Coyote Blog

After years of arguing that expanded credit is critical for the poor, and attacking banks for "red-lining" poor and minority districts, the liberal-left of this country has reversed directions, and has decided that the poor can't handle credit.

No matter how much folks want to paint the recent mortgage problem as some sort of fraud perptrated on homeowners, the fact of the matter is that in large part, lenders lowered their income standards and a lot of those folks now can't pay.  While we have yet to see any specific legislation beyond bailouts, it is impossible for me to imagine any reaction-regulation that does not have the consequence (intended or not) of restricting credit to the poor.

But these restrictions are not limited to the housing market.  Many states, for example, are cracking down and even outright banning payday loan companies, often the last resort (legal) credit source before people turn to the loansharks.  First in Ohio (via Mises Blog)

  If Ohio's 1,600 payday-lending stores want to continue operating past this fall, it
appears they will have to find something else to offer besides payday loans.

   A hotly debated bill that effectively would spell the end of the short-term,
high-interest payday-lending industry in Ohio sailed through the Ohio Senate yesterday despite
pleas from lenders that their stores would close and 6,000 employees would be put out of work.

   The Senate was unable to find a compromise that both satisfied payday lenders and
eliminated the debt trap that bill supporters said forced too many borrowers to take out new loans
to pay for old ones. So it did what the House did last month: dropped the hammer.

   "I think everybody said there is just no way to redeem this product. It's
fundamentally flawed," Bill Faith, a leader of the Ohio Coalition for Responsible Lending, said of
the twoweek loans. The industry "drew a line in the sand, and the legislature kicked the line aside
and said we're done with this toxic product."

And perhaps soon in Arizona.  Yes, the interest rates are astonishing, though the dollars involved are seldom huge for the short life and small size of the loan.  And, as an extra added bonus, Tony Soprano does not send someone to break your legs if you don't pay (the Sopranos being the only alternative provider once payday loan companies are illegal).

So, for those of you oppose payday loans, you are welcome to comment below about what a bad idea they are.  However, I challenge folks to criticize payday loans without simultaneously implicitly expressing disdain for the intelligence of payday loan customers, or trumpeting your ability to make better decisions for payday loan customers than they can make for themselves.

However, for those who think they are ever so much smarter than payday loan customers, who are charged a lot of money for small liquidity boosts, consider this:  Let's say you take out $40 each week from an ATM to keep you liquid and that the ATM fee is $1.50.  You are therefore spending $1.50 or 3.75% for a one week liquidity boost of $40, which you must again refresh next week.  Annualized, you are effectively paying 195% to get liquid with your own money.  For this kind of vig, at least payday loan customers are getting the use of someone else's money.

The Mises Blog, not one to give the government much of a break, argues that the decision on home education last week in California was narrow and has been mis-interpreted, and applies narrowly to the credentialing of home tutors, not parents performing home-schooling. 

Maybe, but the teacher's union certainly thought that was what the judge was saying and the judge went out of his way to say specifically "Parents do not have a constitutional right to home school their
children" which is an overly broad statement that was not at all required had the decision really been intended to be narrow.  Jeffrey Tucker at Mises argues:

It comes down to a case of a judge who got carried away with his rhetoric and didn't understand the law.

Oh, OK.  I feel so much better now.

From Scientific American Magazine - January 2008 via the Mises Blog

...As with living organisms and ecosystems, the economy
looks designed"”so just as humans naturally deduce the existence of a
top-down intelligent designer, humans also (understandably) infer that
a top-down government designer is needed in nearly every aspect of the
economy. But just as living organisms are shaped from the bottom up by
natural selection, the economy is molded from the bottom up by the
invisible hand.

I need to read the whole article, it looks awesome, but in fact yours truly made the same observation over a year ago (emphasis in the original - I was going through an overuse-of-bold-type phase.

So here is this week's message for the Left:  Economics is a
science.  Willful ignorance or emotional rejection of the well-known
precepts of this science is at least as bad as a fundamentalist
Christian's willful ignorance of evolution science (for which the Left
so often criticizes their opposition).  In fact, economic
ignorance is much worse, since most people can come to perfectly valid
conclusions about most public policy issues with a flawed knowledge of
the origin of the species but no one can with a flawed understanding of
economics....

In fact, the more I think about it, the more economics and evolution are very similar.  Both are sciences that are trying to describe the operation of very complex, bottom-up, self-organizing systems.  And,
in both cases, there exist many people who refuse to believe such
complex and beautiful systems can really operate without top-down
control. 

For example, certain people refuse to accept that homo sapiens could
have been created through unguided evolutionary systems, and insist
that some controlling authority must guide the process;  we call these
folks advocates of Intelligent Design.  Similarly, there are folks who
refuse to believe that unguided bottom-up processes can create
something so complex as our industrial economy or even a clearing price
for gasoline, and insist that a top-down authority is needed to run the
process;  we call these folks socialists. 

It is interesting, then, given their similarity, that socialists and
intelligent design advocates tend to be on opposite sides of the
political spectrum.  Their rejection of bottom-up order in favor of
top-down control is nearly identical.

I have long suspected, but can't prove, that most of the recycling we do is worthless.  I look in my recycling bin and think -- it's got to be cheaper to start with the raw material than what's in this bin.  The problem is hidden system costs.  For example, everyone thinks they are saving energy by recycling.  But in my town, as in most towns, recycling basically doubles the vehicle miles driven by the sanitation trucks to get all the waste out, because we get a visit from the "trash" truck and later in the week get a visit from the "recycling" truck.  Plus there is all that extra labor in the pickup and the sorting.  And that is all before the processing costs.  And all this is without even considering the staggering amount of "free" labor the recycling system gets from you and I as individuals.**

The Mises Blog has a link to the online video of a Penn & Teller Bullshit! show that takes on this very issue.  Since its Penn & Teller, its both funny and smart, and comes to the conclusion that only aluminum can recycling really makes sense.  All the rest is a big feel-good circle jerk that really saves no money or energy.  Its particularly funny when they put about 15 different colored cans in front of one guys home and tells him each is for a different type of material.  The one addition I would make is that reusing an object for its original use almost always saves money -- for example, we save Amazon boxes to use when we ship things out.

Along the same lines of hidden costs, this study sent to me by a reader looks at the total lifetime energy costs of automobiles, including their manufacturing and transportation as well as their fuel use.  I can't vouch for it's accuracy, but the results are somewhat surprising -- for example, most hybrids have lifetime energy costs higher than average for vehicles.

** But recycling is easy!  It hardly takes any time!  Well, let's say it takes only an incremental 1 minute a week from each individual in the country to recycle (a number that is lower than the actual, I think).  That translates to 260 million man-hours a year or the equivalent of 130,000 full time jobs.

There is nothing bloggers enjoy more than ranking themselves. Brian Gongol issues the latest rankings, this time of Business and Economics blogs.  Coyote Blog actually makes the rankings, with between 8-9% of the traffic of the leader Marginal Revolution (which is a great site).  Gongol uses a newspaper analog to say that if Marginal Revolution is USA Today, I am the Rochester Democrat and Chronicle.  Uh, OK. 

Maybe someone can set up trade futures on business blog rankings.  If that were to happen, you know what Marginal Revolution would title the post....

By the way, he leaves off two of my favorites, probably because they are not in the NZ Bear data base:  Cafe Hayek and Mises Blog.

Have you ever heard of government authorities making public statements around Valentine's Day to please conserve on roses since we are entering our peak demand season for them and rolling shortages could ensue?  No?  Never?  Well, the demand spike for roses on Valentines is much more dramatic than the demand spike for power on a hot summer day.  So why no urgent government messages for conservation of the former but constant ones for the latter?

Because the rose market is not heavily regulated.  Producers are free to manage their capacity without government interference, and, perhaps more importantly, producers are free to charge peak pricing in high demand periods.  In fact, prices for roses on Valentines go for a multiple of everyday pricing that a similar differential in a peak supply period at, say, a gas station would likely get the proprietor arrested for price gouging.  But we recognize that its tough to manage a business to supply all its capacity in one day of the year, and accept the higher pricing.  Why is it we can't accept the same facts of life in electrical generation, where capacity is orders of magnitude more expensive to manage than rose growing?

More from Llewellyn Rockwell at the Mises Blog and Lynn Kiesling at the Knowledge Problem

About ten years ago, I remember Microsoft started to get pounded by observers for "missing out" on the Internet.  One of their responses was the development of Internet Explorer, which, thanks to a good design and the fact it was bundled with the OS, quickly beat out Netscape and other incumbents.

Recently, PC-Pundit John Dvorak has argued that Microsoft's foray into Explorer has been its biggest blunder.  I'm not usually a Dvorak fan (I find him to be too much of a technocrat, tending to favor top-down standard setting over messy bottom-up innovation) but I thought his take was pretty interesting:

I think it can now be safely said, in hindsight, that Microsoft's entry
into the browser business and its subsequent linking of the browser
into the Windows operating system looks to be the worst decision"”and
perhaps the biggest, most costly gaffe"”the company ever made. I call it
the Great Microsoft Blunder....

If the problem is not weird legal cases against the company, then
it's the incredible losses in productivity at the company from the
never-ending battle against spyware, viruses, and other security
problems. All the work that has to go into keeping the browser afloat
is time that could have been better spent on making Vista work as first
advertised.

All of Microsoft's Internet-era public-relations and legal problems
(in some way or another) stem from Internet Explorer. If you were to
put together a comprehensive profit-and-loss statement for IE, there
would be a zero in the profits column and billions in the losses
column"”billions.

Yeah, I know, the Internet was supposed to be the next platform for applications taking over from the PC.  This has always been a slow phenomena to emerge (I LIKE having my applications on my own PC and available even if Cox cable is having another hiccup) and its not at all clear you need a browser to play well anyway.  While Microsoft has screwed around with Explorer and dot-net, Google has become the gold standard of web-based applications, and they don't have a browser at all.

By the way, if you are waiting for the new version of Explorer, just get Firefox instead.  It is everything Microsoft is trying to make Explorer and it is there already.  And you don't even have to think in Russian to use it.  (OK, did anyone get my movie reference there or am I a total loser?)

Hat tip to the Mises Blog.

Want to get worked up about price collusion in the oil industry?  Don't waste your time.  No study has ever found collusion effects that raised US gasoline prices more than a few percent, and only for a very short period of time.  The reason is that in a free market, there is too much incentive for new entrants undercutting a price collusion attempt.  Railroads and airlines have probably the most severe economic incentives to collude, and they have never pulled it off for any period of time EXCEPT when the government stepped in to enforce the arrangement (e.g, airline controls pre-deregulation).

If you want to see a real cartel at work raising prices at the expense of consumers, check out this from the Mises Blog:

The raisin agricultural marketing order (AMO), with roots in the
Depression-era Agricultural Marketing Agreement Act, is rationalized as
a way to "stabilize" prices. However, it allows the Raisin
Administration Committee (RAC), controlled by producers, to determine
how much of each crop can be sold, with the rest forced into storage.
That power to jointly restrict output to raise price makes it a cartel.
A cartel with so many members would not usually succeed, and the mere
attempt would be prosecuted if antitrust laws were applied, but AMOs
are enforced by the government, through the USDA...

The RAC "stabilization" is accomplished by restricting sales, often
substantially. "Free tonnage" has been as low as 53% of the crop in
2001, and less than 80% in most years. That helps producers by harming
consumers, turning price "stabilization" into price enhancement....

The raisin cartel's effects on American consumers can also be seen
in the gap between the "free tonnage" prices and "reserve pool" prices
for raisins destined for low value markets. In 2001, those prices were
$877.50 per ton versus $250 per ton; in 1998, it was $1250 versus $357;
in 1984 and 1994, the differential approached 10 to 1.

Jason McBride was arrested for selling gasoline at too high of a price during the shortages that followed Katrina, under an Alabama anti-price-gouging law.  What was the legal price he violated?  Well, the law doesn't actually set a price maximum, it just makes you liable to be arrested if a random government bureaucrat feels like your price is too high.  Mr. McBride followed up with more information on his original story to Christopher Westley at the Mises Blog:

I recently heard from Jason McBride, who was the subject of my last Mises.org
article, "The Right to Set Your Own
Price". McBride, a gas station owner from Aliceville, Alabama, was arrested
for violating Alabama's "anti-gouging" law on the day that Hurricane Katrina
slammed into the Gulf Coast.

Jason told me that there was more to the story than what had been reported in
the newspapers. He said that the price he charged for a gallon of gas that day
was actually $3.49 (not the $3.69 that was reported) and that he purchased that
gas that very day for $3.29 a gallon. He said that this information was provided
to the district attorney during his investigation.

But there's more. Jason told me that he sold gas for only three hours at the
$3.49 price until he received a call of complaint from the D.A.'s office. His
response was to shut down his pumps until the the State of Alabama contacted him
with a "correct price." His pumps were shut down for 18 hours until the
state told him he could sell gasoline for $3.09 a gallon. This happened in the
midst of a crisis when consumer demand for gasoline increased dramatically.

Despite his bending over backwards to comply with the law, and despite zero
evidence of malicious intent, the district attorney's office still arrested him.
His picture was on the front page of a state newspaper the next day (while, he
pointed out, a report on a murder was relegated to page 6).

From the Mises Blog:

For those who maintain that the government "failed" its "mission," I must say
that they are wrong. True, the government with its ham-fisted policies of
blocking relief missions, imposing price controls, and acting in a dictatorial,
but incompetent style, seems to have "failed" in making things better,
especially in the days directly after the storm passed. But, if you understand
that government is a mechanism by which some people impose their will by force
over others, then you would have to admit that the government succeeded and
succeeded beyond its own expectations.

Thus, I leave readers with this question: If you believe that the government
"failed" in the aftermath of Katrina, will the government then have less or more
"authority" when the next disaster strikes? I think all of us know the
answer.

You can always expect government to behave exactly like government. When you
consider your political position, consider whether this institution ought to be
put in charge or disaster relief at all, or the economy, or society, foreign
policy, health care, education, courts, the environment or anything at all.
Katrina and its aftermath is only the latest exhibit in the ongoing historical
documentary in favor of a government-free society

I had similar thoughts here and here.

Katrina comes at a very bad time for US gasoline markets.  Supplies are already tight, and now a substantial amount of US oil production and refining capacity are shut in, for an unknown period of time.  Long ago, I worked as an engineer in a refinery and it can take days to get everything restarted from a cold start.  The result will almost certainly be near-term gas shortages.

There are two ways this can play out:  1)  a short term spike in prices, as much as a dollar or more a gallon or 2) long and irritating gas lines.  Lets hope that prices are allowed to reach their level and gas lines can be avoided, but who knows what political stupidities (ala Hawaii) will be proposed. 

I really, really hate gas lines.  I hate the uncertainty of whether or not I can find a station open.  I hate refilling my tank every day to make sure I am not caught short.  And for those of you who say I am arrogant since I can afford higher prices but the poor cannot, I assure you that folks who are paid by the hour are hurt much worse waiting around for hours in gas lines than the mere irritation I encounter.  More on gas line expectations as a semi-self-fulfilling prophecy here.

PS-  Expect to see news of a refinery fire or explosion over the next week.  The risk of accidents is very high when these complex plants have to start up -- they weren't really meant to be turned on and off.

Update:  First signs of a gas shortage?
Update #2:  The Mises Blog has a roundup of economics posts supporting price spikes during spot shortages (popularly known as gouging).
Update #3:  Jane Galt has more in praise of price gouging

Katrina News at Technorati

Yesterday I wrote that this Supreme Court confused me - I couldn't find a consistent thread in their federalism-related rulings.  Orin Kerr at Volokh has an explanation that makes more sense to me than any other.  He explains where each justice is coming from, and concludes:

The mathematics of federalism on today's Supreme Court, then, is that the four
Justices who do not favor judicial enforcement of federalism constraints only
need one additional vote to form a majority. Conversely, for the Court to rule
in favor of a federalism limitation, common ground must exist that ties together
the differing viewpoints of all five of the right-of-center Justices. The odds
are that the former will happen more often than the latter, which is why
victories for federalism principles have tended to be rare and on relatively
narrow (that is, symbolic)
issues

The Mises Blog informs me that this notion of "affecting" interstate commerce being sufficient to justify federal intervention originated in 1942 with Wickard v. Filburn.  Apparently the majority was accepting Wickard, though Thomas's dissent that I quoted in my earlier post sure points out how Wickard pretty much demolishes the commerce clause.

Decades ago, anti-trust regulation abandoned any pretense that its goal was protecting consumers.  The vast majority of anti-trust laws and cases today are more about protection of businesses from competition.  A good historic example is the Microsoft case, where consumers were bravely protected by the government from getting various utilities included free with their operating system.  You only had to look at the major defenders of the anti-Microsoft anti-trust suit (e.g. Sun, Oracle, etc) to know that the suit was about protecting other businesses rather than protecting consumers.

It would be difficult to find a better example of this today than for gasoline in Maryland:

A gasoline price war erupted in St. Mary's County last week after one station
slashed its price for regular to $1.999 a gallon and spurred three others to
follow suit, giving drivers some hope of relief at the pump.

But the price dip proved fleeting.

Maryland regulators quickly stepped in and told the stations that their prices
were too low. They needed to go up by 5 cents...

The sudden fluctuation in the Lexington Park area was the result of a
little-noticed Maryland law that took effect in 2001. The General Assembly
mandated that stations cannot charge less than what they pay for gas -- unless
they're lowering prices to compete with a nearby station.

The rationale for the law is ostensibly this:

Independent service station owners pressed lawmakers for the measure as a way to
protect themselves from big retailers selling gas below cost to drive them out
of business and limit competition. Maryland is one of at least 13 states to
adopt similar laws, which are not in effect in the District or Virginia.

First, its not the government's job to protect individual businesses.  Businesses should be treated like adults who knew the risks they were getting into in a business.

Second, this argument is specious anyway.  The logic is that ostensibly these dealers will be driven out of business, and then the big guys, without competition, will jack up their prices.  This is absurd.  It is important to note that it never happens this way, not for any sustained period of time in any market in the hundred years of gasoline retailing.  Gasoline retail margins are low, have been low, and will always be low.  If they ever creep up locally, someone has the incentive to undercut prices because volume is so important to profitability.  In fact, people have accused Wal-mart of this for years - ie they cut
prices and drive out the independents.  But so what, particularly if
prices never go back up?  This is even more true in gasoline retailing because gasoline station capacity never really leaves the market.  Because of the unique nature of the infrastructure, and the environmental rules vis a vis underground tanks, the best use for a gasoline station sold in bankruptcy is another gasoline station.  Even if an independent goes bankrupt, the site will likely stay a gas station, under different ownership.

Finally, in the current gasoline market, there are very good reasons not related to driving competitors out for one to sell gas under cost.  Many modern gas stations make as much or more profit on their convenience stores, car washes, and other services than they do on gas.  I know my company does in the few places where we sell gasoline.  Using gasoline as a loss leader to bring in convenience store traffic is perfectly valid.  Grocery stores have been doing this with eggs and milk for years.

This type law is a lazy protection device for a few companies that happen to have political clout in the government.  Maybe the IJ will get on the case.  Overlawyered.com has commentary and examples from other states.

Update:  One should also note that it various circumstances, the oil industry has, in addition to this case where a company was hit by the government for selling at a lower price than competitors, been accused of gauging (selling above cost and other competitors) and collusion (selling at the same price as competitors).  The Mises Blog has a nice link to R.W. Grants the Incredible Bread Machine, a poem that includes this stanza:

"These very simple guidelines,
You can rely upon:
You're gouging on your
prices if
You charge more than the rest.
But it's unfair competition if

You think you can charge less!
"A second point that we would make
To
help avoid confusion...
Don't try to charge the same amount,
That would
be Collusion!
You must compete. But not too much,
For if you do you see,

Then the market would be yours -
And that's Monopoly!

Note:  I have posted a more recent article with updated data here.

Mises Blog has a good article on the "Peak Oil" meme.  You may have gotten investment solicitations urging you to invest in oil because production is supposedly going to peak in 2006.

Oil production will peak some day.  I do not know when.  I do know that when I was in high school debate in the late 1970's, the topic one year was on resource policies.  I read everything there was at the time on oil supply as well as other critical mineral supplies.  Most "experts" at the time were predicting that oil would "run out" in about 1985 or 1990.  As you can see below, folks who invested in oil in 1980, after a price run-up similar to the one we have seen lately, got slaughtered.

Think twice or maybe three times about this graph before you invest.  Notice that there is no long term trend in real oil prices, even over one hundred years!  To make money buying oil, you have to do it on timing, buying ahead of sharp temporary increases.  And given that we are at the top of one of those sharp increases, can now really be the time to buy?

You can never get all the oil out of a field, and the exact amount of oil you can recover is dependent on how much you want to spend to do it, which in turn is related to oil prices (or expectations of oil prices).  The first 20% of the oil in a field might just squirt out under its own pressure.  The next 20% might have to be pumped.  The next 20% might need high pressure water injection to help it.  The next 20% might need expensive CO2 injection to help it.  If you ask the field manager how much oil was left, he would give you different answers at $20 and $45 a barrel, because he would make different assumptions about how far along this investment curve he would go.

If you are still thinking about investing, do one more thing: Study the famous bet between Paul Ehrlich and Julian Simon:

In 1980, economist |Julian Simon| and biologist Paul Ehrlich decided to put their money where their predictions were. Ehrlich had been predicting massive shortages in various natural resources for decades, while Simon claimed natural resources were infinite.

Simon offered Ehrlich a bet centered on the market price of metals. Ehrlich would pick a quantity of any five metals he liked worth $1,000 in 1980. If the 1990 price of the metals, after adjusting for inflation, was more than $1,000 (i.e. the metals became more scarce), Ehrlich would win. If, however, the value of the metals after inflation was less than $1,000 (i.e. the metals became less scare), Simon would win. The loser would mail the winner a check for the change in price.

Ehrlich agreed to the bet, and chose copper, chrome, nickel, tin and tungsten.

By 1990, all five metal were below their inflation-adjusted price level in 1980. Ehrlich lost the bet and sent Simon a check for $576.07. Prices of the metals chosen by Ehrlich fell so much that Simon would have won the bet even if the prices hadn't been adjusted for inflation. (1) Here's how each of the metals performed from 1980-1990.