Property Rights and Contracts

Posted by PITHOCRATES - March 26th, 2012

Economics 101

We put a lot of Money and Time into Maintaining Property we Own so we can Enjoy it Exclusively

Have you ever bought the Brooklyn Bridge?  I hope not.  For if you have someone probably conned you.  Unless you bought it from the New York City Department of Transportation (DOT).  Because they currently own the Brooklyn Bridge.  And are the only ones who can sell it.  But the last I checked they weren’t selling.  So I doubt they sold it to you.  If you are about to enter into negotiations to buy the Brooklyn Bridge I suggest you do a title search first.  To verify that the seller in fact owns the property.  Has the right to sell the property.  And that the seller is selling the property ‘free and clear’.  To make sure you don’t have to pay any outstanding construction bills for work completed on the bridge that the DOT didn’t pay.  Then and only then should you buy your bridge.  So you can enjoy the pride of bridge ownership.  While charging tolls.  And getting rich.

This illustrates a central point about buying and selling things.  Property rights.  Which lets us buy things.  And sell them.  For to sell something we must first own it.  And to buy something we must know that we can own it.  Because if we’re not sure we can own it we’re not going to exchange our hard-earned money for it.  And once we own something we’re going to use it however we wish to use it.  At least that’s what we expect to do.  If we buy a house with a pool in the yard we’re going to want to use that pool exclusively.  Because we paid for it.  And keep it clean.  By maintaining the pool filters and pumps.  Adding chlorine.  Vacuuming the bottom.  We’re going to put a lot of money and time into maintaining that pool so we can enjoy it.  Our little tropical paradise in our own backyard.  But we’re not going to do all of that if just anyone can walk into our yard and use our pool whenever they damn well please.  For if that were the case we wouldn’t spend the time and money in the first place.  We’d look for a pool we could use for free.  Like everyone else who thought they could walk into our yard and use our pool whenever they damn well please.

Or would we?  Let’s say someone in your neighborhood just moved in.  They put in a nice in-the-ground pool.  Spent a fortune on it.  Kept it pristine.  And used it exclusively.  They were happy.  Until the subprime mortgage crisis hit.  And all of a sudden they owed far more on their mortgage than the house was worth.  So one night they just disappeared.  And let the bank have the house.  Once you notice their house is empty you think about that pool.  And decide what could it hurt if you went over for a swim?  You go there.  Notice they left the pumps and filters on.  And the pool is still pretty clean.  So you enjoy a swim or two.  Others find out.  And go over for a swim.  A lot of them.  The pool is crowded.  And not so clean anymore.  No one is skimming the garbage out of it.  Or maintaining the chlorine level.  Some of the kids are even peeing in the pool instead of getting out of it.  Soon the pool begins to smell bad.  Algae is growing.  The filters plug up.  With the water flow blocked the pumps strain and trip the circuit breaker.  Stopping the pumps.  And the filtering.  The crud they filtered out backs up into the pool.  Soon the water turns a greenish gray.  And looks more like a stagnant pond where dead fish float on the surface than the pristine tropical paradise it once was.

We can trace most Pollution and Environmental Damage back to the Tragedy of the Commons

Economists call this the Tragedy of the Commons.  Which is what happens when we poorly define our property rights.  In our example the pool was clean and enjoyable when someone owned the pool.  When no one owned the pool (after the previous owners abandoned it) the pool became dirty and no longer enjoyable.  Why?  Because when we own something we have an incentive to take care of it.  For our long-term enjoyment.  When no one owns it no one has an incentive to take care of it.  Some may try but others will continue to pollute.  Because they don’t own it.  And have no incentive to spend the time and money to keep it clean.  Especially when others are still polluting.  So no one tries to keep the pool clean.  They’ll enjoy it while they can.  And when the pollution gets so bad they will move on and find something else to enjoy. 

We can trace most pollution and environmental damage back to the Tragedy of the Commons.  If you love the beach so much that you buy a house on it you will keep your beach clean.  You’re not going to litter it with cigarette butts, empty bottles, food wrappers, used condoms, etc.  A public beach, on the other hand, is a different story.  Just as people will take their trash to a public field to dump it.  Because they don’t own that land and have no incentive NOT to pollute it.  And it’s cheaper than taking their trash to the private landfill that charges a fee.  Who helps to keep America beautiful by burying our trash.  And when the landfill is full someone else will buy it and make a beautiful golf course out of it.  Or something else.  As long as someone owns it something nice will happen with that land.  To maintain the value of that land to the landowner.

When you own something it has value to you.  Such as a logging company cutting down trees on land they own.  Because this land has value they will not over-log it.  And when they cut down trees they will plant new seedlings.  So the land continues to have value.  Because they will be able to cut down these seedlings after they grow into trees.  Or the future owner of that land will be able to.  Who will buy that land because it has value.  Whereas there is no incentive for a private logger working on public land NOT to over-log it.  Or to plant seedlings.  Because they don’t own that land.  Anything they don’t cut down some other logging company will.  And without any property rights to that land they won’t plant any seedlings.  Because nothing will prevent anyone else from cutting these down once they grow into trees.

Well Defined Property Rights allow Buyers and Sellers to Enter into Contracts with one Another

To do all of this buying and selling we need well defined property rights.  Clearly spelling out what the seller owns.  And what exactly the buyer is buying.  For example, a logging company buying a tree farm may want to drill an exploratory well to see if there is oil or natural gas under that land.  So he or she will want to make sure that the terms of the sale include all mineral rights.  Paying additional for these rights if necessary.  Or getting the tree farm at a lower price than other comparable tree farms because the seller wants to retain the mineral rights.

Well defined property rights allow buyers and sellers to enter into contracts with one another.  Contracts clearly state the terms of sale and any other special provisions.  Such as the seller retaining his or her right to have his or her pick of one tree anywhere on that land once a year in the month of December.  As long as buyer and seller freely enter into these agreements they expect each other to honor the terms of the contract.  And only when both parties honor the terms of the contract does the ownership of property transfer from one party to another.

Property has value.  Even the Brooklyn Bridge.  And well defined property rights protect that value.  Because the DOT owns that bridge they spend money to maintain that bridge.  A well-maintained bridge provides value for those who want to cross the East River.  Currently the various taxes they pay to the city and state make their way to the DOT.  To pay for that maintenance.  But if the city of New York found itself in serious financial trouble they could sell the Brooklyn Bridge.  To a private person.  Who wants to put up toll booths on the bridge.  The city gets a large sum of money to help with their financial trouble.  And the new private owner gets a revenue stream in the form of tolls.  And the city of New York will, of course, screw those crossing the East River.  Because they’ll now have to pay a toll to cross the Brooklyn Bridge.  But they won’t get any of their taxes back.  Because governments rarely if ever cut their taxes.  The city and the private person do well because they both have well defined property rights.  And a contract.  The people using the bridge don’t.  They had no contract with the city that clearly stated the terms for their use of that bridge.  And will continue to pay the taxes that paid their crossing fees.  As well as the new tolls.  Which is business as usual.  Because government always screws the taxpayers.  Who are always at a disadvantage when it comes to property rights and contracts when dealing with the government.  For government has the power to break contracts and take property.  Unlike private persons entering into contracts.  Who only transfer the ownership of property by mutual consent.

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Rule of Law

Posted by PITHOCRATES - November 21st, 2011

Economics 101

To take Civilization to the Next Level required the Rule of Law

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  And religion allowed great gatherings of people to live together in urban settings.  Which was a start.  But it didn’t solve all the ills of packing a lot of people together in a crowded urban setting.

Religion did bring people together.  But organized civilization needs leadership.  And having a leadership position over the masses gives one great powers.  For good.  As well as bad.  And all too often leaders have become intoxicated on that power.  Especially if that leader was also the god that the people worshipped.  Who felt they could do anything they wanted.  To anyone they wanted.  And often did.

But it’s just not leaders who failed to choose good.  A lot of the people did, too.  Some people cheated each other.  Stole from each other.  Didn’t honor their agreements.  Fights broke out.  Some harmed others.  Even killed people.  Clearly, religion alone wasn’t enough to get everyone to live in peace and harmony.  They needed something more.  Some basic ground rules.  Rules of the game.  The game being living together in a crowded urban setting.  Working together.  And entering into economic transactions.  What they needed to take civilization to the next level was the Rule of Law.

We use the Rule of Law to Clearly Identify and Protect our Private Property

The key for economic development rested on the principle of private property.  Economic activity is based on trade.  To trade you need first to create things to trade.  Often requiring costs and great personal effort to create these things.  Which people will gladly undertake.  As long as if they own what they create.  And are free to do whatever they wish with it.  Keep it.  Use it.  Or trade it.

We use the Rule of Law to clearly identify and protect our private property.  We define what is ours.  And forbid others to take what is ours without our consent.  If they do they will be punished under the law.  Which will deter some.  And those undeterred will face the consequences.  Thus producing a safer environment to live in.  Where we are safe in our persons and property.  Especially in crowded urban settings.

This encouraged greater economic activity.  With more opportunity to trade.  Sometimes we didn’t exchange things after concluding our negotiations.  Instead entering into a contract for an economic exchange.  Such as summarizing the terms for the exchange of a piece of land.  Or for a future farm crop.  Agreements we freely and consensually enter into.  Because we trust the Rule of Law to protect and enforce these agreements.

Private Property Rights and Contracts are the Indispensible Requirements of any Free Market Economy

The Rule of Law picked up where religion left off.  For those who did not wish to choose good behavior.  Whether it be people in the masses.  Or the leaders.  The Rule of Law became supreme.  Everyone was answerable to the laws of the land.  Today, government leaders often swear an oath to support and defend these laws.

And by clearly setting the ground rules for economic exchange, the Rule of Law unleashed economic activity.  Perhaps more so than any other thing.  By establishing private property rights.  And creating contracts.  The indispensible requirements of any free market economy.

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Obama’s Economic Policies have Failed because they’re Keynesian Economic Policies

Posted by PITHOCRATES - September 2nd, 2011

Government Spending and Easy Monetary Policy haven’t created any Jobs 

The new jobs report is in.  It’s not good.  Surprise, surprise (see ‘No confidence’ sparks rush to safety by Blake Ellis posted 9/2/2011 on CNNMoney).

The Labor Department reported that the economy added no jobs in August, while the unemployment rate remained at 9.1%. That was the worst reading since September 2010, when the economy lost 27,000 jobs.

Economists had been expecting a weak report given the recent debt ceiling gridlock, plunging consumer confidence and the downgrade of the United States’ credit rating in August. But what they got was even worse than expected.

These Keynesian economists have been predicting every kind of wonderful they could with every new Keynesian policy.  But government spending and easy monetary policy haven’t created any jobs.  If they did we’d have them.  Jobs.  But we don’t have them.  After close to 3 years of trying.  I mean, the economy is so bad that oil prices are falling.

Since a healthy economy typically spurs demand for oil, fears that another recession is around the corner are causing traders to worry about waning demand, said Flynn.

“Crude oil is looking at demand destruction right now,” he said. “With a lack of people going back to work and economic data as a whole as it is, it’s just not a supportive environment for higher prices.”

So the Obama administration has spent the U.S. to record deficits.  And record debt.  But because so many people are unemployed demand for oil is destructing.  What a terrible tradeoff for cheaper oil.

Oil is the lifeblood of a healthy economy.  So you know an economy is not healthy when people aren’t buying oil.  In a country where chronically insufficient domestic supplies once raised the price of gasoline to over $4/gallon.  Now any spikes in gas prices seem to have more to do with a depreciating dollar (thanks to all that easy monetary policy) than demand.

Keynesians see no Downside to Excessive Government Spending or Inflation

Still there are some who say the problem is not excessive spending.  But spending that was not excessive enough (see Fatal Distraction by Paul Krugman posted 9/2/2011 on The New York Times).

Zero job growth, with unemployment still at nosebleed levels. Meanwhile, the interest rate on 10-year US bonds is down to 2.04%, and it’s negative on inflation-protected securities.

Aren’t you glad we pivoted from jobs to deficits a year and a half ago?

Krugman is a Keynesian.  So by ‘jobs’ he means government spending.  And by ‘deficits’ he means responsible government.  He sees no downside to excessive government spending.  Or inflation.  As if the 1970s never happened.

A lot of People hate the Rich and Successful, especially Ivy League Elitists

But the 1970s did happen.  And we had double-digit inflation at the end of that decade.  Didn’t help.  It didn’t make a dent in the unemployment numbers.  Yet there are those who want to take that very dangerous road again (see View: Inflation Is Easy to Free, Hard to Control by the Editors posted 9/1/2011 on Bloomberg).

…But now, a growing number of voices, mainly on the left wing of the Democratic Party but also in the Federal Reserve, are calling for what is in effect default in slow motion. It goes by the name of inflation.

Inflation decreases the value of debts, like the $14 trillion owed by the federal government to lenders such as the government of China (and a lot of ordinary American savers, too), and it increases the value of assets, like houses. Thus it helps all debtors, from the federal government to individual homeowners who can’t pay their mortgages. Inflation has been running at an average of 2.4 percent over the past decade. After a couple of years of, say, 6 percent inflation, that $14 trillion would be worth closer to $12 trillion in current dollars. A $400,000 mortgage would be worth about $350,000.

Some may say, shrinks debt?  Increases asset value?  Well where’s the problem with that? 

We call it class warfare.  Of the worse kind.  Creditors versus debtors.  The poor versus the rich.  The poor hate the rich because they have to borrow from them to buy a house.  And they would love to not pay them back.  But if you start doing this eventually the rich won’t loan their money anymore.  So there will eventually be no more home ownership.  Except for the rich. 

It’s a story as old as time.  And the U.S.  The states were passing debtor laws.  Favoring debtors.  Harming creditors.  And destroying legal contracts in the process.   Which a nation built on the rule of law could not have.  For if there are no contracts there is only force.  Where the most powerful get what they want.  And those not powerful enough to fight them off simply lose what they have. 

This is one of the reasons why the Founding Fathers called for the Philadelphia Convention in 1787.  To save what they just fought 8 years to get.  A nation where no man is above the law.  And contracts are legal binding.  Still, there are a lot of people who hate the rich and successful.  Who think contracts are merely suggestions.  Especially Ivy League elitists who have no ability but arrogance and condescension.  Who could never become rich and successful on their own.  Preferring privilege over hard work.  And have no problem trampling over people’s contract rights.  Or Constitutional rights, for that matter.  But that’s another story.  For another time.

As it happens, a couple of years of 6 percent inflation is exactly what the leading economist advocating this approach — Kenneth Rogoff at Harvard — recommends. He is joined by Paul Krugman and by a growing number of economic journalists and commentators. Some of these people have been saying that inflation is no threat worth worrying about, because it has not appeared despite circumstances that ordinarily would have produced it. Now they say inflation is no threat because a little of it would actually be a good thing.

At Bloomberg View, we think that doing anything to encourage increased inflation is a very bad idea. People who advocate it are either too young or too old to remember our last adventure with inflation, in 1979 and 1980…

You can’t easily pencil in two years of 6 percent inflation and then go on your merry way. Inflation is self-feeding and takes on a life of its own. And it works only by surprise. If lenders all know that the government is going to induce or at least tolerate something like 6 percent inflation, they will demand something like 8 percent interest from borrowers. There goes the grease on the wheels. And it’s not just lenders: Labor negotiators will have their backs stiffened if they know that any dollar figure they negotiate will buy less and less. Manufacturers who know their inputs are going to be getting more expensive, in dollar terms, will raise their prices in anticipation, thus making inflation a self-fulfilling prophecy. Long-term planning becomes difficult to impossible.

This is what happened in the Seventies.  It’s why there were double-digit interest rates.  Inflation was depreciating the dollar so fast that it took near usury rates before anyone would loan money.  It was great for people with money to loan.  But horrible for people who had to borrow.

There is no Record of increasing Taxation and Regulation increasing Economic Activity

This is not just a condemnation of the Obama economic policies.  This is a condemnation of Keynesian economics as a whole.  They only lead to a bloated federal government.  That grows at the expense of the job-producing private sector (see Needed: A Reagan Moment To Stop Our Decline by Lawrence Kudlow posted 9/2/2011 on Investors).

During the Bush years, the federal government increased from 18% of GDP to 21%. The debt went up $2.5 trillion, from roughly 32% of GDP to 40%. And now, during the Obama period, spending has moved even higher to at least 24% of the economy, while total federal debt has ballooned near 100% of GDP.

It’s almost a mirror image: The expansion of the public sector and the decline of the private sector. This is completely inimical to the American peacetime experience…

And all while jobs, the economy and stocks slumped over the past 10 years, the dollar dropped 37% and gold increased by nearly 500%, from $250 to nearly $1,900 an ounce.

We don’t have the kind of inflation today that we experienced in the 1970s. But it is certainly worth noting that a collapsing currency and a skyrocketing gold price are key barometers of a loss of confidence in the American economic story.

But the Keynesians aren’t worried.  Mr. Paul Krugman belittles those ‘responsible’ people who worry about phantom demons like inflation.  When it comes to spending, their constant refrain is to flame on.  And only worry when inflation is burning white hot.  Then they can simply tap their monetary breaks and make everything good again.  Or so they think.

But there is a bigger problem.  This ‘limited’ government of the Founding Fathers is growing into a leviathan. 

My key thought is that the U.S. in the last decade has adopted a wrongheaded policy of government expansion — primarily spending and regulating — financed by ultra-easy monetary policy and rock-bottom interest rates.

Tax rates haven’t moved much. But the whole tax system is badly in need of pro-growth flat-tax reform and simplification. However, the expansion of spending and regulating is robbing the private sector of its entrepreneurial vitality. Here’s the new fear: More big-government spending stimulus from Obama’s jobs plan. More EPA. More NLRB. More Dodd-Frank. More ObamaCare.

And as the policy mantle for growth has swung to Federal Reserve stimulus, we are learning once again what Milton Friedman taught us 40 years ago: The central bank can produce new money, but there is no permanent production of jobs and growth from that pump-priming.

Big government financed by easy money is a lethal economic combination. It must be reversed. We should be reducing the regulatory and spending state while keeping money predictably stable (and even re-linked to gold).

The supply-side nostrum that worked so well for 20 years, beginning with Ronald Reagan, was low tax rates, light regulation, limited government, and a hard dollar. Gold collapsed between 1980 and 2000 as stocks, jobs, and the economy roared. The last ten years? We’ve gotten the policy mix completely backwards. The results show it.

And that’s something that the Keynesians can’t point to.  When they had full legislative power (as they had since the Democrats won the House and Senate back in 2006), they can’t point to a historical record of success.  Like the tax-cutting supply-siders can. 

JFK cut taxes and saw economic growth.  Reagan cut taxes and saw economic growth.  George W. Bush cut taxes and saw economic growth.  But there is no record of increasing taxation and regulation increasing economic activity.  You know why?  Because it doesn’t.  If it did the economy would be booming now because the government has never spent or regulated more.

Let’s hope the Keynesians Concede Failure while there is still an Economy to Save

How many bad economic reports will it take before the Keynesians will finally concede failure?  When will the Ivy League elitists stop hating people who are more talented and successful than they are?  And when will the people that put them into power see that it’s only the power they’re interested in?  Not the economy.  Or our well being?

I hope these people come to their senses soon.  While there is still an economy to save.

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Unions and Government Join Forces Against the American People

Posted by PITHOCRATES - November 29th, 2010

The GM IPO Rewards the UAW and Screws the Stakeholders

What do unions and liberal Democrats have in common?  Elitism.  They think they are better than everyone else.  That they are above the law.  And that they should prosper at other’s expense.

The Obama bailout of GM illustrates this. For it wasn’t a bailout of GM as much as it was a bailout of the UAW (see GM’s union recovering after stock sale by Patrice Hill posted 11/25/2010 on The Washington Times.)

The boon for the union fits the pattern established when the White House pushed GM into bankruptcy and steered it through the courts in a way that consistently put the interests of the union ahead of many suppliers, dealers and investors — stakeholders that ordinarily would have fared as well or better under the bankruptcy laws.

“Priority one was serving the interests of the UAW” when the White House’s auto task force engineered the bankruptcy, said Glenn Reynolds, an analyst at CreditSights. The stock offering served to show once again how the White House has handsomely rewarded its political allies, he said.

The UAW didn’t invest in GM.  They did not buy any stock.  They didn’t buy any bonds.  When any other company goes bankrupt, the courts don’t place their employees ahead of the stakeholders.  But not at GM.

Banks loan people money to buy a house.  They take that chance because those borrowing offer the house as collateral.  If they can’t make their payments, the bank can sell the house to recover some of its investment.  That’s a binding legal agreement.  When people cannot pay their mortgage, no bankruptcy judge will award them the house free and clear and screw the bank.  If that happened, no bank would loan money.  And why are banks protected by binding legal contracts?  Because home owners are not protected by unions.

The union’s health care and pension trust fund earned $3.4 billion through the sale of one-third of its shares in GM last week. Analysts estimate that it would break even if it sells the remaining two-thirds of its shares at an average price of $36 — close to where the stock traded shortly after the offering hit the market. GM shares closed at $33.45 on Wednesday.

For taxpayers to break even, by contrast, the stock would have to rise to at least $52 and by some estimates as high as $103 — levels that would take years to achieve.

Not only are the UAW and the Obama administration screwing stakeholders, but they are also screwing the American taxpayers.

The generous share of GM stock given to the union trust fund under the White House deal puts it not only ahead of the Treasury but on a par with secured creditors such as banks, which normally receive the most favorable treatment from bankruptcy courts.

Borrowing from banks is cheapest because they are typically first in line during bankruptcy.  That’s why their borrowing costs are so low.  They have a better chance of getting their money back.  Bondholders take a greater risk.  So they get a higher interest rate.  They’re close to the front of the line during a bankruptcy.  As long the government does not nullify legal binding contracts, that is.

“It gives outraged flashbacks to the old GM bondholders,” who remain mired in the bankruptcy proceedings and are unlikely to recover more than 30 percent of their investments, Mr. Reynolds said.

He compared the deal to the corrupt crony capitalism in Russia under President Vladimir Putin.

And who are these bondholders?  They can be anyone.  Even a retiree who has invested his retirement nest egg in ‘safe’ bond.  Like GM debt used to be.

Craig Coffey, a retiree in Nevada who invested $55,000 in bonds in the old GM that are now worthless, was outraged that the union is on its way to recovering all its money before investors get even a cent of compensation

The Rule of Law and Contracts are Merely Suggestions

Unions and the Obama administration take care of each other.  And screw everyone else.  Banks.  Stockholders.  Bondholders.  And the American people. 

To them the Rule of Law and contracts are merely suggestions.  Mild inconveniences in their pursuit of power and privilege.  The elite take care of their own.  And if you can’t help them win elections, or give them fat benefits, they will walk all over your rights.

You know, Ford didn’t take any bailout money from the government.  Remember that the next time you shop for a car.

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