Basic Economics

I finished listening to Thomas Sowell's Basic Economics today, and considering my last article was very short, I've decide to write a quick review on the book.

Also, for those TJ Maniacs, don't worry he'll be back this week after having some computer problems last week.

Sowell has taught Economics, "the study of scarce resources with different uses," at Cornell, Amherst and Cal-LA, currently he is a scholar in residence at the Hoover Institution at Stanford.

I don't have my copy of the book here at school, so I can't do a thorough review, but here are some of the main points explored in the book:

• Prices are essential and price controls always cause shortages. Using hotel rooms as an example: after a hurricane hits many people leave their homes and try to find a hotel somewhere. If the hotel kept the normal low price a family of four or five may choose to rent two rooms, causing the supply of rooms to drop. However, if the price is raised sufficiently, the family will probably choose to use just one room, this allows some other family to use the other room.
• Centrally planned economies cannot succeed. Simply: a farmer knows a helluva lot more about what to plant on his farm than a bureaucrat 1,000 miles away ever can. More complicated: most resources have different uses, with prices they will be put to the use that is most needed, because the low supply will cause the price to rise, if the economy is centrally planned these resources are likely to be misused and there may well be shortages of food, while something like ethanol is in full supply.
• Speculators help, a lot. A commodity speculator effectively takes all risk off the farmer, by signing a contract agreeing to pay that farmer a set price for the commodity, regardless of the eventual real price. Because of this, the farmer takes no risk if the price soars, and the speculator, through a diversified portfolio of commodities, can also reduce his risk
• In international trade there are no 'winners,' or 'losers,' and a lot more jobs are gained then lost. For example, because it is 'free' trade, there can be, by definition, no loser (both parties agree on terms, so both win). Because of this even if some jobs are lost many more jobs are created by the excess of profits.
  

Sowell goes over these points (in much better detail) and many others in the book. It is written very well, and is never hard to understand, thankfully, considering the nature of the book. It is also written with many references and real-world and business examples, that add to the enjoyment of the book while verifying its contents.

In Defense of the Oil Companies

After watching an incredibly biased interview of Exxon CEO Rex Tillerson, being interviewed by ABC’s Charles Gibson (the video can be found here and transcript here) I decided to write the first energy-policy related article on Agents of Liberty.

Three big points, infinitely touted by the biased media, need to be countered.

‘Obscene’ Profits

First, to kill the ridiculous notion of obscene profits. ExxonMobil had ~$138 billion in revenue last quarter, and ~11.7 billion in net income. This net income number may seem huge, but it is just 11.8% of Exxon’s profits, by comparison Google’s profits are 23% of its Revenue, Microsoft’s are 27%, in fact a Google Stock screen turns up over 1,300 companies with net margins of at least 12.2%.

Exxon has huge profits, but this is from huge volume, not from price gouging, in fact if Exxon was stupid enough to price gouge it would probably immediately lose business to other gas companies who are willing to sell their product at an 11% margin.

Exploration vs. Buybacks

The following exchange was the most revealing of the interview:

CHARLES GIBSON: When profits are so high, why is spending on exploration so low?

REX TILLERSON: Well, we're spending at record levels. Through the first half of this year, we have spent $12.5 billion. That's a record level of capital and exploration expenditures for us. We expect we will spend about $25 billion this year. And we have forecast over the next five years that we will invest $125 billion in capital and exploration expenditures. And to give you some perspective on that, that's a little more than half of what all 13 OPEC nations are going to invest as they've announced. So we are investing at record levels and expect that we will continue to be doing that in the years ahead.

CHARLES GIBSON: You're spending more money buying back stock than you are on exploration.

REX TILLERSON: Well, that's a cash flow question, Charlie, in terms of how should we manage our cash flow. And that's important for our shareholders, obviously. It's important for our future health as well.

The first thing we do is invest in all the projects that we have available to us and that make sense to invest in. And the second thing we do is pay all our taxes, pay all our operating costs, all of our employees and all the people that do business with us. And then we see what's left over. And what's left over we try to return efficiently to the shareholder, because it's their money. So we do that through dividends, and we do it through share buybacks. Our shareholders then take all that money, and they're doing something with it elsewhere in the economy.

Tillerson effectively dismantled Gibson’s heinous argument that the buybacks should be lower than exploration, but as Gibson mentioned many more times that Exxon buys back a lot of stock, the arguments needs to be clarified.

ExxonMobil is a business; therefore it is run to produce a profit. Gibson mentions that they: Invest in projects, pay taxes, pay operating costs pay labor then return the rest to shareholders.
This is pretty easy they pay what they need to continue running the business then return the rest to shareholders, who own the business.

Gibson either doesn’t understand this or is too ignorant to care, as he digs himself into a hole by trying to tell an experienced CEO what he should be doing with his business. Let’s return to the business definition: it’s run to make a profit, by that definition everything in which Exxon invests must be capable of producing a profit for the shareholders in the future.

Gibson is of a different opinion and for some illogical reason thinks Exxon should invest billions of dollars in unprofitable investments (something I believe he has absolutely no knowledge of) instead of returning the money to the shareholders, who, through their positions, have the right to it.

Windfall Profit Tax

Later, in the interview Gibson talks about windfall profits taxing and Obama’s plan to tax the ‘windfall profits’ of oil companies $65 billion over the next five years. Again, Tillerson has a simple response that Gibson seems incapable of comprehending, “What would that accomplish.”

This is something Obama has not addressed. Senator Obama: we understand you think taxing is the answer to everything, and that you understand that when uneducated people see Exxon’s large profit dollars they are angered. However what exactly would this accomplish?

In a world where too much government has caused the price of oil to soar, how is more government the answer?

Also, the price of all food related to corn has soared almost the same amount as oil over the past few years. Yet corn farmers are getting subsidies from the government, to produce corn to make ethanol, a fuel that just about every scientist believes has no reasonable use, and would be more expensive than gasoline.

Where’s the difference? Why should the shareholder’s of the oil companies have their money stolen three times: To subsidize the farmers, to pay higher food prices and to kill their dividends?

The Real Problem

The real problem is unrelated to any oil companies, but good luck finding that on any news channels.

There are two big reasons for the high oil prices, the dollar and supply and demand.
The supply and demand issue is not very revolutionary, the demand for oil went up, but the supply did not, as a result the price went up. This is basic economics.

One way to increase the supply of oil is to open up off-shore drilling and ANWR, regardless of how long this would take to produce oil, I fail to see what gives the government the right to forbid drilling.

The dollar issue, however, is more complicated. The US dollar is not backed by any commodity and is currently being printed willy-nilly by the Fed. Whenever more of a currency is printed inflation goes up (this is because if you have more of something it loses its value, if everyone had $150 million, it would not be a big deal to have $150 million).

So inflation is going up, the value of the dollar is falling, and all the oil in the world, with the exception of that under the control of Mahmoud Ahmadinejad, is traded in dollars, as a result the price of oil is up.

This may seem negative as there is nothing the government can do to help (as if there has ever been anything where the government helped), but true Capitalism was shown in June as the demand for oil fell the most in ~30 years, this affected the price of oil and it fell from over$140 per gallon to below $115.

This whole situation reminds me of a conversation between Dagny Taggart and Hank Rearden in Atlas Shrugged, Dagny was remembering how she was taught in school that eventually the sun would burn itself out and the world would end. Rearden replied that he had always thought that by the time any of this had happened man would invent a solution.

Maybe the government should stand aside and let man invent a solution.

Roark will be a college student majoring in Economics in less than one week, until then he will make do with the many books by genius authors he has collected. For more on Roark, please visit out about page.

Minimum Wage Nonsense

On Thursday the minimum wage increased 70 cents, to $6.55 per hour. Many liberals feel this will have a positive impact on the economy (one commenter on the New York Times site thinks the wage low needs to be tripled to force the economy to turn-around).

It will definitely have an impact, though there is very little chance it will be anything positive. Like most liberal sentiments minimum wage knowledge is clouded by ignorance, here I will go through the facts and common sense on them.

To tear apart the myth of minimum wage I could quote economic studies showing it increases the unemployment rate, or reference the 90% of economists who believe it is harmful to workers, but none of this is necessary, because I can easily explain the negatives with common sense.

I used to work at KFC, so I'll use my story as an example.

I moved to Utah when I was 15, before I moved I worked for a movie theatre for five months (where coincidentally I was never paid minimum wage and received two raises based on performance before leaving).

After arriving to Utah I was unable to get a job because of strict labor laws (which are for a different day), but I applied in the month of my birthday and interviewed a few weeks before to allow my first day of work to be the day I turned 18.

I was hired for $5.50 per hour, already more than the minimum wage based on my five months of experience at an only partly-related job.

Within six months I was up to $6.70 and was on the verge of beginning management classes.

In total I worked there for a year and a half, in that time I learned how to do all positions (cook, register, pack food, shift supervisor), took two courses on management and as a result ended up with an $8.50 per hour wage before leaving to focus on school in the fourth term of my senior year.

I achieved this through hard work, the simple virtue which most liberals despise.

I was literally never late for work; I took only one sick day when it could not be avoided because I worked in a restaurant; I was never disrespectful to a person in a position of authority (or any others for that matter); I took every opportunity to further my knowledge of my work and move-up; and regardless of the situation I always worked hard and never asked for a break or sat-down.

I view the ability I had to achieve this when I was 16-17 years-old as proof that any semi-competent worker who cannot earn minimum wage is a loser, and save for any medical problems, has no excuses.

For those who disagree, there was a woman who worked at KFC at the same time I did.

She had three kids with her boyfriend who was addicted to drugs. She usually showed up 15 minutes late for work, smelling like smoke and complained her whole shift, begging for a break.

Though she was an obviously bad employee she still made $8 per hour simply because people who could work during the day were in demand. This is called Capitalism and is the result of the Free Market.

I believe I have sufficiently proved minimum wage is unnecessary, now let's go through some logic to prove it hurts the economy.

• 1. It is common sense every business is run to make a profit, if it didn't it would no longer be a going concern.

  2. 2. So, employers can only pay employees the value of their work, if they paid more they would be unprofitable and go out of business.

  3. 3. Since employers can logically only pay the value of the employees work, the minimum wage causes them to lay-off employees whose work is worth less then minimum wage, usually those who just started working.

  4. 4. As employers nationwide lay-off employees who they can't afford to pay the unemployment rate goes up (the employees who make themselves worth more to the employer are usually kept).

1.

If there were no minimum wage, employers would have the ability to hire people for below the minimum wage, and allow them to prove themselves to earn a higher wage (The vast majority of people who earn the minimum wage get a raise within a year and 40% get one within four months). As the employee made himself valuable to the employer he would either be forced to pay the employee more, or watch him go elsewhere to make more. Either way the employee ends up with a relatively good wage, without the government's help.

Finally, it's necessary to show that upping the minimum wage does not turbo-charge the economy.

The liberal argument is that when employees make more they will have more money, which will allow them to spend more helping the economy (this sounds very similar to trickle-down economics, but not related to tax cuts).

It's true that people who make minimum wage (or something tied to it which many union workers make) will be able to spend more. But, that money has to come from somewhere.

Businesses can't just print new cash (though the fed seems to be unable to learn this simple fact), so to pay some workers more they will have to lay-off others and raise the prices of the things they sell.

Let's look at a simple pencil, if the minimum wage goes up the company that cuts down the trees will have to cut workers and raise the price of the wood, as will the:

• Company that mines the graphite for the 'lead'
• Mines the metal to put on the eraser
• Makes the eraser
• Puts it all together and makes the pencil
• And sells it at the retail level

Even this is an overly simplified example, there are many more possibilities, but the end result is the same: the prices will rise!

Now to use a little more logic, if a lot of people lose their jobs and the prices of goods rise, the economy will go down!

Wow! Revolutionary.

Roark is the pseudonym of an 18 year-old writer based in Utah. He remains surprised at the ignorance of most politicians, related to many other areas than Minimum Wage. For more on him visit our About Page.

For more on kinimum wage see: Somebody's Gotta Say It by Neal Boortz and Minimum Wage, Maximum Damage: How the Minimum Wage Law Destroys Jobs, Perpetuates Poverty, and Erodes Freedom by Jim Cox