What is social justice?

Since only individuals act, only individual actions can be judged.  Groups, governments, corporations, etc. are not acting entities and therefore cannot be judged.  The individuals who act under the aegis of such groups can, of course, be judged.  So what could social justice possibly mean?

Along comes the redoubtable Wendy McElroy with an answer.  It is “forced distribution of ‘privileges’ across society with an emphasis on providing wealth and opportunity to classes of people who are considered to be disadvantaged.”  It matters not whether a particular set of circumstances is the result of voluntary interactions.  Individuals who are female, have dark skin, low income, etc. qualify automatically as victims.  Examples of redress include affirmative action and progressive taxation.

Enough from me.  Please go read Wendy’s post.

Measles Vaccine? Not Me!

That’s because the vaccine didn’t exist when I was a kid. I got the disease instead, leaving me with natural immunity. I think my chums all got it too and it amounted to a few days of discomfort, no big deal. But there must have been some who got it and suffered serious consequences, even death. News just didn’t get around in those days (ca. 1950) like it does today.

It’s terrific that a vaccine now exists, but like all vaccines it entails perverse incentives. When nearly everyone is vaccinated, there is little incentive for an individual parent to get it for his child because the disease can’t spread through a vaccinated population, and at least some incentive not to get it: cost, bother, and a remote chance of ill effects. And if enough parents skip the vaccine, the percentage of vaccinated children may fall low enough to permit the disease to propagate as, in fact, it has begun to do lately in some areas.

The solution for public schools is simple: require vaccination for all entering school children. As long as we have public schools, there have to be rules and this would be a quite sensible rule. For private schools the situation is trickier. Should the government require private schools to require vaccination? I think not. Most parents would have sense enough to keep their kids away from such schools. A no-measles policy would be a selling point for private schools.

The Gold Standard is Not Without its Costs

News from the department of “life is bigger than art:” A few days ago I posted a fictitious account of a future Wells Fargo Bank operating on a revived gold standard. Turns out the real Wells Fargo, now a regular large commercial bank with its roots in the California gold rush, has a branch in downtown San Francisco at the site where the bank was first opened in 1852. The branch had an exhibit of historic artifacts, including gold nuggets from the gold rush era. I say had, because last night thieves rammed an SUV into the lobby and made off with the nuggets!

All of which underscores the fact that security is among the real costs associated with a gold standard. There is no law of nature that says free banking has to be based on gold, as I pointed out in my post. The market would, if free to do so, sort out costs and benefits and find the sort of system or systems that best satisfies consumers.

I love Wells Fargo; They Hate Me.

While I have this blog window open I’ll add some unrelated comments about Wells Fargo. I am a happy customer and I credit this to the stiff competition among banks at the retail level. I regularly get solicitations from banks offering $100 bonus to open an account, with strings attached, of course but I stick with Wells Fargo. At the macro level our current banking system is gravely flawed but it works well for us retail customers.

I get free checking, a handy web site, and ATMs all over the place. When my credit card was hacked recently, they replaced it promptly and took my claims about false charges at face value. My average credit card balance last year was nearly $4,000 and I paid zero interest. That’s because I pay it off at the last possible date, which is 25 days after billing. I pay an $18 annual fee but got $300 in cash rebates last year. I never pay late fees or penalties of any kind.

I do not have a savings account with Wells Fargo because those accounts are a joke. Their most popular savings account yields (drum roll) 0.01%. Not one percent, but one hundredth of one percent. For every thousand dollars I might keep in a savings account, I would get ten cents in annual interest, taxable. I do, however, hold shares of Wells Fargo preferred stock which pay 6.8% current yield (for you experts, a somewhat lower yield to call). The shares appreciated about 70% since I bought them at the bottom of the Great Recession.

So I am a money loser for Wells Fargo. They earn merchant fees from my credit card use and that’s about it. They count on their average customer’s ignorance and lack of financial discipline to generate fee income and to carry high-interest balances on their credit cards. Dear reader, if that describes you, don’t despair. You can get out in front of the wave and let the banks work for you, not the other way around. It just takes a little knowledge and some discipline. Most important: if you can’t pay cash for a purchase (or use a credit card paid off before interest kicks in), you can’t afford it! That includes cars. Save up your money and buy a junker. Mortgages are OK for home purchases because of tax breaks, but even there, start with a healthy down payment.

Here endeth today’s sermon. Go in peace and freedom!

A Tale of Free Banking

Herewith we visit an imaginary future where free banking prevails. Government regulation of banks is a thing of the past. Banks have the freedom and the responsibility that they lacked under government regulation. In particular, private banks are free to print money, either literally, in the form of paper banknotes for the shrinking number of customers who want them, but in electronic form for most.

Print money? Horrors, you say! Fraud! Runaway inflation!

Not so fast. Come with me on a fantasy visit to the local branch of my bank, a future incarnation of Wells Fargo to be specific.

The first thing we notice is a display case showing a number of gold coins and a placard that says, “available here for 1,000 Wells Fargo Dollars each, now and forever.” I have in my wallet a number of Wells Fargo banknotes in various denominations. I could walk up to a teller and plunk down 1,000 of them and the smiling young lady would hand over one of these coins. More likely I would whip out my smartphone and hold it up to the near-field reader, validate my thumbprint, and complete the transaction without paper.

I have a few of these beautiful gold coins socked away at home but I don’t want any more today nor do I want to carry them around. Electronic money is ever so much safer and more convenient. Still, I am reassured by the knowledge that I could get the gold any time I wanted it. That is the basis for my confidence in this bank, not the FDIC sticker we used to see in the bank’s window.

Confidence? What about inflation? Wells Fargo can create as many of these dollars as they want, out of thin air. Without government regulation, who will stop them from creating and spending as many dollars as they want?

The market will stop them, that’s who.

In my scenario, Consumer Reports and a number of lesser known organizations track Wells Fargo and other banks. These organizations post daily figures online showing the number of Wells Fargo dollars (WF$) outstanding and the amount of gold holdings that the bank keeps in reserve to back these dollars. Premium subscribers, I imagine, can get an email alert any time a bank’s reserves fall below some specified levels. Large depositors will notify Wells Fargo of their intention to begin withdrawing deposits and/or demanding physical gold. Small depositors piggyback on the vigilance efforts of big depositors. They know it is not necessary for them to pester the bank when the big guys are doing it for everybody.

Wells Fargo practices fractional reserve banking. They cannot redeem all their banknote liabilities and demand deposit liabilities at the stated rate of one ounce of gold per thousand WF$. This situation is clearly outlined in the contract that depositors sign and is printed on their banknotes.

Let’s assume Wells Fargo backs just 40% of its banknotes and deposits with physical gold. How is this figure arrived at? By trial and error. Managers believe that if they let the reserve ratio slip much below 40% they will start getting flak from the monitoring websites and their big depositors. If they let it rise much above that figure their stockholders will begin complaining about missed profit opportunities.

Under fractional reserve banking, bank runs are possible. A bank run is a situation where a few depositors lose confidence in a bank and demand redemption of their deposits in gold or in notes of another bank. Seeing this, other depositors line up to get their money out, and if left unchecked, the bank is wiped out along with the depositors who were last in line. Bank runs are not a pretty sight.

Wells Fargo has a number of strategies for heading off a bank run. They have an agreement with the private clearing house of which they are a member that allows the bank to draw on a line of credit under certain circumstances. There is a clause, clearly indicated in the agreement with their depositors, allowing them to delay gold redemption for up to 60 days under special circumstances. They can reduce the supply of WF$ by calling in loans as permitted by loan agreements. Most important, though, is Wells Fargo’s reputation. Not once in their long history has Wells Fargo been subject to a bank run. Management is keenly aware of the value of their reputation and will move heaven and earth to preserve it.

To sum up, Wells Fargo’s ability to create unbacked money is limited by the public’s willingness to hold that money. The bank can respond to changes in the demand to hold WF$ whether those changes are seasonal in nature or secular.  They have strategies in place to head off runs should one appear imminent or actually begin.

What about competing banks, you may ask. Does Bank of America issue its own money? If so, there must be chaos with several different brands of money in the market. Are there floating exchange rates? Is a BofA$ worth WF$1.05 one day and WF$0.95 the next? What else but government regulation could put an end to such chaos?

The market, that’s what else.

Competing suppliers of all sorts of products have an incentive to adhere to standards even as they compete vigorously. If we were in a classroom right now I would point to the fluorescent lights overhead. The tubes are all four feet long and 1.5 inches in diameter, with standard connectors. They run on 110 volt 60 Hz AC current. Suppliers all adhere to this standard while competing vigorously with one another. If they don’t adhere to the standards people won’t buy their light bulbs.

So it is that competing banks in my fantasy world have all converged on a gold standard. They all adhere to the standard one ounce of gold per thousand dollars. (I trust it’s obvious that I just made up this number. Any number would do.)

Why gold? Gold has physical properties that have endeared it to people over the ages—durability, divisibility, scarcity to name a few. But other standards might have evolved such as a basket of commodities—gold, silver, copper, whatever.

You may raise another objection. All this gold sitting in vaults detracts from the supply available for jewelry, electronics, etc. That’s a real cost to these industries and their customers.

Yes, it is. It’s called the “resource cost” of commodity-backed money. To get a handle on this cost we must recognize that gold sitting in vaults is not really idle, but is actively providing a service. It is ensuring a stable monetary system immune from political meddling. How valuable is that? The market will balance the benefits of stability against the resource costs of a gold standard.

Furthermore we can expect resource costs to decline slowly as confidence in the banking system increases and people are comfortable with declining reserve ratios. Wells Fargo may find that a 30% reserve ratio rather 40% will be enough to maintain confidence. Other things equal, this development would boost profits temporarily, but those profits would soon be competed away, to the benefit of depositors and the economy as a whole.

Let’s go back to bank runs. Aren’t they something horrible, to be avoided at all costs?

Actually an occasional bank run is something to be celebrated. Not for those involved, of course, but to remind depositors and bank managers alike that they need to be careful. The same is true of the recent Radio Shack bankruptcy. Bad news for stockholders, suppliers and employees but an opportunity for competitors to learn from this bankruptcy.

Under my free banking scenario, depositors must take some responsibility for their actions. That doesn’t mean they have to become professional examiners. They just have to take some care to check with Consumer Reports or other rating organizations before signing on with a bank.

Have I sketched out a perfect situation? There’s no such thing as perfection in human affairs but I submit that this situation would be vastly superior to what we have now, where the Federal Reserve’s policy of printing money to finance government deficits will end badly. Furthermore, relatively free banking has existed in the past and worked well. To learn more, start with Larry White’s “Free Banking in Britain.”

What’s up with Oil and the Saudis?

In case you haven’t noticed, the price of oil has dropped dramatically and has not rebounded as yet. As I write, the price of the most common form of crude oil is under $54 per barrel, about half of what it was in mid-2014. What’s going on?

Several factors contributed to the fall. One was increased U.S. production, much of it shale oil. Also, U.S. consumption has not been rising apace with GDP in part because of higher fuel efficiency. Demand in Europe and Japan is muted due to low growth or recession.

Those things did not happen suddenly, however, so the drop would appear to be overdone. Large producers, who have a lot of pricing power, would normally cut production in this circumstance. (Pricing power means a change in their production has a noticeable effect on the world price.) The Saudis have considerable pricing power and their production decisions are controlled by their government. Why have they not cut production? I believe they are engaging in predatory pricing.

Predatory pricing is illegal in the U.S. and elsewhere, under anti-trust law. Predatory pricing occurs when a supplier cuts his prices for the purpose of bankrupting a competitor, or at least driving the competitor out of the market. The predator is willing to suffer losses or reduced profits temporarily, while holding the prices low. Once the competitor is gone, the predator’s pricing power will have increased enough that he can raise prices a lot and make up for losses suffered during the period of predation. Predatory pricing is definitely possible in free markets but is very risky for several reasons: (1) the predator can’t be sure how long it will take to ruin his competitor, (2) he can’t be sure how long he can maintain low prices without sustaining ruinous losses or perhaps face a shareholder rebellion, (3) it’s possible the competitor, or someone who has bought his assets in bankruptcy, will come back to life and start competing as before. For these reasons (and others, such as the difficulty facing regulators who are supposed to distinguish predatory motives from “innocent” business strategy), I believe there is no reason to outlaw predatory pricing.

The situation is a little different in the international oil market because the Saudis and many other major players are government controlled. They are not constrained (much) by the market forces outlined above. They are not accountable to shareholders and are only vaguely responsible to the population of Saudi Arabia. They have substantial latitude to pursue political motives even if their profits suffer.  And anti-trust law does not operate across national borders.

What might the Saudis want to accomplish politically? They hate Russia and Iran, both of which rely heavily on oil exports. They don’t hate the U.S., at least not openly, but they surely wouldn’t mind sticking it to U.S. and Canadian shale oil producers. Those producers are largely market-driven and thus have limited ability to withstand predatory pricing. The Saudis could indeed drive smaller firms out of the market, and also less profitable operations of larger firms.

That might not be such a bad thing. There has been a huge land rush into shale oil and fracking. In any such boom, whether in energy, mining, or computers, many small firms fall by the wayside. If the Saudis ruin some marginal firms or projects, that’s not such a bad thing.

We little guys are sitting pretty. We’re paying a lot less for gasoline. If we hold shares of the major oil firms we’re probably OK, as their share prices have held up and their dividends look solid. The same is true of the pipeline operators. Only if we hold shares of marginal energy firms or oilfield service companies are we in any trouble.

So – go for it, Saudis! Stick it to the evil governments of Russia and Iran and help us clean out some of our marginal energy operations.

Net neutrality? Mail neutrality?

“Net neutrality,” you surely know, is the notion that all internet traffic ought to be treated equally. All it takes is that one little word, “equal,” to send hoards of left-wing morons to the barricades. For those who care to think through the issue, I offer the following.

If net neutrality is a good idea, so is “mail neutrality.” The Post Office should treat all mail equally. No more Priority Mail, not even First Class Mail. Just mail.  No more commuter express lanes on the freeways.  No priority for anybody, anywhere.

Data sent over the internet, or any local network for that matter, is divided into packets which have header information indicating the destination of the packet followed by a block of bytes that is the digital form of the data, whether text, audio, or video; web traffic, email, or ftp. As far as I know there is no provision in the ethernet protocol for priority information, but that isn’t necessary to prioritize packets.

Why should they be prioritized? Because different kinds of traffic have different natural degrees of urgency. email messages are not terribly urgent, but packets of video are, because if the those packets don’t keep coming at a steady pace, the result is irritating pauses and that little spinning circular thingy. If consumers of video want good service, they should pay for it. If email users who are in no hurry are willing to wait a bit and pay less, that’s good too. Markets generally tend to segment in this fashion. Starbucks doesn’t practice coffee neutrality. They offer fancy drinks to those willing to pay for them and plain coffee for those of us who just want the caffeine.

What rules should be set for internet providers? None, except common law prohibition and prosecution of theft and fraud. Let the service providers set their own policies for use of their private property.  In the interests of their bottom line, they will seek out practices that best serve their customers.  The crucial requirement is that politicians and bureaucrats be kept away.

Staten Island and Cleveland: Different from Ferguson

Having argued in a recent piece that the problem with Ferguson was collectivism, as manifest in the notion of collective guilt, I feel obliged to speak out on recent incidents in Cleveland and Staten Island. None of us (presumably) were there so we need to be cautious, but what we see from those unfortunate places strongly suggests police misconduct.

I am a native of Cleveland and it comes as no surprise to me that the police force there is a troubled one. For many years there has been a divide between the central city and suburbs and despite a few encouraging exceptions, things have gone steadily downhill in the central city. The problems are similar to Detroit’s but on a smaller scale. The best Cleveland Police officers would surely aspire to leave the Cleveland PD for one of the suburban forces at the first opportunity. It doesn’t surprise me that the Justice Department claims there has been systematic excessive use of force by the Cleveland police.

I have only been to Staten Island once and cannot add anything to what is generally known. That the unfortunate victim was selling untaxed cigarettes, of all things only adds to the outrage.

The non-violent demonstrators in both cities are right this time.