes of people – those who prayed, those who fought and those who worked to support the first two.  These days it only takes a few people to produce the food to support those who fight and those who consume.

Therefore demanding that governments provide more jobs is not reasonable.  We have to find some other way of ensuring that everyone  has a comfortable life.  One proposal for doing this is in the essay “LETS go to market:: Dealing with the economic crisis” on this weblog.

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Dairy farming: Canadian supply management and American subsidies.

Last night our community held the annual Robbie Burns dinner (a roast beef dinner with entertainment for ten dollars) and I sat next to a dairy farmer (from outside our community).

Canadian dairy farmers are protected  by marketing boards which enforce supply management.  All dairy farmers are required to sell their milk to a marketing board which says how much they can produce.  This supply management works to limit the amount of dairy products on the market and keeps prices up.  Dairy farmers generally appear to do well financially.

Gerald_G_Fast_Food_Drinks_FF_Menu_2Some Canadians object to supply management and claim our consumer dairy prices are the third highest in the world.  Prices in the United States tend to be about 50 per cent lower than  Canadian.  Some Canadians living close to the border have been known to purchase milk and cheese in the States.

When I asked this guy about subsidies for dairy farmers I was told Canadian farmers get none but Americans are subsidized by about 50 per cent.

I was aware American farming is heavily subsidized but have never really thought about the dairy industry.  This morning I googled “dairy subsidies” and it appears the guy was right.

So Canadians restrict competition with quotas and supply management and Americans keep prices down with subsidies.  I don’t eat much dairy so I have to prefer the Canadian way because my taxes are not going to dairy subsidies.

If Canadians were to get rid of supply management and Americans were to drop subsidies then dairy farmers would have to be competitive and work as efficiently as possible.  We would all be better off.  Subsidies should be given to consumes rather than producers.

Pandemics and other risks

This is an interesting article analyzing the many economic risks of a pandemic.  I liked the line which says “Wall Street never encountered a disaster it couldn’t profit from, and pandemics are no exception.”

This article may be an understatement of the risks and it is not clear that even Wall Street could survive.  I say this remembering a book I read some time ago: Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future by Ian Morris.

Anonymous_U_shaped_arrow_set_5Morris’s book is a good summary history of the world. Using evidence from a number of disciplines he shows how geography has influenced the rise and decline of civilizations.

He identifies what he calls the five horsemen of the apocalypse – famine, epidemic, uncontrolled migration, state failure and climate change and shows how these have combined to produce disastrous, centuries-long collapses and dark ages.

II would like to go into denial and  believe that our civilization is exempt from any of these threats.  However, any one of them, or all of them at once, could become problems for us.  There are also some new threats such as nuclear war, energy resource depletion or an electromagnetic pulse which has the potential to wipe out large chunks of the power grid.

I wish I knew how we could protect ourselves but sometimes there is no answer.  There’s a song:  The answer, my friend, is blowing in the wind.

Inequality: the buzzword and the norm

Gerald_G_Fairy_sitting_on_MoonIt appears the latest economic buzzword and current explanation for economic problems is inequality.

Historically inequality has been the norm for most large-scale societies.  Just think Roman Empire and Europe during  the Middle Ages.  Wherever societies have been large enough to have rulers who did not know all their subjects some people have used their strength to exploit others and most of the time the others were left just at a subsistence level.

Starting with the Industrial Revolution things started to change.  People became more efficient at extracting resources and making things which meant increasing prosperity.  A shortage of bodies in some parts of the world allowed more people to claim a share of that prosperity.  To some extent our income and standard of living is a function of the supply and demand for bodies.

It may be that this golden age of prosperity has not been experienced by all the people currently living on this planet and equality is still the norm for lots of places.

In the last few years things have been changing.  We have exploited the most easily accessible resources upon which our prosperity has been based and there are more and more people demanding a share of what we do have.

So there you have it.  We are returning to the norm where a few people are able to claim most of the available resources.  And some people will say we can overcome all economic problems if we can return to more equal economy.

Competition and regulating tax preparers

This news item is probably a tiny bit of good news for American tax payers.  The IRS has been told it cannot  regulate tax preparers.

Whatever the rationale,  regulations and in effect licensing would restrict  competition and force up prices.

Economic theory tells us that to have perfect competition all participants in a market should have perfect knowledge.

Therefore, If the IRS is concerned about the quality of work being done by some tax preparers, the way to deal with it is to require tax preparers to tell clients their qualifications and of any problems they have with the IRS with respect to other work.

 

Banking, risk, greed and a house of cards

When I took the  course on economics of money and banking,  banks were said to be financial intermediaries which means they act as the facilitator between savers and borrowers.

I thought about this a lot as I read House of Cards by William D. Cohan published by Doubleday in 2009.  It is an account of the history and collapse of Bear Stearns & Co. which was the fifth largest investment bank in the United States.

It appears the two big problems in this bank failure were risk and greed.

When a person borrows money there is some risk that he/she will not be able to repay the loan.  The longer the term of the loan the greater the risk. As interest is in part to allow for risk the longer the term the higher will be the interest rate charged.

The question: Who is going to take the risk? The depositor or the banker?  Whoever takes the risk should also get the interest compensation.

It is clear from this book that the bankers took upon themselves the risk although when the risk became reality  their depositors also lost.  The bankers may not have realized, may not have wanted to realize, the risk they were taking.,

What makes this risk attractive is that short-term interest rates are generally much lower than long-term interest rates.  Therefore a banker can make lots of money by taking short-term deposits with which to make long-term loans.  And this is what Bear Stearns was doing.  A large chunk of the mortgages they were holding in a couple of hedge funds were financed with overnight deposits.  Apparently this was/is a common practice on Wall Street.   There are two risks in doing this: short-term interest rates may move against you or your depositors may  withdraw.

So long as the economy was experiencing economic growth it worked and the bankers made obscene fortunes.  But when economic growth slowed down and it became known that these sub-prime mortgages were not as sound as they had been  promoted, the bankers found that their short-term  lenders refused to re lend the money. Disaster. And these guys had the nerve to whine when it became apparent they were going to lose some of their personal fortune.  They also had to be rescued because banks create money and are too important to let fail.  When Bear Stearns went down there was a lot of worry that the whole financial system would collapse.

One has to note this way of working probably under priced the risks of the sub-prime mortgages and that the investment bankers had a vested interest in doing so.  It made it much easier for them to sell their wares.  If the full risk of the sub-prime mortgages had been charged in interest rates most low-income borrowers would not have been able to afford them. (It is interesting that the U.S. government starting with Clinton encouraged this business by asking the banks to finance  housing for low-income people.)

It is probably safe to say most of these investment bankers were con artists.  However, I would suggest that to have a successful con you must have at least two greedy people.  It is hard to con somebody who is not greedy.

So how do we prevent bankers from taking upon themselves excessive risk?

The first answer is to changed the way in which our economy creates money so that banks are excluded from the process.  For more on this please see the essay LETS go to market: dealing with the economic crisis  on this weblog.

The second thing is to require banks to match the terms of their deposits and loans.  They should make their profits out of the spread between the interest rates they pay and charge. The risks and rewards should go to depositors according to the decisions they make.

The third thing us to require them to publish lots of information about their business.

As for greed, governments should probably not try to legislate. Greedy people should be expected to take the consequences. (Lets make a distinction between cons involving two greedy people and exploitation by a person who has superior strength)

Wall Street has rebounded from this  crisis.  One  has to wonder of any lessons have been learned or are investment bankers still financing long-term loans with short-term deposits.  If so there is potential for another crisis.

Money as a reason for revolution

Here’s a quote from Henry Ford which I like as I believe we need some revolutionary changes in the way in which money is created.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

 

And the revolutionaries probably would not be calling for the creation of a trillion-dollar coin .

 

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