The Berger Memoranda

Should the government control credit card interest rates?

I find the question so ludicrous that I don’t understand why anyone would ask it. But, leave it to people in government. They seem to deal in the ludicrous. Since they grant themselves the power to control every aspect of our lives, the question becomes legitimate.

Some legislators say the high interest rates are “immoral.” I heard one say, “Yes the account regulations state that the credit card issuer can increase rates at any time. But, the regulations governing the accounts are too long for consumers to read. They’re just like those long mortgage loan documents.” Most just say the higher rates are “unfair.” So they want, as usual, to protect us from our own immorality, ignorance, and irresponsibility.

But, what does capping interest rates really do?

Those who advocate any form of “price control” (and interest rate caps amount to another form of price control) don’t understand that the government cannot control prices. They actually control quantities. Let me explain.

A price amounts to the ratio at which traders exchange goods in a market. If you exchange $10 for 2 pounds of manure, the price (or ratio) equals $5 per pound of manure. To change that price, the quantity of dollars must change, the quantity of manure must change, or both must change. Only changes in the quantities will change that ratio.

In a market where the price has settled to $5 per pound of manure some buyers might have been willing to pay more and some sellers might have been willing to accept less. On the other hand buyers unable to pay the market price and sellers unwilling to accept it would be closed out of the market. When the government set price limits those quantity relationships change.

If the government sets a limits the quantity of money (not the price directly) needed to buy a pound of manure to $2, the number of people able to buy will increase. They may have expanded the demand, but what about the quantity of supply? Sellers not willing to take as little as $2 per pound will take their supply off the market. Government action has limited the quantity of manure that suppliers will offer (not the price directly).

In the case of minimum wages (a price floor) the government eliminates the amount of labor that would be supplied and demanded below their floor. It does not raise wages of people below the minimum; it tells them they need not apply.

Controlling credit card interest has an effect similar to the price ceiling for manure. Lenders willing to supply funds at higher rates will withdraw from the market. Borrowers willing to pay higher rates will get shut out of the market.

In an environment in which the government espouses the expansion of credit for them to advocate a regulations that amounts to a limitation of credit seems like…well, a load of manure.

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I have suffered recently from a terrible bout of the chills.

Yes, spring has arrived (even with a little snow) and I have the chills. I don’t have a disease (that I know of), yet I have the chills. I don’t have a fever; I don’t do drugs; I have no physical reason to have chills; but I do.

I find that those chills become more predominant when I read, watch, or listen to any news about the economy. The mention of the depression (oh, sorry, recession), however, does not trigger these feelings. I get the shivers when I hear what the government plans to do to “fix this economy.”

The fed pumps up its asset base. I get the chills. The government forces money (they call it capital) into banks. I get the chills. Now, the talk has turned to nationalization. (Oh, I know that they don’t like to use that word.) I get the shakes so bad I have trouble turning off the television.

So, why does the same information that makes most people feel warm and fuzzy give me the chills?

Some how, after these many years, I have avoided the cloud of propaganda that has fallen over most people in this country. Everything the government does will have a detrimental effect on the economy, and everyone should recognize it, but they don’t.

Expansion of the money supply got us into this mess. The devalued dollar sent market prices in key sectors of the economy to levels that sent false signals to the market. People bought, built and spent beyond a sustainable level. Now the fed has lighted the fuse for another unsustainable boom.

Government spending just takes from one group of people and gives to another. Particularly now it takes from more productive people and gives to less productive people. How can that stimulate future economic growth?

Government regulation, the panacea of the ignorant, does not work. The markets collapsed for a lot of reasons other than a lack of regulation. In fact, regulation (always applied unevenly) contributed to the mess. (Hearing about regulation does help with the chills. Hearing the phrase “accountability and transparency” makes me hot under the collar.)

So, what do I do to counteract my chills?

As a part of the oppressed masses in this country I can do little to implement fundamental solutions, e.g. eliminate fractional reserve banking, stop government spending, and repeal government regulation. I will, therefore, continue to treat the symptoms.

I get a little warmth from writing this blog, for I continue to hope that the citizens of the United States will see the light, rise up, and take back their liberty.

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President Obama, in his never ending desire for “transparency,” revealed his tax return on tax day. He also provided a wonderful example of how the burden of taxation shifts throughout the economy.

On an adjusted gross income of $2,656,902 the Obamas paid $933,206 in federal and state income taxes (about 35%.) Some would admire the Obamas for paying their “fair share.” But let’s have a closer look.

Most of the Obama’s income came from the sales of his two best-selling memoirs. So that money did not come from Barack Obama. It came from the people who bought his books.

No one coerced the buyers of those books to pay for them so they must have felt they got their money’s worth. But, in order for the Obamas to receive the $1,723,696 they got after taxes they had to charge 35% more for the books to cover their tax burden. So the buyers of the books gave up money they could have used for a lot of other needs they may have had. (By the way, who has more influence over how that $933,206 gets spent, the book buyers / voters or President Obama?)

In addition, whatever money the Obamas did not make from those book sales consisted of money given them by the government (money seized from citizens.) So, every dollar of the $933,206 in federal and state income taxes paid by the Obamas came from citizens (most voluntarily and some involuntarily.)

Now, let’s give the President some credit. The amount of money he made with his book sales make him a net tax payer, not a net tax taker like most of his former colleagues in Congress. Also, the buyers of his books felt they got a deal so he should not have reduced the price. But, what if he (and the rest of us) did not have to pay taxes?

In that situation Barack Obama would have to do what the government should allow the rest of us to do. He would have had to save his own money and figure out how best to invest it for his own benefit. Without the government redistributing our money we (Barack Obama included) would individually and collectively make better decisions, based on our own needs, than do the politicians in Washington.

In a system with little or no taxes Barack Obama would have to act like a productive saver and investor instead of the grand redistributor. He and everyone else would be much better off.

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Happy Tea Party

On the day dedicated to the masters of government a lot of commentators take differing positions regarding the “fairness” of the federal income tax. Some point out that the lowest 50% of earners pay only 3% of the income taxes. Others point out that, although the top 10% of earners pay over 70% of income taxes, they get the benefit of this wonderful system that “allows” them to make so much money.

But, do we really know who pays all the taxes?

Wages and salaries (including taxes and regardless of how high or low) become part of the cost of products sold. When consumers buy products they pay an increment of the taxes of all the employees of the producers and distributors of those products. This means that Dick pays part of Jane’s taxes; Jane pays part of Dick’s and Harry’s taxes; and Harry pays part of the taxes of Dick, Jane, and a few other people.

All tax burdens get shifted somewhere.

Through their product purchases, the rich pay some of the taxes of the middle class (in this classless society), the middle class pay some of the taxes of everyone, and even the poor (who pay no income taxes to government) pay some of the taxes of the rich. (Of course, no one pays the taxes of the poor who pay no taxes. (Oh, I guess that seems obvious.))

So, why make such a fuss about taxes? It seems that it does not matter who we tax. They just shift that burden to someone else.

The big deal consists of the massive misallocation of resources that comes as a result of government spending. The market, using the pricing mechanism and the decisions of individuals looking out for their own interests, efficiently allocated resources to the most important uses. Government CANNOT do this, because it does not have market prices with which to make allocation decisions.

Government fixes spending and tax rates without the benefit of price information. In a dynamic system, like the economy, these fixed factors do not adjust in response. This causes misallocation of resources.

And the government economists wonder why we have booms and busts. Since they don’t have a clue who really pays the taxes, nor when, they cannot play effectively.

Taxes do one thing for certain. They increase the power of government.

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Why do we implement some of the dumb political/economic policies that we do? Do we really want to continually shoot ourselves in our collective foot? No. Much of the idiotic legislation that legislators pass comes as a result of sincere–although misguided–good intentions.

Helping other people, protecting the environment, and shifting resources to where people need them, all sound like noble objectives. But, by attempting to do those things-and a lot of others driven by good intentions, we set in motion some counterintuitive results. The economics of good intentions generally don’t produce the intended consequences.

Let’s have a brief look at government “healthcare” programs as an example.

When we combine a little semantic honesty with a simple economic principle we begin to get some sense of the devastation reeked by these government programs. First, what the government wants to implement amounts to sickness-care, not “healthcare.” Government programs, for the most part, subsidize care for sick people, not programs to keep people healthy. Second, an economic principle that we frequently find swept under a political rug, states that you tend to get more of the things that you subsidize.

Thus, when the government subsidizes the care of sickness, we get more sickness. The demand for medical care rises. Medical costs rise. Sickness-care programs expand.

In addition to the effect of subsidizing sickness, consider what does not get done with the money confiscated from taxpayers to fund these programs. Without the incentive to remain-or become-sick, which government programs provide, people might just take health a little more seriously. The money not taken to subsidize sickness might just get spent on exercise equipment, better diets, and vacations used to reduce stress.

Some of the money saved by not having government subsidized programs might also go into developing better medicines or production methods that drive down the cost of medical care.

Yes, it seems like a nice idea to give every American access to free medical care. But, that “free” care comes at a huge cost. Can we afford to forcibly redistribute nearly 20% of the national economic resources into an economic black hole?

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The people running financial institutions have taken the blame for the financial collapse. According to popular opinion those devious people exercised bad judgment, took too many risks, took advantage of innocent investors and borrowers, and committed a laundry list of other offenses. They got away with this underhanded behavior because congress had not created sufficient regulations to prevent it-at least so the story goes.

Now the Obama administration, Congress, and everyone else wants more regulation “so this sort of crisis will never happen again.”

More regulation, however, won’t solve the problem. Thinking that more regulation will eliminate financial crisis suffers from at least two major logical flaws.

First, people cannot design regulations that will cover all contingencies in a complex living system like financial markets. Too many variables already exist. To regulate all of them would require regulations so massive and complex it would choke the regulators themselves.

In addition, living systems learn. By that I mean, whatever regulations Congress creates, inventive minds will learn a way around them. Not because these people have malicious intents; simply because they want to find ways to make money.

Second, the financial markets did not crash because of lack of regulation. They crashed in response to the artificial boom precipitated by the expansion of the money supply. Expanding money caused the dollar prices in certain sectors of the economy-most notably housing and autos-to rise out of proportion to the supply of goods in those markets relative to demand. These falsely stimulated dollar price increases lead the producers of these products to simply make too much. Rising prices kept telling them-falsely-that they needed to make more. The result-a crash.

The only solution: eliminate the fractional reserve banking system.

Do that and financial problems will no longer sweep through the entire economy. And regulation will become superfluous.

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