Who Should Set Interest Rates?

Column 2019-6 (2/11/19) 

I have debated with myself about writing this column. It covers an important point that is generally ignored. My concern is, Will it put everyone to sleep? If it does, perhaps you should clip it out and put it in your medicine cabinet.

In free markets buyers and sellers interact to determine prices. When there is a surplus of hammers the price decreases. Producers make fewer hammers. Because of the lower price buyers purchase more hammers. The price moves toward the point where supply will equal demand. That “perfect price” is a moving target, not a fixed number. Nevertheless, supply and demand stay close to being balanced most of the time.

If government imposes price controls, shortages and surpluses are inevitable. Producers will only make things they can sell at a profit. Price controls caused the natural gas shortage during the 1960s and 1970s. The price was set so low that drillers stopped drilling. The waiting lines at gas stations in the 1970s were also caused by price controls. Gasoline prices could not rise to where supply equaled demand.

Half of most sales is money. Even if the buyer doesn’t pay with money, the prices are usually expressed in units of money. In the US most prices are expressed in US dollars. How can we have free markets when the quantity of money and the rental price (interest rate) are determined by the government?

Government doesn't set interest rates. The Federal Reserve (Fed) increases or decreases the amount of money until lenders and borrowers agree on the rate the Fed wants. It is like determining the price of hammers by manipulating the supply of hammers.

Almost all economists recognize that price controls for goods and services create shortages and surpluses which can cause serious problems. At the same time most economists accept and encourage price controls on the rental price for money.

Government can’t create hammers, natural gas, and gasoline out of thin air. So, when the shortages occur people are left on their own to deal with the problems as best they can. The Fed and fractional reserve banks can create an unlimited amount of money out of thin air. Thus, even with artificially low interest rates borrowers can still find money to borrow.

So, what is the problem? The problems occur when the borrowers start spending the new money. The supply of things to buy didn’t increase when the money supply increased. Prices rise, soon, even with the new money the borrowers can’t afford to buy. They cancel their buying plans that were based on more money and the same old prices.

The shock waves disrupt the entire economy. The recession that follows is the price we pay for government’s manipulation of the rental price of money.

If the money supply wasn't manipulated by government, only savers could lend. The saver would transfer his right to his savings to the borrower. The borrower spends the money the lender didn’t. The money supply remains unchanged. Borrowing has minimal affect on prices.

Interest rates will endlessly seek the point where the demand for loans equals the savings offered for borrowing. If borrowers want to borrow more they will have to offer to pay higher interest. This offer will encourage more savings.

No one will have to worry about finding the right interest rate. Interest rates will be determined by lenders and borrowers interacting in the marketplace. This will eliminate the problem of artificially low interest rates over heating the economy which then crashes into a recession.

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Copyright 2019

Albert D. McCallum

For Profit

Column 2019-5 (2/4/19)

For many the term “for profit” is an obscenity. I doubt that most people who hate profits understand the object of the hatred. Perhaps they have been conditioned by others to hate profits.

So, what are profits? A business sets out to produce and sell something. It secures resources and makes its product. If the product sells for more than the resources cost, the gain in value is profit. The business earned its profit by pleasing its customers.

Profits can be measured only in free market transactions. If the business is subsidized by government or the customers are coerced to buy, we can’t know the real cost of the product or what customers free to choose would have paid for it. There is no way to measure the earned real profits. At least part of the business's gain was forcibly taken.

Measuring profits and losses is a way to calculate whether the business created or destroyed wealth. If a business creates substantial wealth, others will try to duplicate the success. Increased competition will pull down profits. In free markets profits are self limiting.

A legislator has submitted a resolution to amend the Michigan Constitution. The amendment would make it unconstitutional to hire a for profit business to manage a charter school. The Mackinac Center for Public Policy has analyzed the ratings for Michigan schools. It found that some of the best schools are charter schools managed by for profit businesses. Should the successes be wiped out by a constitutional amendment?

For profit businesses provide our food, vehicles, clothing, furniture, etc. Why is it a special evil for them to provide education services? If it is evil to profit from providing education services. How dare we pay school teachers and administrators? “Wages” is just a different name for profits earned by an employee.

This does not mean all wages are earned. Some employees are paid more than the value they produce. For profit businesses try to identify and eliminate such wasteful jobs. Government doesn’t have to worry about keeping employees who cost more than they produce. At least it doesn’t have to worry until it reaches the limits of taxation and borrowing.

Government “sells” to taxpayers who don’t have the choice of saying “no.” Thus, we will never be able determine the value, if any, of what government produces.

I don’t doubt that those who want to eliminate “for profit” from charter schools despise profits. I strongly suspect that they hate charter schools even more than they hate profits.

The hatred of charter schools is fueled by the schools’ successes rather than their failures. No one is forced to patronize charter schools. Charter schools can survive only if they convince parents and students that the charters provide better service than district schools provide.

For the most part those who attack charter schools do so to preserve district schools for the benefit of the schools’ employees and the unions. To achieve this goal they are willing sacrifice the students.

The Detroit district schools are generally recognized as the worst in the country. Anyone who is pro education should seek to aid children in escaping those schools, not force children back in to them.

Consumer choice kills businesses that fail to please customers. Government subsidizes its failed schools so they can continue torturing children. The Detroit district schools have been headline grabbing failures for decades. There is still no improvements in sight. Why should we sink the charter school life boats in which some children have escaped?

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Copyright 2019

Albert D. McCallum

California Crazy

Column 2019-4 (1/28/19)

I try to ignore California. Apparently this irritates California. It keeps upping its game until it does something so outrageous I can’t ignore it. This time California hit me with a trifecta. The three contestants are competing for both the most outrageous and the silliest. You can pick the winners.

The first two entries spring from the shortage of housing in the Golden state. Several cities have an idea. They turned it in to an ordinance. I don’t understand how the ordinance eases the housing shortage. Maybe you will.

These ordinances require the owners of rented housing to pay the tenant a moving expense charge to get the tenant to move. Payment of the charge is required even when the rental period has ended. The charge may be as much as $8,000.

A couple serving in the military rented out their house while stationed outside California. When they returned they had to pay thousands of dollars of ransom to liberate their house. The ordinance didn’t even exist when they rented their house to the tenant. Surprise! The legality of the moving charge is now the subject of a lawsuit.

The national government has a program that aids the building of “affordable” housing. A developer used this program to get the government to provide most of the financing to build some apartments. The apartments cost over $700,000 each.

I guess affordable doesn’t mean much until you know “affordable by who.” Or, perhaps no one can afford to live in California.

Having just saved humanity from destruction by plastic straws, California seeks new dragons to slay. Without villains there would be no heroes. Berkeley found a monster lurking in the same jungle as plastic straws. The newly discovered menace is the straws companion, disposable cups.

How might a hero slay the disposable cups? Berkeley’s dragon slayer is the quarter. Be very careful when you reach for your change. It may include one of those killer quarters.

So, how will Berkley deploy its newly discovered weapon? It will require beverage sellers to charge a nonrefundable fee of $0.25 for each disposable cup. The merchant gets to keep the quarters. This may be the dragon slayer's Achilles heel. As one reporter pointed out, there appears to be nothing to prevent a merchant from lowering his price $0.25 to offset the cost of the cup.

One of the counsel members voting for the ordinance suggested it was to save the planet. Ah, yes, for the want of a quarter the planet was lost. The ordinance did include some other planet saving features, such as a ban on disposable table wear that wasn’t compostable.

Maybe going back to wooden spoons will save at least half of the planet. Do ice cream cups still come with wooden spoons? Or, is that something that only those of us from the age of dinosaurs remember?

In case three examples weren’t enough, I am including a bonus warning without any extra charge. California is considering baning paper receipts for purchases. Would this force everyone to switch to plastic?

Some may believe I want to stop the foolishness in California. I wouldn’t think of it. No idea is so bad some politician doesn’t want to road test it. Let California be the proving ground for bad ideas. California can serve as the bad example for the rest of us to learn from.

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Copyright 2019

Albert D. McCallum