Browsing the blog archives for October, 2013.

Starbucks in China

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Starbucks is now a target in China. State-owned CCTV recently complained that a medium-sized latte costs $4.43 in China compared to $3.28 in Chicago, $2.40 in Mumbai, and $3.98 in London. CCTV accused Starbucks of price discrimination.

I first learned of the incident on CNN-International while traveling abroad. CNN-I is always willing to jump on anything opposed to capitalism or the Republican party. The network reported on the story right after noting that the Australian wildfires have reignited discussions on global warming, and right before identifying Ted Cruz as the most reviled man in Washington. CNN-I referred to the practice as price gouging and immediately demanded a response from Starbucks.

Price gouging? Really? The term “price gouging” is typically used to describe situations involving presumed necessity, such as buying oil or drinking water after a natural disaster. But coffee? Do companies like Starbucks really need to justify their prices to CCTN, CNN-I, or anyone else?

Starbucks has been an active participant in “fair trade” coffee since 2000, meaning that it pays above-market prices for coffee beans from growers in poor regions of the world and passes the extra cost along to consumers. The media has no problem with the fair trade concept even though it results in price hikes. Hence, the uproar here is not about price, but about profit. It’s being alleged that Starbucks—not the poor coffee growers—is profiting unfairly by charging a higher price in Beijing.

This claim is ridiculous on its face. Companies set prices based on costs (e.g., land, taxes, labor, and materials), demand for the product, and competition. The market price is usually what the market will bear. Sometimes this level is well above the cost to produce a product; sometimes it can even drop below production cost. Because these factors vary across locations, it is obvious that Starbucks’ prices would vary as well. The Economist has demonstrated this for years by tracking the price of a Big Mac across the globe (http://www.economist.com/content/big-mac-index).

I found the CNN-I coverage particularly misinformed. The news anchor added a side comment about her recent coffee purchase and “having to pay” a certain amount for a cup. I didn’t realize anyone forced her to pay anything? Did they tie her up or just snatch the money out of her purse? Perhaps she should have called the police…

So why should you have to pay $4.43 for a cup of coffee in China? The answer, of course, is that you do not. Brew your own coffee or shop elsewhere. Starbucks isn’t gouging anyone. In fact, you hold the fate of Starbucks in your hands every time you make a coffee purchase decision. What networks like CCTV and CNN-I fail to understand is that consumers are ultimately in charge in market economies.

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Obamacare and the Debt Ceiling

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The Republicans caved as expected. We’re told they did all they could in the battles against Obamacare and the debt ceiling. If we could only unite again and elect more Republicans…

I’m not buying it, at least not at the party level. I expect my representatives to compromise, but not on core principles. Congress is supposed to control the purse strings, but the Republican establishment seemed unwilling to take a real stand.

The problem is not one of courage, but of convictions. A default was virtually impossible (without Obama’s directly causing one) even if the debt ceiling had not been raised, yet many Republicans referred to “reaching a deal to avoid default.” When pressed by the mainstream media about “shutting down the government,” many Republicans accepted the narrative and responded sheepishly. Unfortunately, the truth is that many Republicans accept a Keynesian worldview and are really promoting a mixed economy with a healthy dose of socialism.

The problem with the middle ground is that is always seems to shift further to the left, primarily for political reasons. The cost per individual for a given wealth redistribution program is rarely great enough to muster enough political will to stop it. But most programs have their own advocacy groups. Consider subsidies for ethanol. Various farm groups campaign vigorously for them because they reap a significant financial benefit, but the average person doesn’t pay enough for the program to justify putting up a fight. Besides, their supposed intent is to advance alternative energy, and who can argue with that. Never mind the fact that fuel subsidies are bad economic policy.

Bastiat called this plunder. One group lobbies politicians for programs that redistribute the wealth of others for their own benefit. When everyone is plundering everyone else, the result is a mishmash of bad economic policies, expanded bureaucracy, high taxes, debt, and reduced independence and personal initiative. This is the current state of affairs in the US.

Obamacare should have been an exception. The cost will be massive and should have been large enough to raise enough attention to stop it, or at least rein it in when many of the problems became apparent to those who actually believed that it would expand health care while lowering costs. The Democrats can be blamed for passing it, but Republicans as a group were unwilling to hold out for some reasonable concessions. These Republicans are part of the problem.

Raising the debt ceiling should have been another exception. A trillion dollars in government spending works out to about $3000 per person, and that’s before you consider that many Americans don’t actually pay taxes anyway. Insisting on a serious change should be a no-brainer for anyone with a sense of fiscal responsibility.

We reached a crossroads when President Obama was elected with Democrat majorities in the House and Senate. We just reached another when the Republican majority in the House—the most important branch of government in terms of legislation and spending—refused to hold its ground and insist on a legitimate compromise on these two high profile, high-cost issues. The Republican Party has become its own worst enemy.

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The Truth About the Debt Ceiling

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As we move closer to the debt ceiling “deadline,” there are 2 points I would like to make. First, the U.S. WILL NOT NOT DEFAULT if the debt ceiling is not raised UNLESS President Obama chooses to do so. Monthly tax and other revenues are sufficient to cover interest on the debt, as well as Social Security and other obligations. The President has a good bit of authority to decide what gets paid and what doesn’t. The idea of a default is only propagated by those who have a personal interest in leading you to believe that the world will come to an end this weekend if we don’t continue spending more than we take in. It won’t.

The second point is a bit more complicated. President Obama and other Democrats have been talking DOWN the stock market for the past few weeks. I believe this is also being done to scare average Americans and old-guard Republicans into thinking that the debt flow must continue or their personal portfolios and retirement accounts will be at risk. Wall Street is responding to this rhetoric to a point, and some minute-by-minute analysis suggests that traders tend to sell off each time the President warns of financial catastrophe. But we must look at the bigger picture.

Wall Street has been and continues to be the beneficiary of Fed-financed government debt, much of which primes demand for securities and pushes prices upward. Like Washington, Wall Street is addicted to debt and the Fed’s artificially low interest rates. Expect stock prices to drop in the short run if and when one or both of these drugs is withheld. I don’t think this can be avoided. When this will occur, the extent of the decline, and our ability to recover are open to speculation.

The debt ceiling debate is only a symptom of the real problem, the debt that got us to this point in the first place. Raising the debt limit to keep the drug flowing is not a solution. In fact, doing so will simply increase the debt and create more pressure to raise the ceiling next year, the year after, and so on.

The Federal Reserve is a huge player as well. The Fed is financing much of our new debt because other nations, namely China, have become less willing to do so. Interest rates are being kept near zero–well below the natural market rate–to prime consumer spending and keep government debt payments low. As price inflation becomes more of a problem, it will be difficult for the Fed NOT to raise rates. This scenario is largely predictable and has the potential to wreak real havoc on our economy. It is brewing while many Republicans seem preoccupied with negotiating a “deal” to save the country from alleged default.

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Unintended Consequences

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Investors Business Daily and other publications have chronicled numerous and serious problems associated with the implementation of Obamacare, from huge cost spikes to a long list of companies cutting workers to avoid the impending regulations. The President recently claimed, “There’s no widespread evidence that the Affordable Care Act is hurting jobs.” I don’t know how he defines widespread, but other Obamacare defenders have acknowledged some of the “glitches,” referring to them as unintended consequences.

An unintended consequence is when something happens that was, well, unintended. If these consequences were unintended, then the follow-up question should be unintended to whom? No serious economist, politician, or businessperson should have ever doubted that many companies will cut hours whenever possible if doing so avoids retribution from Washington, or drop or modify their own plans if they become too expensive in the new system. History tells us that any new government program can be expected to cost much more and deliver much last than originally touted. A cursory analysis of Amtrak, the post office, or the IRS should tell us all we need to know about government’s inability to manage organizations effectively and efficiently.

If we take those who claim unintended consequences at their word, then we should also insist that they join the opposition, because there’s a lot more to come. I’m not so generous. I think many supporters expected these problems are simply want another round of “reforms” to whip the American public into shape. They favor the inherent wealth redistribution in the plan and don’t mind forcing it into place. When the Republicans likely cave, I expect those on the left to propose more regulations to fix the problems created by the current ones. Such is the process of socializing a once free nation.

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