Thursday, September 21, 2006

The Economics of Gang Life

Steven Levitt, author of Freakonomics, discusses the economics of being in gang. It's fascinating to break down the thought-process of young inner city kids, and to think that joining a gang that makes profit by selling crack is actually a highly rationale decision. Levitt remarks at one point during his lecture that being a crack dealer in a gang is the worst job in America, yet he acknowledges the potential benefits of an inner city teenager doing just such a thing.

A street-trader in a crack cocaine gang in Chicago earns $3.50 an hour, and if he is in on the street selling cocaine for 4 years he has a 25% chance of dying. These are horrifying conditions, but the potential payoffs are enormous. If a street-trader becomes in charge of a small part of turf, with street dealers working for him, he will earn $100,000 annually. For a young inner-city kid, who cannot go to university, or get anything but a minimum-wage earning job, earning $100,000 is tremendous, and it is obvious why a young inner-city teenager would be lured into joining a gang.

There are two problems with this situation.

First, there is a 25% chance that these street-dealers will die if they stay in the gang for four years, and such a loss of life, at the hands of other humans, is simply not acceptable.

Second, talent that could be going to university and subsequently benefiting society is instead going into violent drug-dealing gangs.

So what should be done?

The most critical component of a solution to get inner-city kids off the streets and into productive society is education. And this is government's responsibility. Inner-city public schools are simply not able to effectively craft productive members of society, and are often a recruiting ground for gangs. Furthermore, inner-city public schools have a vicious lack of motivation cycle, whereby academic success is in some instances simply not possible.

Government should provide vouchers to good inner-city students to go to private schools that provide far better education than inner-city public schools. Funneling more and more cash into public schools will not do much at all to help; the best bet for inner-city school kids with potential is to be educated in an environment in which they will not be exposed to gang violence, as well as receive a great education.

But what about getting the kids that are already on the streets, off?

That is a more difficult question to answer, as members of gangs have probably subscribed to the dogma of the gang, and endorse gang life over all else. They are most likely resistant to taking other life-paths.

Instead of trying to convince individual gang members of the ills of joining gangs, of which they are certainly aware, and disregard, the best solution is to attack the problem at the source: get rid of gangs altogether. How can such a lofty ambition be accomplished? The solution is actually fairly simple. Gangs derive practically all their revenue from the black-market sale of drugs, so if the black-market for drugs is eliminated, gangs will have no source of revenue, and will thus cease to exist. So how do we eliminate the black-market? Legalize drugs. All of them.

The black market exists because it is illegal to produce, consume, and sell drugs such as cocaine, marijuana, ecstasy, etc. Making them legal and available at licensed stores removes the black market, and allows a private and far more efficient market to arise. One might say that legalizing drugs will result in widespread consumption and the subsequent degradation of society, but to that point I argue that drugs are widely available now, and their consumption is not overtly widespread, at least not to the point of bringing society to its knees. Furthermore, drugs sold legally could be taxed, and the revenue gained from drug taxes could be used to fund school vouchers, or the police department in the inner city.

I disagree with drug illegalization on a theoretical, moral basis. Yet the illegalization of drugs has a far more widespread effect than just my objection to it. It is my strong belief that the legalization of all drugs will significantly reduce the impact gangs have on the inner city, allowing inner city kids to become productive members of society, instead of gang members trained to kill.

Tuesday, September 19, 2006

Al Gore Proposes Carbon Tax to Replace Payroll Tax

Al Gore has proposed scrapping the payroll tax that finances social security, and replacing it with a carbon tax. According to him, the revenues from taxation would remain the same, the difference is the individual would not be taxed for working, giving him a larger incentive to work, and the business would be taxed for polluting, giving it a larger incentive not to pollute.

In short, I think this is a fantastic idea. The fact that payrolls were taxed to finance benefits that the very people who were directly taxed were to receive I find ridiculous. Why not let them spend their money as they please? It is simply government paternalism. The environment, on the other hand, is an issue which needs decisive action. A direct tax on carbon emissions would give industry a higher incentive to explore other alternative fuel possibilities, and at the same time it would lower the tax burden on the workers.

Reducing the tax on employers would give employers more incentive to employ, as they have more money available to pay workers. So not only would scrapping the payroll tax lead workers to be more productive, it would lead more workers to be employed.

The fact that under Gore's plan, carbon emissions would be taxed will inevitably be reached with harsh opposition by business ineterests, especially the coal industry, as they will certainly be hurt by a tax on emissions. So be it. The threat to our environement is too great, and the burden on the employers and employed too overbearing, for the current system of social security financing to be continued.

Of course, everything could be better if the whole system was scrapped altogether, but that, unfortunately, is political suicide.

Do Corporations Have a "Social Responsibility"?

My friend reacted poorly to my entry on “Fair Trade” standards. “Chris,” he said, “by your logic we shouldn’t buy our favorite clothes either, because they were probably manufactured in a sweat shop. How can you blame the companies?” And how can you? Is not every corporations sole obligation that towards the shareholder? Should a corporation not be concerned exclusively with profit?

My friend’s protestations of my attacks on the Starbucks corporation bring up a question that has existed as long as the corporation itself: should corporations be held morally and socially responsible?

The answer is obviously too complicated to be answered with a simple yes or no, but it is my opinion that corporations should indeed be held morally and socially responsible. At the same time, however, a corporations primary objective should be to maximize profits and benefit shareholders. So clearly a balance is required, between a corporation concerned solely with the welfare of society, and not its actual business, and one that is ruthless and merciless in its pursuit of the almighty dollar.

I draw the line at two issues, and both relate to the economic stability and welfare of society at whole: transgressions of the law, and misinformation.

I believe corporations should be held entirely responsible for staying within the boundaries of the law, whatever they be, at all costs. The law helps provide stability and predictability to a market, which, if followed by all parties, insures competing ends that any transactions they enter will be able to be backed in court, and upheld. Without adherence to the law, individuals and corporations alike would not be able to determine if transactions they undertake are fair to them, thus an adherence to the law is absolutely necessary for corporations and individuals alike.

Misinformation (also known as lying,) a subject a remarked on yesterday, hinders the ability of individuals to make decisions that benefit themselves, impeding the efficiency of markets. Starbucks, in falsely advertising that its coffee is “Fair Trade,” misleads the consumer into buying coffee that he/she believes to be environmentally friendly and ethically grown. Corporations must ensure that information they give the buyer or consumer is factually correct, and although often not upheld stringently by the law, as is the case with the Starbucks situation, it is a responsibility that corporations must undertake and accept.

So while I do not believe that corporations have the ‘social responsibility’ that many claim, such as the responsibility to provide healthcare and benefits to employees, or to be more environmentally friendly than is required, I do believe that corporations must operate within certain simple bounds, that, when transgressed, do harm society and the ability of the markets in which the corporations exist to operate efficiently.

So to my friend, when he asks me “how can I blame the corporation?” I answer quite simply that I can blame the corporation because it does not uphold its duties as a component of a free-market system, that works on the availability of information and operating within the law.

Monday, September 18, 2006

Enjoy your Starbucks Coffee You Disgusting Pigs

Starbucks, as well as many other coffee retailers, advertise their coffee as being "Fair Trade" certified. Fair Trade grown coffee is *supposed* to mean that the coffee growers were paid directly by the buyers, that workers for the coffee growers were paid minimum wage, and that the growing of the coffee was in accordance with certain environmentally friendly guidelines, among other things.

Starbucks, in advertising that its coffee is "Fair Trade" is, quite simply, lying.

An investigation by the Financial Times revealed that hardly any coffee farmers pay their workers the minimum wage, primarily because they are not being paid the minimum wage themselves. Furthermore, the Financial Times found one Fair Trade licensed farm in Peru to be growing 20% of its coffee illegally by planting on National Park designated area.

So, Starbucks, the bastion of liberal psuedo-intellectuals everywhere, the onus is now on you. Will you, given this new information, continue to brandish the Fair Trade label in order to secure more profit, at the expense of the coffee growers and workers in third world countries? Or will you act as a responsible corporation, and fight for what you advertise so vociferously?

When you walk into a Starbucks next, and see the "Fair Trade" label next to a $5.00 cup of coffee, think of the Peruvian plantation worker, getting paid $3.00 a day. And then think of the greedy Starbucks executives sitting in their boardrooms.

Oh wait!! I thought this was supposed to be a free-market, capitalist, blog? It is! Free-market means FAIR. And exploiting misinformation and lack of regulation in order to get a quick buck is not a capitalist value, and certainly not a value of mine.

I'm Back

I'm back to writing for this blog, after a hiatus of a few months. In the future I will try to concentrate on analyzing current political and economic events, but I may write a few essays as I have done in the past on various theoretical subjects.

The Federal Reserve meets on Wednesday (2 days from now.) Many analysts are predicting the Fed to keep the interest rate at 5.25%, but I think that would be a grave mistake, and an indicator of the Fed's willingness to allow excess liquidity to flow not into customary inflation, but into asset markets, such as the housing market. A huge housing market bubble has resulted, and has fueled American consumer spending. As America's economy is reliant on heavy consumer spending, a burst in the housing market bubble, which would greatly reduce the purchasing power of American households, would be disastrous.

Yet this type of bubble is exactly what the Federal Reserve (and China) continues to finance. In 2003 the Fed slashed interest rates to as low as 1% out of a fear for deflation. Why? The Fed obviously still has bitter memories of the Great Depression, in which deflation resulted in a vicious cycle of economic stagnation. But the economic situation of the 1930s is not at all similar with the economic situation of today. A comparable time period would be the 19th century, when the industrial revolution greatly increased production and thus lowered prices, resulting in deflation. Today, new industry and technology do not have as much to do with the global economic boost as does a new phenomenom: gobalization. During the industrial revolution, deflation was accompanied by great economic growth, so the fear of inflation that the Fed exhibits today is entirely unfounded.

So how has globalization contributed to lowered inflation? Emerging economies, most notably China, are able to produce goods at much lower prices than developed economies such as the United States. Thus, an influx of cheaply priced goods into the US results in lower prices across the board, holding down inflation despite economic growth and lax monetary policy.

So if monetary policy is lax, meaning there is a large amount of money in the economy, and prices are down, where does the money go? Into various asset-markets, most notably the housing market. The Federal Reserve should have encouraged deflation, and kept interest rates high, thus preventing the housing market bubble. Is it too late to fix the problem? I think a backlash of some kind from the bubble is inevitable, but the Federal Reserve must take note of the severity of the situation. Inflation has slowed in recent weeks, due to lower oil prices and a slowing of the housing market, and the Federal Reserve should attempt to continue that trend by raising interest rates at its meeting on Wednesday. This would allow the housing market to become progressively depressed rather than building up the bubble, only to have it burst instantaneously, throwing millions of Americans into economic disarray.

Some pessimism: “This soft-landing scenario is a fantasy,” says Ed Leamer, director of the UCLA Anderson Forecast."

And some more from the same economist: “Anything housing-related is going to feel like a recession, almost like a depression.”