Bitcoin faith.

Any value that bitcoins might have is not derived from its unique software.  The bitcoin software is open source.  The number of potential competing currencies that could use the bitcoin software is unlimited.  The source of bitcoins value comes from the faith of holders of bitcoins that others will accept them in the future as payment in return for other things of value – just the same as with U.S. Dollars.

Both currencies, bitcoins and Dollars, are supported only by the faith of the holders and nothing else.  Both bitcoins and Dollars have no intrinsic value.  But, one big difference between bitcoins and Dollars is that the U.S. Government will accept U.S.Dollars for payment of debts owed to the U.S. Government.  The fact that bitcoins have most of the attributes of Dollars does not mean that they are a sound store of value.  Just like bitcoins, Dollars have no intrinsic value and any value is only  supported by faith.

If a person wants to speculate, an investment in bitcoins is appropriate.  If a person want a store of value, U.S. dollars are a better choice.  But, a better choice for store of value is an investment in a diversified portfolio of common stocks.  Common stocks represent ownership in valued physical and intellectual assets – essentially a broad basket of commodities.  Common stocks themselves would not do well as a currency, but if a “mutual fund” of diversified common stocks were to issue bitcoin-type credits based on bitcoin’s software and backed “dollar for dollar” by common stocks, those bitcoin-type credits could operate as an asset backed currency,

Wind energy jobs created?

“Iowa has enjoyed tremendous economic benefits by being a leader in both wind power development and wind manufacturing.”  So wrote Mike Prior, Milford, interim executive director, Iowa Wind Energy Association, in a letter to the editor on 2/4/2012, (“Wind energy is important jobs provider”)  He went on to extol the many benefits that Iowans have enjoyed as a result of the funding that taxpayers have provided to those in the industry.  He urged that we, “… continue to invest in Iowa’s future.”

Good economic analysis must consider both what is seen and what is not seen.  We see the jobs.  We see the payments to farmers.  What we don’t see are the other jobs that would have been created if people had been left to spend or invest their own money.  Other jobs would have been created that would not be dependent on government handouts.  Instead, we hear a never-ending story about how we must continue to provide taxpayer support or the investment and jobs will be lost.  This is very typical when government creates new “incentives” and makes “investments” in what should be left to the private sector.

Welfare for wind energy producers is like all other special interest giveaways: the benefits are large and concentrated among the few who who are politically connected, and and costs are relatively small and disbursed among many taxpayers. This is a classic case in public choice theory.  Those who directly benefit have a great incentive to lobby government to continue the subsidies, and those who pay the taxes don’t have a strong incentive to oppose any specific program.

We need legislators who will stand against political favors for special interest factions who press their political power for their own self interest.

Link to Register article:  http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=2014302040081

Bitcoin bubble?

The current Bitcoin phenomenon proves there is always a greater fool in speculative bubbles – until the bubble bursts.  The run up in price can only be due to speculation.  Bitcoins have no intrinsic value – whatever market value there might be is based only on what others are willing to give in return for the Bitcoins.  (Just like the U.S. Dollar – Bitcoins are not backed by gold or any other commodity.  Unlike the U.S. Dollar – government does not force others to accept your Bitcoins.)   If you want to gamble, start accumulating Bitcoins.  If you want to make money using Bitcoins, try arbitrage – quickly buy low in one market and sell high in another market.  Just don’t get caught holding Bitcoins when the bubble bursts.

Income inequality is not the problem.

Income inequality is not a problem in and of itself.  As long a people earn their income through honest, peaceful and voluntary exchange, then there is no moral reason for our government to redistribute that wealth.  What is a problem is when government places its thumb on the scale and unfairly helps the rich to get richer, or hurts the poor and makes them poorer.  To the extent that a person gains wealth by unequal preferential treatment by government, it is morally correct for government to use its force to take away that wealth.

One good example of the many unfair government policies that wrongly favor the rich is the special low income tax rate on “carried interest” income earned by hedge fund managers.  They call it carried interest, but it is nothing more than a bonus based on performance.   In any other situation, this type of income is taxed at regular income tax rates. Somehow, hedge fund managers have sold politicians on the idea that carried interest is a special kind of income that should be taxed at lower rates.  Another example is the Oil Depletion Allowance for oil companies.  Another is farm subsidies for rich farmers.  We do not need to raise tax rates on ordinary income, we do need to do away with the unfair preferences, tax breaks, and subsidies that go mostly to the wealthy.

A good example of government policy that hurts poor people is that of keeping interest rates low in order to prop up housing prices.  If housing prices had been allowed to fall to their free market levels, housing would be much more affordable for poor people.  Instead, our government tries to fix the problem that it helped to create (unaffordable housing) by giving rent subsidies to the poor – creating more dependency on government, but not fixing the underlying causes of the problem.

To misquote Walter Scott, “Oh what a tangled web we weave when first we practice to use our government to achieve social goals.”  The solution to many of our economic problems today is to reduce the size and scope of our government.  Many unfair crony capitalist subsidies and tax breaks exist because our government has expanded far beyond its Constitutionally limited powers.  The primary just powers of government are to protect our lives, liberty and property; and to resolve disputes.  The scope and powers of our current federal government are clearly way beyond the limited government that our founding fathers created.  Lets start by closing unfair tax breaks and lowering spending to match.

Reduce monopoly protection.

Patents are not natural property rights.  They are government created and enforced monopoly rights.  It is debatable whether patents encourage or hinder innovation and inventiveness. Even if patents promote inventiveness, there is no specific optimal number of years of protection.  In many instances, there is a good case to be made that no patent right,s or very limited patent rights, might spur more invention.  The case of pharmaceuticals and medical devices is more complicated because of government regulations that require much greater spending before a product is allowed on the market.  Even in those cases, we should err on the side of more limited monopoly rights and less use of government force and protection.  Humankind has made tremendous progress by being free to copy the ideas of one another.  What if fire, or the wheel, had been allowed to be patented?  Would that have spurred invention?  Our elected representatives should support shorter periods of time for monopoly patent protection.
Links to Register guest opinions:

Ethanol credit speculation – for dummies

Speculators are being blamed for increases in ethanol RIN credits!  Renewable Identification Number (RIN) credits are issued to manufacturers for every gallon of ethanol that they blend into gasoline.  All manufacturers are required to meet targets for blending ethanol into their gasoline – in order to meet national Renewable Fuels Standards.  If they fail to meet their targets, they have to pay substantial penalties.  Some manufacturers exceed their targets so they have excess credits that they are allowed to sell.  Others fail to meet their targets and either have to purchase credits from other manufacturers or pay the penalties.  If, for the entire market, it appears there will be a shortage then the price of the credits will go up.  If it were possible for a few speculators to “corner the market”, then they might be able to hold out for higher prices.  But, the there were truly a shortage, then manufacturers who have excess credits could just as easily do the same.  In either case, this puts pressure on manufacturers to blend more ethanol.  If there is a shortage of ethanol, then the price of ethanol should rise.  If the price of ethanol rises than ethanol producers will try to increase their production to capture more profit.  In any case, the credits are doing what they are supposed to do: reward manufacturers who blend excess gallons and penalize those who blend less than their target.  If the entire market is below the target, then there will be incentives to produce more ethanol.  Speculators help the market to work as it was intended.  The real problem here is the entire Renewable Fuel Standards that uses force, in the form of money penalties, to make everyone use more ethanol than they would in a voluntary market.  This is a classic case of unintended consequences that occurs when people discover, as Friedrich Hayek wrote, “…how little they know about what they imagine they can design.”

Don’t fear end of Freddie and Fannie.

President Obama and both houses of Congress are calling for an end to Fannie Mae and Freddie Mac, the two government owned entities that guarantee most of the home mortgages in the U.S.  Real estate agents, home builders, mortgage brokers, wall street bankers, and others who have a vested interest in keeping our government in the mortgage guarantee business are scared to death.  They have all become so addicted to government guarantees that they can’t imagine a world without them.

When Fannie and Freddie are closed down, and private lenders are left to decide what risks they will or will not take, It is likely that 30 year fixed interest rate mortgages will become more difficult to obtain.  It is also likely that when lenders risk their own money, they will want things like significant down payments, accurate appraisals, and borrowers who have a proven ability to make the monthly payments. ( Back in the olden days, before government guarantees, mortgage bankers used to do something called “underwriting” before deciding whether or not to make a loan – you can look it up on Wikipedia.)

Still, there are businesses such as life insurance companies, annuity companies, pension plans and others that need to invest large sums for long periods of time in secure investments like home mortgages.  So, there is no reason to believe that mortgages will not be available in a private market.

It may be that mortgages in the future will have fixed interest rates for only 10 to 15 years, and will need to be refinanced at the end of that time.  But, the monthly payments can still be based on a 30 year payoff schedule.  This has been the situation in parts of Europe for many decades.  There is a risk to the home owner that interest rates will be significantly higher at the time of refinance, but the principal balance will be paid down significantly, so the risk of having to make significantly higher monthly payments fairly low, and the ability to get a refinance should be fairly easy.

So, don’t believe those who have a vested interest government guaranteed mortgages when they tell you that housing markets will fall apart if Fannie and Freddie cease to exist.  Fannie and Freddie still allow all of the players in the home mortgage marketplace to shift much, if not all, of their risk to taxpayers.   If Fannie and Freddie had never existed, it is likely that we never would have had the housing crisis and the great recession that followed.  When people are required to pay for their own mistakes, people make fewer mistakes.  We need to get our government out of the mortgage guarantee business.

Farm Bill changes needed.

The Farm Bill should not pass until the following changes are made:

Separate the food stamp program (the SNAP program) from the rest of the farm bill.  The huge size of the food stamp program dwarfs the farm subsidies and, in effect, hides them.  Farm subsidies need to be exposed to a more open process.  It would also help make the food stamp program more transparent.

Stop subsidizing crop insurance.  Make farmers pay 100% of the cost.  If that raises the price of food, so be it.  If it reduces farmers’ incomes, so be it.  Subsidizing crop insurance is not a proper role for our government.  Today’s federally subsidized crop insurance not only covers losses due to unforeseen disasters, it also covers drops in revenues!   If farmers had to pay the full price for their coverage, they might prefer higher deductibles and lower levels of coverage.  But to add insult to injury,many farmer who receive subsidies are also very wealthy.  There is no good reason why wealthy farmers should be subsidized, even for crop insurance.  If our goal is to help poor farmers, then surely the subsidy should be phased out as a farmer’s wealth and income increase.

Establish a maximum amount of subsidy that can be received by any individual or commonly owned group of farms under all farm subsidy programs combined.  Again, we shouldn’t be subsidizing big farmers or farm organizations.

Don’t place tariffs on imports unless the country of origin first places tariffs on our exports to that country.  Free trade is beneficial to all.  It is voluntary!  It requires no intervention by government other than to resolve disputes.  Free people should not be forced exchange or be prevented from voluntarily exchanging with another party.  Amazingly, under the current Farm Bill, we pay Brazilian cotton farmers almost $150 million per year as compensation for the damage done to them by the subsidies we provide to our U.S. cotton farmers!  Is that not insane trade policy?

Separate the “rural development” programs from farm subsidies.  Again, the tens to hundreds of millions of dollars spent in this area are hidden within the much larger primary subsidy programs.  It is questionable whether or not rural economic development is even a proper  role of government.  In any event, consideration of spending for rural economic development should not be mixed with farm subsidies.

Tie environmental practices to any subsidies granted.  We shouldn’t expect perfectly clean water in our lakes and rivers.  Wild animals have defecated in them forever.  But, it reasonable to expect farmers to not fowl the water down stream from them, and to pay for damages when they can be reasonably determined.  The idea of requiring minimum buffer strips between farms and rivers and lakes is reasonable.

Stop crop insurance boondoggle!

Thanks to the Des Moines Register for the article, “Crop insurance payment soar” on 3/14/2013.  It is not right that we taxpayers are required to subsidize crop insurance premiums for farmers.   I can accept our government administering a crop insurance insurance program if there is no viable private market.  But I cannot understand why taxpayers should subsidize the crop insurance program.  Farmers make higher than average incomes.     Many farmers and farm owners are very wealthy.  Both large corporate farms and wealthy absentee owner investors get Insurance premium subsidies.  Fees and commissions paid to crop insurance companies and sales representatives appear to be very generous.   We need to stop the farm welfare.  Charging the full cost of the insurance to farmers will cause farmers to help keep cost down and prevent abuse.

 

Walmart jobs are beneficial.

Contrary to the letter to the editor in the Des Moines Register by Doris Render on 11/23/2012, “Taxpayers subsidizing low-wage businesses”, all private businesses, including those that pay low wages, add wealth to our community.  People take jobs at Walmart because their next best option is a job that pays less, or possibly no job at all.  There is no reason to believe that if our government stopped providing welfare benefits to poor people, that employers would start paying higher wages and benefits.   Government welfare helps poor people, it does not subsidize business.
If businesses like Walmart were forced by government to pay higher wages and benefits, then prices will go up correspondingly.  Those higher prices will hurt low income families the most.  Sure, those who keep their jobs will benefit from a higher minimum wage.  But those who are most vulnerable, those with the least skills, will lose their jobs as automation and foreign competition become more economical because of the higher wages.
History has proven that government attempts to control wages and prices are doomed to failure.  Even today, our slow economic recovery is due in no small part to our government’s attempts to prop up housing prices and force all employers to pay for health insurance.  Good intentions are no excuse for bad policy. The unintended consequences of government actions must always be considered when government uses force, (i.e. laws and regulations), to manage our economy.
Link to Register article: http://www.desmoinesregister.com/article/20121123/OPINION04/311230033/Letter-to-the-editor-Taxpayers-are-subsidizing-low-wage-businesses?Opinion&nclick_check=1