Carnegie, Rockefeller, Ford, Westinghouse, Boeing, Gates and Tariffs

Posted by PITHOCRATES - September 10th, 2013

History 101

Ford brought the Price of Cars down and Paid his Workers more without Tariff Protection

Andrew Carnegie grew a steel empire in the late 19th century.  With technological innovation.  He made the steel industry better.  Making steel better.  Less costly.  And more plentiful.  Carnegie’s steel built America’s skylines.  Allowing our buildings to reach the sky.  And Carnegie brought the price of steel down without tariff protection.

John D. Rockefeller saved the whales.  By making kerosene cheap and plentiful.  Replacing whale oil pretty much forever.  Then found a use for another refined petroleum product.  Something they once threw away.  Gasoline.  Which turned out to be a great automotive fuel.  It’s so great that we use it still today.  Rockefeller made gasoline so cheap and plentiful that he put the competition out of business.  He was making gasoline so cheap that his competition went to the government to break up Standard Oil.  So his competition didn’t have to sell at his low prices.  And Rockefeller made gasoline so inexpensive and so plentiful without tariff protection.

Henry Ford built cars on the first moving assembly line.  Greatly bringing the cost of the car down.  Auto factories have fixed costs that they recover in the price of the car.  The more cars a factory can make in a day allows them to distribute those fixed costs over more cars.  Bringing the cost of the car down.  Allowing Henry Ford to do the unprecedented and pay his workers $5 a day.  Allowing his workers to buy the cars they assembled.  And Ford brought the price of cars down and paid his workers more without tariff protection.

George Westinghouse decreased the Cost of Electric Power without Tariff Protection

George Westinghouse gave us AC power.  Thanks to his brilliant engineer.  Nikola Tesla.  Who battled his former employer, Thomas Edison, in the Current Wars.  Edison wanted to wire the country with his DC power.  Putting his DC generators throughout American cities.  While Westinghouse and Tesla wanted to build fewer plants and send their AC power over greater distances.  Greatly decreasing the cost of electric power.  Westinghouse won the Current Wars.  And Westinghouse did that without tariff protection.

After losing out on a military contract for a large military transport jet Boeing regrouped and took their failed design and converted it into a jet airliner.  The Boeing 747.  Which dominated long-haul routes.  Having the range to go almost anywhere without refueling.  And being able to pack so many people into a single airplane that the cost per person to fly was affordable to almost anyone that wanted to fly.  And Boeing did this without tariff protection.

Bill Gates became a billionaire thanks to his software.  Beginning with DOS.  Then Windows.  He dominated the PC operating system market.  And saw the potential of the Internet.  Bundling his browser program, Internet Explorer, with his operating system.  Giving it away for free.  Consumers loved it.  But his competition didn’t.  As they saw a fall in sales for their Internet browser programs.  With some of their past customers preferring to use the free Internet Explorer instead of buying another program.  Making IE the most popular Internet browser on the market.  And Gates did this without tariff protection.

Tariff Protection cost American Industries Years of Innovation and Cost Cutting Efficiencies

Carnegie Steel became U.S. Steel.  Which grew to be the nation’s largest steel company.  Carnegie had opposed unions to keep the cost of his steel down.  U.S. Steel had a contentious relationship with labor.  During the Great Depression U.S. Steel unionized.  But there was little love between labor and management.  There were a lot of strikes.  And a lot of costly union contracts.  Which raised the price of U.S. manufactured steel.  Opening the door for less costly foreign imports.  Which poured into the country.  Taking a lot of business away from domestic steel makers.  Making it more difficult to honor those costly union contracts.  Which led the U.S. steel producers to ask the government for tariff protection.  To raise the price of the imported steel so steel consumers would not have a less costly alternative.

During World War II FDR was printing so much money to pay for both the New Deal and the war the FDR administration was worried about inflation.  So they put ceilings on what employers could pay their employees.  With jobs paying the same it was difficult to attract the best employees.  Because you couldn’t offer more pay.  So General Motors started offering benefits.  Health care.  And pensions.  Agreeing to very generous union contracts.  Raising the price of cars.  Which wasn’t a problem until the imports hit our shores.  Then those union contracts became difficult to honor.  Which led the U.S. auto makers to ask the government for tariff protection.  To raise the price of those imported cars so Americans would not have a less costly alternative.

These two industries received their tariffs.  And other government protections.  Allowing them to continue with business as usual.  Even though business as usual no longer worked.  So while the foreign steel producers and auto makers advanced their industries to further increase quality and lower their costs the protected U.S. companies did not.  Because they didn’t have to.  For thanks to the government they didn’t have to please their customers.  As the government simply forced people to be their customers.  For awhile, at least.  The foreign products became better and better such that the tariff protection couldn’t make the higher quality imports costly enough to keep them less attractive than the inferior American goods.  With a lot of people even paying more for the better quality imports.  Losing years of innovation and cost cutting efficiencies due to their tariff protection these American industries that once dominated the world became shells of their former selves.  With General Motors and Chrysler having to ask the government for a bailout because of the health care and pension costs bankrupting them.  Something Carnegie, Rockefeller, Ford, Westinghouse, Boeing or Gates never had to ask.

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Load-Bearing Walls, Steel Skeleton, Skyscrapers and Otis Safety Elevator

Posted by PITHOCRATES - May 22nd, 2013

Technology 101

Because there is no Elevator in a Brownstone the Lower Floors are more Valuable

If you live in Manhattan on the Upper West Side you may have a view of the Hudson River.  Depending on how high you live.  For the higher you are the better your view.  Which is why the best apartments are on the top floors of our high rises.  Interestingly, though, if you live in a 5-story brownstone the prime real estate in those buildings are on the lower floors.  Why?  Because they don’t have an elevator.

Early buildings had a limit on height.  Because they had load-bearing walls.  And as the buildings grew taller the walls grew thicker.  To support the weight of the buildings above them.  Consider the pyramid.  Large, tall structures made of stone.  Part of the reason why they were pyramid shape was the weight of these heavy stones.  Supporting these heavy stones above the ground required a wide stone base below them.  So as a building got taller the walls got thicker on the lower floors.  So thick that they had less useable space than the upper floors.

It’s also more difficult to put windows in load-bearing walls.  As an opening reduces the strength of those walls.  In your typical 5-story walkup brownstone you’ll have small window openings facing the street.  Making it hard to flood these spaces with natural light.  So buildings with load-bearing walls have a few drawbacks.  Thick walls shrink living space.  And reduce the amount of natural lighting.  Not to mention having to hoof it up all of those steps.  Which is why the lower floors are more valuable in a brownstone.  For no one wants to walk up and down 5 flights of stairs every time you leave the apartment.

With a Steel Skeleton replacing Thick Load-Bearing Walls we can Enclose a Building with Glass Curtain Walls

In the 19th century new building technologies addressed these problems.  Thanks to Henry Bessemer and his Bessemer process.  The first cost-effective way to produce large amounts of steel.  Steel is stronger than iron.  But early steel was brittle.  Because of a high carbon content.  So we used iron.  For our train rails.  And our boilers.  But we could not harden iron as much as steel.  Because of a lack of carbon in iron.  Which is why iron boilers had a tendency to explode.  And iron rails failed.

Henry Bessemer changed that.  By blowing oxygen through the molten steel.  Which removed impurities.  And excess carbon.  Andrew Carnegie used the Bessemer process on a grand scale.  Producing the steel that built America.  Mass producing the structural steel that changed the way we built buildings.  Bringing the word ‘skyscraper’ into the lexicon of building.  As Carnegie’s steel sent our buildings soaring to the sky.

Instead of building thick load-bearing walls we built a rigid steel skeleton.  We anchored it to the earth with some steel-reinforced concrete piers deep underground.  And steel piles driven down to bedrock.  Giving us a tall, sturdy structure to build around.  The structure being so strong we can support up to a hundred (or more) concrete floors from it.  With useable space on every floor.  And without thick load-bearing walls we can hang glass curtain walls from this steel skeleton.  Wrapping the exterior of the building in glass.  Flooding these floors with natural light.

Before Elisha Otis and Andrew Carnegie the Top Floor of any Building was the Hardest to Let

So the steel skeleton allowed us to build buildings taller than ever.  But it took something else to allow those buildings to reach skyward.  For people were just not going to walk up and down a hundred flights of stairs every time they left their home or office.  They may walk up and down 5 flights of stairs in exchange for a cheaper rent in a brownstone on the Upper West Side.  But no one is going to walk up and down a hundred flights.  Even if they don’t have to pay rent.  So it was the elevator that really allowed today’s skyscraper.  Tiny little cars suspended by a few cables in a very long vertical shaft.

Elevator safety evolved over time.  At first it was not that uncommon for people to fall to their death in an elevator car that broke free from its cables.  Elisha Otis solved that problem.  He attached the elevator cable to a flat-leaf spring attached to the car.  The tension on the cable from the weight of the elevator car compressed the flat-leaf spring.  Drawing in mechanical linkages.  If the cable broke the energy in the compressed spring released and pushed down on the mechanical linkages.  Which forced arms outward and into saw-tooth safety rails that ran the length of the elevator shaft.  Bringing the elevator car to an immediate stop if the cable broke.

This revolutionized elevators.  And allowed our buildings to reach skyward.  As people no longer feared getting into an elevator.  Thanks to Elisha Otis.  Who went on to found the Otis Elevator Company.  If you see the word ‘Otis’ in the elevator car you’re in you can thank Elisha Otis.  For you’re in one of his elevators.  And you can thank Andrew Carnegie.  For giving us tall buildings.  And whose company may have even built the steel of the building you’re in.  Before Otis and Carnegie the top floor of any building was the hardest to let.  Because no one wanted to climb up all of those stairs.  But with tall steel and a safe elevator the top floor in a building now commands the highest rent.  Because of the view.  And the ease at which we could enjoy that view.

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Iron, Steel, the Steam Engine, Railroads, the Bessemer Process, Andrew Carnegie and the Lucy Furnace

Posted by PITHOCRATES - November 21st, 2012

(Originally published December 14, 2011)

With the Steam Engine we could Build Factories Anywhere and Connect them by Railroads

Iron has been around for a long time.  The Romans used it.  And so did the British centuries later.  They kicked off the Industrial Revolution with iron.  And ended it with steel.  Which was nothing to sneeze at.  For the transition from iron to steel changed the world.  And the United States.  For it was steel that made the United States the dominant economy in the world.

The Romans mined coal in England and Wales.  Used it as a fuel for ovens to dry grain.  And for smelting iron ore.  After the Western Roman Empire collapsed, so did the need for coal.  But it came back.  And the demand was greater than ever.  Finding coal, though, required deeper holes.  Below the water table.  And holes below the water table tended to fill up with water.  To get to the coal, then, you had to pump out the water.  They tried different methods.  But the one that really did the trick was James Watt’s steam engine attached to a pump.

The steam engine was a game changer.  For the first time man could make energy anywhere he wanted.  He didn’t have to find running water to turn a waterwheel.  Depend on the winds.  Or animal power.  With the steam engine he could build a factory anywhere.  And connect these factories together with iron tracks.  On which a steam-powered locomotive could travel.  Ironically, the steam engine burned the very thing James Watt designed it to help mine.  Coal.

Andrew Carnegie made Steel so Inexpensive and Plentiful that he Built America

Iron was strong.  But steel was stronger.  And was the metal of choice.  Unfortunately it was more difficult to make.  So there wasn’t a lot of it around.  Making it expensive.  Unlike iron.  Which was easier to make.  You heated up (smelted) iron ore to burn off the stuff that wasn’t iron from the ore.  Giving you pig iron.  Named for the resulting shape at the end of the smelting process.  When the molten iron was poured into a mold.  There was a line down the center where the molten metal flowed.  And then branched off to fill up ingots.  When it cooled it looked like piglets suckling their mother.  Hence pig iron.

Pig iron had a high carbon content which made it brittle and unusable.  Further processing reduced the carbon content and produced wrought iron.  Which was usable.  And the dominate metal we used until steel.  But to get to steel we needed a better way of removing the residual carbon from the iron ore smelting process.  Something Henry Bessemer discovered.  Which we know as the Bessemer process.  Bessemer mass-produced steel in England by removing the impurities from pig iron by oxidizing them.  And he did this by blowing air through the molten iron.

Andrew Carnegie became a telegraph operator at Pennsylvania Railroad Company.  He excelled, moved up through the company and learned the railroad business.  He used his connections to invest in railroad related industries.  Iron.  Bridges.  And Rails.  He became rich.  He formed a bridge company.  And an ironworks.  Traveling in Europe he saw the Bessemer process.  Impressed, he took that technology and created the Lucy furnace.  Named after his wife.  And changed the world.  His passion to constantly reduce costs led him to vertical integration.  Owning and controlling the supply of raw materials that fed his industries.  He made steel so inexpensive and plentiful that he built America.  Railroads, bridges and skyscrapers exploded across America.  Cities and industries connected by steel tracks.  On which steam locomotives traveled.  Fueled by coal.  And transporting coal.  As well as other raw materials.  Including the finished goods they made.  Making America the new industrial and economic superpower in the world.

Knowing the Market Price of Steel Carnegie reduced his Costs of Production to sell his Steel below that Price

Andrew Carnegie became a rich man because of capitalism.  He lived during great times.  When entrepreneurs could create and produce with minimal government interference.  Which is why the United States became the dominant industrial and economic superpower.

The market set the price of steel.  Not a government bureaucrat.  This is key in capitalism.  Carnegie didn’t count labor inputs to determine the price of his steel.  No.  Instead, knowing the market price of steel he did everything in his powers to reduce his costs of production so he could sell his steel below that price.  Giving steel users less expensive steel.  Which was good for steel users.  As well as everyone else.  But he did this while still making great profits.  Everyone was a winner.  Except those who sold steel at higher prices who could no longer compete.

Carnegie spent part of his life accumulating great wealth.  And he spent the latter part of his life giving that wealth away.  He was one of the great philanthropists of all time.  Thanks to capitalism.  The entrepreneurial spirit.  And the American dream.  Which is individual liberty.  That freedom to create and produce.  Like Carnegie did.  Just as entrepreneurs everywhere have been during since we allowed them to profit from risk taking.

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FT121: “As liberals gain knowledge and experience they become conservatives.” -Old Pithy

Posted by PITHOCRATES - June 8th, 2012

Fundamental Truth

Carnegie and Rockefeller were able to make the World Better because of Capitalism and Free Markets

Liberals campaign hard to get the youth vote.  Before the young grow up and become responsible adults.  Lose their youthful idealism.  And their ignorance of rudimentary economics.  Kids graduating from high school don’t know much about economics.  They don’t know that JFK was a tax cutter just like Ronal Reagan.  And that those tax cuts stimulated real economic growth.  They don’t know any of this.  But they know who Al Gore is.  And will read you the riot act whenever you do anything that will increase your carbon footprint on this planet. 

Those who go on to college build on their liberal high school education.  Where they don’t learn about how Andrew Carnegie and John D. Rockefeller created the modern nation we know today.  Carnegie made steel plentiful and inexpensive.  Allowing us to build the skyscrapers in our cities.  Rockefeller made kerosene so plentiful and inexpensive that he put the whale oil industry out of business.  Saving the whales.  And gave us plentiful and inexpensive gasoline for our automobiles.  Providing fuel for our trains and planes.  Giving us the freedom to travel anywhere.  Visiting big cities like New York.  Where many of the great skyscrapers built with Carnegie steel are still standing today.

Carnegie and Rockefeller are just two entrepreneurs who changed the world.  And greatly increased our standard of living.  Who were free to make the world a better place because of capitalism and free markets.  Instead of working for a paycheck like most people do they took risks and created things.  Better steel.  And better fuel.  As well as jobs.  Lots and lots of jobs.  So people could work for a paycheck.  Why did they take these great risks?  Because the possibility of getting rich is a great incentive.  Which is why aspiring actors go to Los Angeles and starve.  Hoping to get a break.  Get discovered.  So they can become rich.   Which is why people buy lotto tickets.  To become rich.  For it appears everyone wants to get rich.  But there is a difference when people like Carnegie and Rockefeller get rich.  Everyone lives a better life when they do.  Not just the movie star or the lotto winner.

Students live College Life to the Fullest and Pursue Degrees that won’t take up too much of their Time

So what do they learn in college?  That capitalism isn’t fair.  Corporations are evil.  But communism and socialism are good.  Government intervention into the free markets is good.  And, of course, those who do learn economics only learn Keynesian economics.  The school of economics that favors government interventionism into private markets.  And that great industrialists like Carnegie and Rockefeller were greedy and exploited their workers.  While communism and socialism protected their workers.  Which is another failing of our educational system.  Students don’t learn what an abject failure communism was.  Both as an economic system.  And on human rights.  They don’t learn that.  Or that a lot of rich industrialists like Carnegie and Rockefeller spent the last years of their lives giving away the wealth they amassed.  Like some of America’s rich continue to do today.  As exemplified by Bill Gates.

No.  Their education is a poor one.  Which explains why the Indians and Chinese are passing American students by.  The goal of American public education is not to produce high test scores.  But to indoctrinate students into being good Democrat voters.  So those in the public sector unions can continue to earn more in pay and benefits than their counterparts in the private sector.  Another fact they don’t teach these young students.  They keep these students young and dumb as long as possible.  And the government helps.  By focusing on the things important to these students.  Lenient drug laws.  Birth control.  And abortion.  To make sure their first time living away from their parents is a good time.  A fun time.  And to make sure that they understand that Democrat political candidates aren’t like their parents.  Those buzz kills.  Whose favorite word in their vocabulary is ‘no’.  Not the Democrats.  They like the word ‘yes’.  As in “yes we can.”  And yes you can.  Do whatever young people with raging sex drives like to do.  And they do. 

They live college life to the fullest.  Many pursuing degrees that won’t take up too much of their time.  Taking less science and math like the Indians and the Chinese.  Because those are hard and require a lot of homework.  Instead they pursue degrees in women’s studies.  Minority studies.  Family studies.  American studies.  Communications.  Film.  Psychology.  Philosophy.  Things that are fun and have no math.  Allowing a lot of fun when outside of the classroom.  But are absolutely worthless in the high-tech economy.  The only employment opportunities for these degrees is to become a professor and teach other students these worthless degrees.

It turns out Liberalism is a Lie used to maintain a Privileged Class

So when these college graduates can’t get a job that’ll make them rich overnight they get angry.  And struggle to pay down the mountain of debt that paid for those worthless degrees.  Of course it’s not their fault.  Or the universities who sold them those worthless degrees.  It’s Wall Street’s fault.  Those evil rich people who don’t pay their fair share in taxes.  That somehow if they only paid more in taxes they could find gainful employment.

And when the young start working for a living they discover taxes.  From property taxes to payroll taxes to income taxes.  Which are a lot of taxes.  And when they start raising a family they start paying attention to what’s on television.  Which was fine when they were partying in their youth.  But somehow isn’t right now that they are parents.  They start thinking about the things they did in their youth.  And how to hide it from their kids.

And when there are ballot initiates to raise taxes to pay for budget deficits at the city and state level they pay attention to what caused these deficits.  And they don’t like what they learn.  Public sector pensions and health care benefits that are far greater than theirs.  Worse, they are not only paying for theirs (through a payroll deduction and/or lower pay) they’re paying for these generous public sector benefits via ever increasing taxes.  And they will be paying these taxes for a long time as few will be able to retire until they’re well into their sixties.  Working some 40-50 years.  While public sector retirees can enjoy their more generous benefits after only working some 20-30 years.

Which is why as liberals gain knowledge and experience they become conservatives.  Because young and dumb was fun in their youth.  But everyone has to grow up.  And learn that their parents were right.  Which is why a lot of people grow up to become conservative like their parents.  But few conservatives become liberals.  Because as it turns out liberalism is a lie.  It is just a means to maintain a privileged class.  Where life is great within the privileged class.  Where you can retire after 20-30 years and receive generous pensions and health care benefits.  But it sucks for those outside that privileged class who have to pay for it.  Which is why public education is not about test scores.  But producing good Democrat voters.  To maintain that privileged class.  Because education is in that privileged class.

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Carnegie, Rockefeller, Morgan, Interstate Commerce Act, Sherman Antitrust Act, Sherman Silver Purchase Act, Federal Reserve, Nixon and Reagan

Posted by PITHOCRATES - January 31st, 2012

History 101

Government Induced Inflation caused the Panic of 1893 and caused the Worst Depression until the Great Depression

Britain kicked off the Industrial Revolution.  Then handed off the baton to the United States in the latter half of the 19th century.  As American industry roared.  Great industrialists modernize America.  And the world.  Andrew Carnegie made steel inexpensive and plentiful.  He built railroad track and bridges.  And the steel-skeleton buildings of U.S. cities.  Including the skyscrapers.  John D. Rockefeller saved the whales.  By producing less expensive kerosene to burn in lamps instead of the more expensive whale oil.  He refined oil and brought it to market cheaper and more efficiently than anyone else.  Fueling industrial activity and expansion.  J.P. Morgan developed and financed railroads.  Made them more efficient.  Profitable.  And moved goods and people more efficiently than ever before.  Raising the standard of living to heights never seen before. 

The industrial economy was surging along.  And all of this without a central bank.  Credit was available.  So much so that it unleashed unprecedented economic growth.  That would have kept on going had government not stopped it.  With the Interstate Commerce Act in 1887 and the Sherman Antitrust Act of 1890.  Used by competitors who could not compete against the economy of scales of Carnegie, Rockefeller and Morgan and sell at their low prices.  So they used their friends in government to raise prices so they didn’t have to be as competitive and efficient as Carnegie, Rockefeller and Morgan.  This legislation restrained the great industrialists.  Which began the era of complying with great regulatory compliance costs.  And expending great effort to get around those great regulatory compliance costs.

Also during the late 19th century there was a silver boom.  This dumped so much silver on the market that miners soon were spending more in mining it than they were selling it for.  Also, farmers were using the latest in technology to mechanize their farms.  They put more land under cultivation and increased farm yields.  So much so that prices fell.  They fell so far that farmers were struggling to pay their debts.  So the silver miners used their friends in government to solve the problems of both miners and farmers.  The government passed the Sherman Silver Purchase Act which increased the amount of silver the government purchased.  Issuing new treasury notes.  Redeemable in both gold and silver.  The idea was to create inflation to raise prices and help those farmers.  By allowing them to repay old debt easier with a depreciated currency.  And how did that work?  Investors took those new bank notes and exchanged them for gold.  And caused a run on U.S. gold reserves that nearly destroyed the banking system.  Plunging the nation in crisis.  The Panic of 1893.  The worst depression until the Great Depression.

Richard Nixon Decoupled the Dollar from Gold and the Keynesians Cheered 

J.P. Morgan stepped in and loaned the government gold to stabilize the banking system.  He would do it again in the Panic of 1907.  The great industrialists created unprecedented economic activity during the latter half of the 19th century.  Only to see poor government policies bring on the worst depression until the Great Depression.  A crisis one of the great industrialists, J.P. Morgan, rescued the country from.  But great capitalists like Morgan wouldn’t always be there to save the country.  Especially the way new legislation was attacking them.  So the U.S. created a central bank.  The Federal Reserve System.  Which was in place and ready to respond to the banking crisis following the stock market crash of 1929.  And did such a horrible job that they gave us the worst depression since the Panic of 1893.  The Great Depression.  Where we saw the greatest bank failures in U.S. history.  Failures the Federal Reserve was specifically set up to prevent.

The 1930s was a lost decade thanks to even more bad government policy.  FDR’s New Deal programs did nothing to end the Great Depression.  Only capitalism did.  And a new bunch of great industrialists.  Who were allowed to tool up and make their factories hum again.  Without having to deal with costly regulatory compliance.  Thanks to Adolf Hitler.  And the war he started.  World War II.  The urgency of the times repealed governmental nonsense.  And the industrialists responded.  Building the planes, tanks and trucks that defeated Hitler.  The Arsenal of Democracy.  And following the war with the world’s industrial centers devastated by war, these industrialists rebuilt the devastated countries.  The fifties boomed thanks to a booming export economy.  But it wouldn’t last.  Eventually those war-torn countries rebuilt themselves.  And LBJ would become president.

The Sixties saw a surge in government spending.  The U.S. space program was trying to put a man on the moon.  The Vietnam War escalated.  And LBJ introduced us to massive new government spending.  The Great Society.  The war to end poverty.  And racial injustice.  It failed.  At least, based on ever more federal spending and legislation to end poverty and racial injustice.  But that government spending was good.  At least the Keynesians thought so.  Richard Nixon, too.  Because he was inflating the currency to keep that spending going.  But the U.S. dollar was pegged to gold.  And this devaluation of the dollar was causing another run on U.S. gold reserves.  But Nixon responded like a true Keynesian.  And broke free from the shackles of gold.  By decoupling the dollar from gold.  And the Keynesians cheered.  Because the government could now use the full power of monetary policy to make recessions and unemployment a thing of the past.

Activist, Interventionist Government have brought Great Economic Booms to Collapse 

The Seventies was a decade of pure Keynesian economics.  It was also the decade that gave us double digit interest rates.  And double digit inflation rates.  It was the decade that gave us the misery index (the inflation rate plus the unemployment rate).  And stagflation.  The combination of a high inflation rate you normally only saw in boom times coupled with a high unemployment rate you only saw during recessionary times.  Something that just doesn’t happen.  But it did.  Thanks to Keynesian economics.  And bad monetary policy.

Ronald Reagan was no Keynesian.  He was an Austrian school supply-sider.  He and his treasury secretary, Paul Volcker, attacked inflation.  The hard way.  The only way.  Through a painful recession.  They stopped depreciating the dollar.  And after killing the inflation monster they lowered interest rates.  Cut tax rates.  And made the business climate business-friendly.  Capitalists took notice.  New entrepreneurs rose.  Innovated.  Created new technologies.  The Eighties was the decade of Silicon Valley.  And the electronics boom.  Powering new computers.  Electronic devices.  And software.  Businesses computerized and became more efficient.  Machine tools became computer-controlled.  The economy went high-tech.  Efficient.  And cool.  Music videos, CD players, VCRs, cable TV, satellite TV, cell phones, etc.  It was a brave new world.  Driven by technology.  And a business-friendly environment.  Where risk takers took risks.  And created great things.

History has shown that capitalists bring great things to market when government doesn’t get in the way.  With their punishing fiscal policies.  And inept monetary policies.  Activist, interventionist government have brought great economic booms to collapse.  Who meddle and turn robust economic activity into recessions.  And recessions into depressions.  The central bank being one of their greatest tools of destruction.  Because policy is too often driven by Big Government idealism.  And not the proven track record of capitalism.  As proven by the great industrialists.  And high-tech entrepreneurs.  Time and time again.

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Iron, Steel, the Steam Engine, Railroads, the Bessemer Process, Andrew Carnegie and the Lucy Furnace

Posted by PITHOCRATES - December 14th, 2011

Technology 101

With the Steam Engine we could Build Factories Anywhere and Connect them by Railroads

Iron has been around for a long time.  The Romans used it.  And so did the British centuries later.  They kicked off the Industrial Revolution with iron.  And ended it with steel.  Which was nothing to sneeze at.  For the transition from iron to steel changed the world.  And the United States.  For it was steel that made the United States the dominant economy in the world.

The Romans mined coal in England and Wales.  Used it as a fuel for ovens to dry grain.  And for smelting iron ore.  After the Western Roman Empire collapsed, so did the need for coal.  But it came back.  And the demand was greater than ever.  Finding coal, though, required deeper holes.  Below the water table.  And holes below the water table tended to fill up with water.  To get to the coal, then, you had to pump out the water.  They tried different methods.  But the one that really did the trick was James Watt’s steam engine attached to a pump.

The steam engine was a game changer.  For the first time man could make energy anywhere he wanted.  He didn’t have to find running water to turn a waterwheel.  Depend on the winds.  Or animal power.  With the steam engine he could build a factory anywhere.  And connect these factories together with iron tracks.  On which a steam-powered locomotive could travel.  Ironically, the steam engine burned the very thing James Watt designed it to help mine.  Coal.

Andrew Carnegie made Steel so Inexpensive and Plentiful that he Built America

Iron was strong.  But steel was stronger.  And was the metal of choice.  Unfortunately it was more difficult to make.  So there wasn’t a lot of it around.  Making it expensive.  Unlike iron.  Which was easier to make.  You heated up (smelted) iron ore to burn off the stuff that wasn’t iron from the ore.  Giving you pig iron.  Named for the resulting shape at the end of the smelting process.  When the molten iron was poured into a mold.  There was a line down the center where the molten metal flowed.  And then branched off to fill up ingots.  When it cooled it looked like piglets suckling their mother.  Hence pig iron.

Pig iron had a high carbon content which made it brittle and unusable.  Further processing reduced the carbon content and produced wrought iron.  Which was usable.  And the dominate metal we used until steel.  But to get to steel we needed a better way of removing the residual carbon from the iron ore smelting process.  Something Henry Bessemer discovered.  Which we know as the Bessemer process.  Bessemer mass-produced steel in England by removing the impurities from pig iron by oxidizing them.  And he did this by blowing air through the molten iron.

Andrew Carnegie became a telegraph operator at Pennsylvania Railroad Company.  He excelled, moved up through the company and learned the railroad business.  He used his connections to invest in railroad related industries.  Iron.  Bridges.  And Rails.  He became rich.  He formed a bridge company.  And an ironworks.  Traveling in Europe he saw the Bessemer process.  Impressed, he took that technology and created the Lucy furnace.  Named after his wife.  And changed the world.  His passion to constantly reduce costs led him to vertical integration.  Owning and controlling the supply of raw materials that fed his industries.  He made steel so inexpensive and plentiful that he built America.  Railroads, bridges and skyscrapers exploded across America.  Cities and industries connected by steel tracks.  On which steam locomotives traveled.  Fueled by coal.  And transporting coal.  As well as other raw materials.  Including the finished goods they made.  Making America the new industrial and economic superpower in the world.

Knowing the Market Price of Steel Carnegie reduced his Costs of Production to sell his Steel below that Price

Andrew Carnegie became a rich man because of capitalism.  He lived during great times.  When entrepreneurs could create and produce with minimal government interference.  Which is why the United States became the dominant industrial and economic superpower.

The market set the price of steel.  Not a government bureaucrat.  This is key in capitalism.  Carnegie didn’t count labor inputs to determine the price of his steel.  No.  Instead, knowing the market price of steel he did everything in his powers to reduce his costs of production so he could sell his steel below that price.  Giving steel users less expensive steel.  Which was good for steel users.  As well as everyone else.  But he did this while still making great profits.  Everyone was a winner.  Except those who sold steel at higher prices who could no longer compete.

Carnegie spent part of his life accumulating great wealth.  And he spent the latter part of his life giving that wealth away.  He was one of the great philanthropists of all time.  Thanks to capitalism.  The entrepreneurial spirit.  And the American dream.  Which is individual liberty.  That freedom to create and produce.  Like Carnegie did.  Just as entrepreneurs everywhere have been during since we allowed them to profit from risk taking.

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President Obama: Worse President than George W. Bush? Or Worst President Ever?

Posted by PITHOCRATES - July 8th, 2011

Obama Rolling up his Sleeves and Wagging his Finger

President Obama has taken out his wagging finger.  And he has wagged it.  Scolding Republicans to grow up and be like his daughters.  It is interesting he referred his daughters for an example of responsible behavior.  And not himself.  Because his track record on acting responsibly hasn’t been all that good as Charles Krauthammer points out and lists some of his failings (see The Elmendorf Rule by Charles Krauthammer posted 7/8/2011 on The Washington Post).

• Ignored the debt problem for two years by kicking the can to a commission.

• Promptly ignored the commission’s December 2010 report.

• Delivered a State of the Union address in January that didn’t even mention the word “debt” until 35 minutes in.

• Delivered in February a budget so embarrassing — it actually increased the deficit — that the Democratic-controlled Senate rejected it 97 to 0.

• Took a budget mulligan with his April 13 debt-plan speech. Asked in Congress how this new “budget framework” would affect the actual federal budget, Congressional Budget Office Director Doug Elmendorf replied with a devastating “We don’t estimate speeches.” You can’t assign numbers to air.

Not even a modicum of responsibility there.  So he’s rather like the pot calling the kettle black.  He should perhaps have said “do as I say and not as I do even though I do not do as I say you should do but that’s okay because I’m smarter than you so there.  When will all of you finally get this?”

But the Republicans, insolent as they are, refuse to budge.  So Obama had to bring out the wagging finger to discipline these insolent children.  Advising them to be more like his own children.  Who do their homework in a timely manner.

My compliments. But the Republican House did do its homework. It’s called a budget. It passed the House on April 15. The Democratic Senate has produced no budget. Not just this year, but for two years running. As for the schoolmaster in chief, he produced two 2012 budget facsimiles: The first (February) was a farce and the second (April) was empty, dismissed by the CBO as nothing but words untethered to real numbers.

Obama has run disastrous annual deficits of around $1.5 trillion while insisting for months on a “clean” debt-ceiling increase, i.e., with no budget cuts at all. Yet suddenly he now rises to champion major long-term debt reduction, scorning any suggestions of a short-term debt-limit deal as can-kicking.

That’s right, neither the Democrats nor Obama has done any responsible fiscal legislating/governing for the past two years.  Looks like the responsible shoe is on the other foot.  And those deficits?  They’re records.  Over 5 times larger than those world-ending Reagan deficits.  Yet he has the audacity to wag that finger at the Republicans for not being responsible?  Perhaps he should be wagging that finger at himself. 

And what have been Obama’s own debt-reduction ideas? In last week’s news conference, he railed against the tax break for corporate jet owners — six times.

I did the math. If you collect that tax for the next 5,000 years — that is not a typo — it would equal the new debt Obama racked up last year alone. To put it another way, if we had levied this tax at the time of John the Baptist and collected it every year since — first in shekels, then in dollars — we would have 500 years to go before we could offset half of the debt added by Obama last year alone.

Obama’s other favorite debt-reduction refrain is canceling an oil-company tax break. Well, if you collect that oil tax and the corporate jet tax for the next 50 years — you will not yet have offset Obama’s deficit spending for February 2011.

It is clear the president is in reelection mode.  Because he’s stoking the fires of class warfare.  Rich people fly jets.  And own oil companies.  Rich people are getting sweetheart tax deals.  Saving them billions.  And he wants to put a stop to this unfairness.  And make it fair.  It won’t help to erase the deficit at all.  But it gives you something to campaign on.  Which he needs.  Because his policies have been an economic train wreck. 

The June Jobs Report is worse than May’s

How bad have those policies been?  The June jobs report is in.  And it’s worse than May’s (see June Jobs Report Lands With A Thud: Up Just 18,000 by Steve Schaefer posted 7/8/2011 on Forbes).

In a stark reminder that the U.S. economy has been mired in slow growth, the Labor Department reported Friday that nonfarm payrolls added just 18,000 jobs in June and unemployment came in at 9.2%…

The stunning lack of improvement in June’s report – April’s payrolls figure was revised to 217,000 from 232,000 and May’s cut by more than half to 25,000 from 54,000 – rocked Wall Street Friday morning, as index futures sharply reversed after indicating small opening gains earlier. The Dow Jones industrial average, S&P 500 and Nasdaq were all signaling a red start to the trading session after solid gains Thursday.

And as bad as the May report was, the current report revises the May numbers down.  Fewer jobs were added than originally reported.  April’s, too.  It’s a trend.  Both a downward trend in job creation.  And the revising of previous reports.  Which means the anemic 18,000 jobs reported in June will likely be revised down in the July report.  There’s no good economic news out there.  The stimulus spending failed in a big way.  Which is why Obama is resorting to class warfare.  Because economically he has been an utter and absolute failure.

The June Jobs Report is even worse than it Says

And as bad as the June report was, it’s worse (see Without Dropouts, Jobless Rate Would Be Over 11% by Phil Izzo posted 7/8/2011 on The Wall Street Journal).

The share of the population in the jobs market, called the labor-force participation rate, fell to 64.1% last month — the lowest level since 1984 when women were still just beginning to enter in full force… The participation rate was 66% at the start of the recession and 65.7% when the recovery started in June 2009. If the participation rate were still at that level, the unemployment rate would be more than 11% right now…

There’s also a problem of underemployment. A comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. That number shot up in June to 16.2% from 15.8% a month earlier.

If we count the people who have given up looking for a job the actual unemployment rate would be as a high as 11%.  If you add in all those only working part-time because they can’t find a full-time job the unemployment rate jumps up to 16.2%.  These are horrible numbers.  How horrible?  These are more Great Depression numbers than George W. Bush numbers.

The Green Energy Bubble

America became the world’s largest economy thanks to the innovation of the private sector.  Great entrepreneurs like Andrew Carnegie, John D. Rockefeller and Henry Ford took risks.  The government didn’t have to tell them how to make steel better, more plentiful and cheaper.  Or how to make gasoline better, more plentiful and cheaper.  Or how to make automobiles better, more plentiful and cheaper.  That’s capitalism in the free market.  The private sector takes risks in pursuit of profits.  And when it does it makes things better, more plentiful and cheaper.  When people like Carnegie, Rockefeller and Ford are left alone to do what they know how to do best.  Create wealth.  And jobs.

Obama, on the other hand, believes he knows best.  That he’s smarter than these entrepreneurs.  And that he can direct the private sector to do his bidding.  Which, of course, in his Ivy League world, should result with economic activity.  And jobs.  Even if you’re telling people to build stuff the market doesn’t want (see The Coming Clean Tech Crash by Devon Swezey posted 7/7/2011 on Forbes).

The global clean energy industry is set for a major crash. The reason is simple. Clean energy is still much more expensive and less reliable than coal or gas, and in an era of heightened budget austerity the subsidies required to make clean energy artificially cheaper are becoming unsustainable.

Clean tech crashes are nothing new. The U.S. wind energy industry has collapsed three times before, first in the mid 1990s and most recently in 2002 and 2004 when Congress failed to extend the tax credit that made it profitable. But the impact and magnitude of the coming clean tech crash will far outstrip those of past years.

After one of the worst housing bubbles in U.S. history we now have a green energy bubble.  That’s about to pop.  And you know what happens when a bubble pops?  You get a recession.  To correct for all that malinvestment (to borrow a little Austrian School vernacular).  Which is pretty bad considering we’re still trying to recover from the first bubble.  And may very well still be in a recession despite all the massaging of economic data to say otherwise.  So if we’re still in a recession perhaps the pop of this bubble will push us into depression.  If we’re not in one already.  Based on those god-awful employment numbers.

As part of its effort to combat the economic recession, the federal government pumped nearly $80 billion in direct investment and tax credits into the clean energy sector, catalyzing an unprecedented industry expansion. Solar energy, for example, grew 67% in the United States in 2010. The U.S. wind energy industry also experienced unprecedented growth as a result of the generous Section 1603 clean energy stimulus program. The industry grew by 40% and added 10 GW of new turbines in 2009. Yet many of the federal subsidies that have driven such rapid growth are set to expire in the next few years, and clean energy remains unable to compete without them.

The crash won’t be limited to the United States. In many European countries, clean energy subsidies have become budget casualties as governments attempt to curb mounting deficits. Spain, Germany, France, Italy and the Czech Republic have all announced cuts to clean energy subsidies.

Can’t compete without them?  So what was the point in giving them all of those subsidies in the first place?  Were we forever going to pay for a more costly energy while less costly energy (i.e., fossil fuel) was available?  Apparently so.   Being that the life-blood of an economy is energy that would have just raised the cost of all businesses.  And the price of all consumer goods.  Less disposable income means less demand.  Less demand means fewer jobs.  Not a good plan, really.  Unless your goal is to put the country into a depression.

And the problem is global.  So the coming economic crisis will be global.  As if the European Union didn’t have enough financial crises on their hands already.  This could even hurt those emerging markets of China, India and Brazil.  Who depend on these export markets.  As we depend on them.  To buy our debt.

The U.S. has tried this clean energy before.  And all of these attempts ended in failure.  For the reasons already noted.  But if we’ve tried this so many times before, why haven’t we figured out how to do it right?  To find that innovation that makes it cost-competitive with fossil fuels?

Why is the United States still locked in this self-perpetuating boom-bust cycle in clean energy? The problem, according to a new essay by energy experts David Victor and Kassia Yanosek in this week’s Foreign Affairs, is that our system of clean energy subsidization is jury-rigged to support the deployment of only the least-risky and most mature clean energy technologies, while lacking clear incentives for continual innovation that could make clean energy competitive on cost with conventional energy sources. Rather, we should “invest in more innovative technologies that stand a better chance of competing with conventional energy sources over the long haul.” According to Victor and Yanosek, nearly seven-eighths of global clean energy investment goes toward deploying existing technologies that aren’t competitive without subsidy, while only a small share goes to encouraging innovation in existing technologies or developing new ones.

Oh, that’s why.  Because the government is in the business of picking winners and losers when it comes to the lottery of free government money.  Which is par for the course.  For government spending is about political cronyism.  That money is spent based on political forces.  Not market forces.  Which is a shame.  Because spending that money isn’t necessary.  Because there is an incentive to create cost-competitive green energy.  Unfortunately, that incentive is being distorted by the government subsidies.

It is clear that the current budgetary environment in the United States presents challenges to the viability of the fast-growing clean energy industry. But it also presents an opportunity. By repurposing existing clean energy policies and investing in clean energy innovation, the United States can be the first country to make clean energy cheap and reliable, a distinction that is sure to bring major economic benefits in a multi-trillion dollar energy market.

Get rid of all that malinvestment and that multi-trillion dollar energy market will provide the necessary incentive for the private sector to solve the green energy problem. Making it cost competitive with fossil fuels.  For whoever cracks that nut will be the next Carnegie.  The next Rockefeller.  The next Ford. 

You want to create a green energy market?  Okay, I’ll tell you how to do it.  Step one, get government the hell out of the way.  Step two, eliminate the capital gains tax.  That will motivate people to spend money on solving the problem because if they’re successful they’ll be richer than the Kennedys.  Step three, enjoy your green energy.

Barack Obama and his Keynesian Economics have Failed

President Obama has no chance of reelection if he has to run on his economic record.  Because his economic record may prove to be the worst of all time.  And he knows it.  Hence the finger wagging.  And the class warfare.  He has spent more than any other president.  And not just a little more.  A lot more.  Before him the worst post-war federal deficits were around $200-400 billion.  Since Obama they’re around $1.5 trillion.  And yet he scolds Republicans for being irresponsible because they refuse to raise the debt limit without getting real spending cuts.  As if the Republicans spent all of that money.  Not him.  Or his Democrats.  If he was so worried about defaulting on American debt obligations he shouldn’t have spent money his administration didn’t have.  But he did.  And now he’s wagging his finger at Republicans.

And what did we get for all that spending?  Further proof that he and his administration are economically incompetent.  Government spending doesn’t create jobs.  And government doesn’t know better than the private sector.  He can talk with all the righteous indignation and all-knowing condescension he wants but it doesn’t change that fact.  America’s greatest economic achievements and innovation was done without Government butting into the private sector.

Barack Obama and his Keynesian economics have failed.  Time to try something new.

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LESSONS LEARNED #41: “The want of unearned money is the root of most evil.” -Old Pithy

Posted by PITHOCRATES - November 26th, 2010

Money is a Temporary Storage of Wealth that Makes Trade Efficient

People don’t want money.  They want what money can buy.  A dump truck full of money is useless when there is nothing to buy with it.  For money is nothing more than a temporary storage of wealth.

We make or do creative things.  Things or services that people want.  There is a world full of people making goods or providing services other people want.  Some people make cellular phones.  Some people make microwave ovens.  Others provide landscaping services.  And these are the things we want.  Not money.

Money is a tool.  We use it to make trading with each other easier.  People who make cellular phones don’t need to find someone who makes microwave ovens to trade with.  Instead, they receive money for the cellular phones they make.  And the microwave oven makers receive money for the microwaves they make.  Then the cellular phone makers and microwave oven makers can take that money and trade it for what they want.

Our Human Capital Determines the Size of our Paycheck

We call the skills we accrue over time that lets us make or do things that other people want ‘human capital’.  People that have human capital have jobs.  Employers hire them because they have valuable human capital. 

Some people have so much human capital that they start a business.  They’re very good at bringing together an idea, people and resources to make valuable things or services that other people want to buy.

People with human capital are traders.  Just like in ancient Mesopotamia.  Nothing has changed.  Except that we trade more efficiently these days because of money.

It’s Easier to Steal Money than Televisions and Mansions

Not everyone traded.  Some people stole.  Some fought.  When peoples came into contact with each other, they often fought each other.  And the winner took the spoils.

Not much has changed today.  There are people who still steal.  And they are peoples who still conquer.  The only difference really is the efficiency of some theft.  Again, this is due to money.  It is more difficult to steal a 42″ plasma television than it is to steal $750 (which they can use to buy a 42″ plasma television). 

Likewise, it is more difficult for a politician to steal a million dollar mansion than it is to steal money.  Either as bribes from some special interest.  Or from taxpayers.

Unearned – Evil; Earned – Good

Those who steal typically have little human capital.  But because they still want those nice things they steal money.  The problem with theft, though, is that stolen money is transitory.  If you have human capital, you get a recurring paycheck.  Once you spend stolen money, it’s gone.  And you have to steal again.

This want of unearned money is the root of most evil.

People who earn their money with their human capital improve the lives of others.  The more they buy, the more others sell.  And the more jobs these others create.  And these jobs allow other people to use their human capital to buy other things.  Or even make charitable donations.

This want of earned money is the root of most good.

Rockefeller and Carnegie Made and Gave Away Fortunes

John D. Rockefeller made a fortune with Standard Oil.  He was ruthlessly efficient.  No one could refine, transport and sell petroleum products cheaper than he could.  People benefitted from affordable petroleum products.  And after he retired, he gave away vast portions of his wealth to charitable causes.

Andrew Carnegie made a fortune from steel.  Like Rockefeller, he was efficient.  No one could produce quality steel at a lower price than he could.  His steel built the skyscrapers and railroads of America.  He made a fortune.  And gave most of it away to charitable causes.

Most of the politicians that make it to Washington leave Washington as millionaires.  They sell themselves to special interests.  Raise our taxes so they can buy political favor.  And their policies are notorious for the unintended consequences that destroy (e.g., Aid to Families with Dependent Children (AFDC) destroyed black families). 

High Taxes and Lottery Tickets Punish the Poor

The federal government has created such an entitlement mentality that some people can’t survive without government assistance.  To fund their destructive policies, they’ve raised taxes on the wealthy.  And impoverished the poor.

With taxes so high, charitable contributions have declined.  Sin taxes (on cigarettes and liquor) have hit the poor especially hard (as they have less disposable income).  Which makes the poor more dependent on government.

But the ultimate insult to the poor has got to be the lottery.  The government entices the poor with illusions of getting rich quick.  And this want of unearned money causes the poor to spend large chunks of their small paychecks or government benefits (that they can’t afford) on lotto tickets.  Hoping to win the big one.  With some of the worse odds in the history of gambling.  (People have a better chance of getting struck by lightning than winning the lotto.  And few people believe that they will ever be hit by lightning.  But they’ll keep buying those lotto tickets.)

But whether a thief, a politician or the poor, the end result is the same.  The want of unearned money makes people make bad choices.  And people suffer because of those choices.

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