Fair Trade or Free Trade?

You may have encountered the idea of "Fair Trade" or "Free Trade" in your daily life. Perhaps you were in the local grocery store looking for some herbal tea and noticed a sticker on the box or bag that said "Fair Trade Certified," or something along those lines. Perhaps you've read the newspaper about the WTO and "Globalization" and "Free Trade." Maybe you have a preference for one or the other. Or maybe, like me you're not quite sure of the difference between them, nor their importance to our lives as citizens in a prosperous country or as consumers.

Let's start with some definitions. Free Trade is the idea that trade should be unimpeded by excessive rules and regulations, usually established by governments. These governments create tariffs on goods they see as a threat to their own, domestic industries. The high tariffs prevent or at least make it harder for other countries' goods to be sold in the particular country. This of course makes it easier for domestic industries to compete amongst themselves (they don't have to compete on the world market for domestic customers).

Fair Trade takes the idea of free trade a bit further. Proponents of fair trade believe that free trade doesn't quite cut it. They think that trade should also be "fair." This might mean that rather than eliminating a tariff as a solution to helping a poorer trading partner, they would advocate paying more for the good, to ensure the producer gets a "fair" price. The problem (as the Economist points out) is that the definition of "Fair" is often quite subjective. Frederic Bastiat, a 19th-century French satirist, once observed that the sun offered unfair competition to candle makers. If windows could be boarded up during the day, he argued, more jobs could be created making candles. You can see where this line of thinking might take you.

Most Free Trade agreements were facilitated by meetings with richer countries and agreements that they would lower tariff rates from around 40% down to 4% on manufactured goods. This has been a boon for consumers. Think of cars, for example. Imagine not being able to purchase a Toyota, Honda, Mercedes, etc. Even though these cars tend to have an arguably higher quality rating than domestic brands, with high tariffs in place, you would have to pay a higher premium for them, most of which is used to pay the import taxes to the government. Think of how happy Ford or GM might be at higher tariffs on foreign cars. They wouldn't have to try very hard to produce a competitive car, because they know the consumer might consider price a major factor in their purchasing decision.

While manufacturing has benefited around the world due to the lessening of restrictions, world-wide agriculture has been severely retarded by high tariffs, mostly from developed countries. This hurts developing and third-world economies as farming is usually one of the only ways they can make money (textiles and clothing are also other markets they are often shut out of). An example from an article here (also posted in the comments section) cites the sugar industry as having a particularly nasty lobby that contributes money to politicians in order to ensure that tariffs on sugar in America and Europe remain quite high. As a result, consumers (you and me) pay quite a high premium on sugar, that if we had access to the world market price, sugar would be 90% cheaper. You might be thinking that you don't buy sugar very often and that it doesn't really affect you, but think again. The sugar that goes into candy, bread, sauces, etc. is all being bought at higher prices. Lower these prices, by buying sugar on the world market (and thus supporting poorer farmers from Africa, South America and Asia), and you would naturally decrease the price of a lot of consumer consumables made with sugar. You can help people and still be selfish!

You may have pegged me as a free-trade advocate or as a pro-globalization nut, but I would say that I'm a consumer advocate above all. And with that in mind, I'm not totally opposed to fair-trade, as long as I (and other consumers) have a choice in the matter.

Common advocacy for Fair-trade might be identified closely with the coffee and tea industries of the world. According to the International Coffee Organization, there are over 25 million coffee growers/producers in the world. A lot of times coffee can account for over 75% of a country's export income. Companies like Cafe Direct work with farmers from countries that don't have access to the richer markets and help advertise their coffee. This newly branded "Fair Trade Coffee" sells at a premium compared to other coffees, because the consumer is paying for the price of producing the coffee, plus a "social premium" that covers the cost of living in the country where the coffee was produced, a measure preventing the producer from taking on too much debt, and enough to help the farmer/co-op to improve their operation.

If a consumer wants to help poorer people who are trying to make a living in a world where tariffs and unfair rules are preventing them from getting a fair price, then I applaud them. One of the nice things about living in a free, capitalist society, is that the choice to buy fair-trade goods is available.

However, I think that when it gets right down to it, I would prefer the "Free-trade" approach and have governments lower their barriers to entry and have a truly global market available for all types of goods and services. This would allow countries to specialize in the types of manufacturing or agriculture (or services) that their talents, geography, and culture would best support. This idea is called comparative advantage (a great practical example concerning Country Alpha and Country Omega is highlighted in the link). This idea is extremely important when it comes to understanding the benefits of Free-trade.

I was talking with two different friends at two different times. One had recently returned from Peru on a humanitarian mission and the other had lived in Mexico during her years in college. The friend who had been to Peru lamented the encroaching presence of Wal-mart and McDonalds and the friend who lived in Mexico thought that globalization was destroying their simple way of life; their "culture," as she put it.

Both arguments, to me seem quite selfish, and are based on the idea that the people of these different countries want to continue to live in the poverty they currently find themselves in. The people in Mexico (where she lived) had to live in mud huts and electricity was a luxury. Their major crop was corn of which they mostly grew enough to survive on. She said they couldn't sell it because they wouldn't be paid much. Imagine if trade barriers in the United States for corn were erased. Those people in Mexico might be able to sell their corn on the open market for less than what it costs an American farmer to grow it.

The consumer benefits because now they have more money to buy other things with, the Mexican farmer benefits because they have income to which they can buy electricity, more land to farm, or what they deem necessary. The loser is the American farmer. Currently the source of the most opposition (or fill in whatever industry worker you want: textiles, furniture, cars, anything). They are the ones that want tariffs. They are the ones complaining about losing their jobs to the Chinese or Indians (or Mexicans in the above case). What people need to understand is that because the farmer can't produce the corn at a value to the consumer, they can now do something else. They can learn how to program computers or work in sales. Or maybe they can find jobs as consultants to the farmers in Mexico. The point is that the economy is dynamic and that because both economies have gained from the loss of the inefficiency there is now more resources, money, time to hire that unemployed farmer to do something more productive or relevant to the comparative advantage of the United States.

Free-trade, in my opinion, is the way to end world-wide poverty (or at least come pretty close). Allow people to produce goods at a truly fair price and begin to specialize their economies for the benefit of the whole world. Let consumers spend less on goods that can be produced by those specialized economies and then use the money saved to increase the specialization of their own country.

Two articles here talk about Fair Trade and Free Trade from differing perspectives. Read them and let me know what you think of the whole affair.

My First Job

My first job outside of babysitting for a few dollars and helping out with the little league snack shack was as a lifeguard. I took some classes at a community college and earned my Red Cross Lifeguard card and then a Water Safety Instructor card.

I was reminded of this when I read an article by one of my favorite economists, Walter Williams. He talks about minimum wage jobs and how important they are for the economy and for developing and teaching skills. During my time as a lifeguard, I needed to be responsible for a pool full of children swimming. I also learned how to plan a lesson and deliver it in a meaningful way when I was teaching swim lessons. Williams makes the point that a lot of people would not want to have a job at McDonalds, Wal-mart, or even as a lifeguard (believe me, it isn't as glamorous as Baywatch makes it seem. It's actually quite boring.), but the jobs help people develop. He then goes on to list a number of famous or successful people that got their start working at McDonalds.

What was your first job? Did you find that it provided you with a strong foundation for what you are doing now?

Here is a picture of the last 5 days of Google trading.  

Google Shares Drop

I beginning to find that Google is a popular topic on this blog. I think I am drawn to it because of its semi-unconventional way of doing things. I also like the way the company is attacking major competitors (Microsoft for one) with relatively little advertising for itself. In fact, Google has never advertised, at least in the traditional sense. Word spreads on websites and on webpages. I remember I was in college the first time I heard about Google. I thought the name was stupid, but when I finally got around to looking at it, I never went back (I had been an Excite or Yahoo! search engine user previously).

Yesterday, Google's shares dropped 4.7%. People think it is because of the "poor" start to the Christmas shopping orgy, but I'm beginning to think that Google might be a part of a bubble.

When you look at Google's P/E ratio, you see quite a high number. This is not normally a good sign. Today, the number is right around 80. Last week it was about 100. What is a P/E ratio? At the basic level it is the price of the stock divided by the earnings per share. What does that mean for you, the investor? It would take 100 years for Google to be able to create the earnings that its shares are trading at. Is this a rare occurance? No. Growth stocks or new companies with a lot of potential for growth often have higher multiples. The stock's price reflects the potential future earnings (remember a stocks price can be determined by the present value of all of the future dividends). But sometimes, people get excited about stocks and bid the price higher than what the company can produce, even at an accelerated growth rate. Sooner or later, as history has shown (just look at the stockmarket crash/recession of 2001) the price comes down. I'll explore this idea a little more in my next post.

Capital Gains Tax Set to Increase

A lot of the reasons why people have been investing in the stock market lately is that in 2003, the capital gains tax, originally set at 35% was lowered to 15%. Some have credited this tax cut with saving the economy and causing the post 9-11 recession to be a lot less of an impact on our economy than it could have been. Unfortunately, the tax is scheduled to revert to 35% in 2008.

Dividend income and estate taxes are also scheduled to revert to their pre-2003 levels in the next few years. "What? A few years?" Yes, I know there is still some time, but even with only a few years away, the effect that a tax rise is imminent will have negative effects on the market, most likely causing a number of investors to sell their stocks to take advantage of a lower tax rate.

Read this article at Tech Central Station for more information.

Xbox360 Tries to Knock Sony Off its Pedestal

A great article here from the Economist about the gaming industry, a $20 billion a year market. You may have heard that the Xbox 360 was released last week to lines of people and even some social unrest (when customers at a Wal-mart attacked the manager after he changed the rules for getting one of the entertainment consoles).

The article goes into some detail about the video game industry, especially the strategy behind the big three players (Sony, Nintendo, and Microsoft). Microsoft is in second place, but the jump needed to take first is formidable.

One factor I thought interesting, was that the manufacturers usually sell the consoles at a loss hoping to recoup their investment through the sales of peripheral devices. Another interesting fact is that the fight over standards (blu-ray or HD-DVD for example) seems to be what is really initiating Microsoft's forays into this market.

The Current Income Tax Hurts the US Economy

An article speculates that the income tax Americans pay costs them $500 billion in time and money just to come up with the money.

Put another way in the article, it takes 5.8 billion hours for Americans to figure out how much they owe and ensure it is delivered by April 15th. That time, when looking at the opportunity cost, is worth the equivalent of 2.77 million people quiting the work force. That's right. 2.77 million people working a regular work week with vacations during the year is equal to 5.8 billion hours of wasted time!

Why do we have to shoulder this burden? Businesses (included in the above numbers) have to make decisions, not based on what it good for the business, but also whether there are any tax benefits or penalties to those decisions. Again, if we look at opportunity cost, we can see that this burden is costing the business time and money and potentially higher growth rates because it has to consider tax implications.

Moreover, the article claims, that businesses pass on the burden to the consumer. Of every dollar spent, 22 cents is, on average, used for paying the business' taxes.

John Linder (R - GA), has proposed the Fair Tax (H.R. 25) in order to remedy some of these uneccessary burdens. Read about the Fair Tax here.

The Other Beta

The promise and perils of "beta" in a technology product's lifecycle, profiled here. Also in the comments.

"I deplore it as a consumer; I admire it as a marketing professional," said Peter Sealey, a marketing professor at the University of California at Berkeley and former chief marketing officer at Coca-Cola Co. "I can't come up with anything else in the entire marketing world where marketers knowingly introduce a flawed or inadequate product [and] it helps grow your user base."

The Other P/E

Sometimes it cracks me up to read or watch the "pros" as they attempt to predict where the market is heading. Strike that: it always cracks me up.

I like to think that I don't walk around with my head completely in the sand, but I have long ago stopped paying much attention to the various indicators and gauges that supposedly tell me what to do with my money. Seldom are they right, often are they contradictory (let's play a game... you give me one pundit's outlook on the market, and I'll find a diametrically opposing view in 30 seconds or less or will buy you a lottery ticket), and always are they carefully constructed: pulling just the right information over just the right period of time, to support just the right outlook the pundit's firm is marketing to their client base at the time.

Here's a new one I've never run across: Citigroup's Panic/Euphoria Model, or "The Other P/E". Read it and post where you think the market is heading between now and the end of the year. Up, down, or even. Your guess is as good as anyone else's, I'm sure.

Start Thinking About Taxes

I know. It isn't April yet, but in order to make sure that we aren't over-taxed by the government, we should be thinking about taxes and ways we can avoid unnecessary taxation throughout the year. I came across the Anderson Financial Group's webpage with a wealth of information about taxes and different ways to shelter money from taxes, including retirement tools such as the 401(k) and IRA, to the educational savings account or creating a corporation.

Visit the site and click on the "Tax Center" link in order to read about the different options available to you. Let me know what you think, too.

Managing Personal Wealth Quiz

I'm currently taking an accelerated class in personal wealth management. Every week, the instructor sends out a quiz. I thought I would post the questions and my answers here in order to share the financial information. Most of the questions and answers are vague, but if you have any questions about the topics, please post them in the comments and I'll try to be more specific.

1. BRIEFLY, why do I prefer "don't be poor in retirement"rather than "maximize your wealth" as the primary overall objective in Wealth Management?
Don't be poor in retirement is an obtainable goal. Maximizing wealth is nigh on impossible unless you make every right decision and buy and sell at the exact right moments. Obviously by not being poor and meeting that goal, you can then set higher goals, but it is good "not to be poor."

2. We have several levers to work with in managing personal wealth -- asset allocation, tax structures, etc. Which lever (or 2 levers) are the most under our control and, in that sense, the most powerful.
The two most powerful levers under our control are income and expenses. Of all the things we can control, these two we can control directly. By cutting expenses, we can increase the amount of money we can set aside for reitrement or other financial goals. By increasing income (through moving to a different job) we can also gain additional money for our financial goals.

3. Why do we care about relatively small differences in costs in wealth management?
Unfortunately, a small cost, like 1% of all assets managed can add up considerably over time. Because personal wealth takes a long-term view, 1% can be the difference between thousands of dollars by the time you retire or meet your financial goals.

4. What are the advantages of bond mutual funds? What are the disadvantages?
The advantage of a bond mutual fund is that it provides diversification to someone who wants a wide variety of investments. The disadvantages are that it could carry more risk due to the manager facing the pressure to beat the market. They are also not very liquid. An additional risk is that they are more susceptible to interest rate changes, because there is not necessarily a consistent start/end date for the bonds within the fund.

5. Briefly, what is the advantage of a Roth IRA compared with a traditional IRA?
Roth IRA: Able to invest after-tax dollars. The contribution limits are relatively high for a middle class investor. Can withdraw money for large purchases. Probably the greatest advantage is that you don't pay taxes on the money when you do withdraw it.

Traditional IRA: Must contribute before-tax dollars (set up through the employer). Must pay taxes on the income when it is withdrawn. The same contribution limits that apply to a Roth IRA also apply to the IRA.

6. What are the disadvantages of a tax-deferred annuity (TDA)?
Extremely high costs due to the age of the insurance company (bureaucracy). Fees are generally in the form of a % of holdings. When compared with an index fund, the index tends to return more (mostly because of fees on the TDA).

Follow up: Wal-mart's profits help people

John Stossel, of ABC's 20/20, wrote an op-ed piece here about Wal-mart and the benefits that it provides for all of society, let alone its own workers.

We can debate again the virtues or vices of Wal-mart but what struck me from the article as being particularly interesting was Mr. Stossel's reference to 1900's "Robber Barons" and their perceived problems. Being neither robbers or barons, these people (Vanderbilt and Rockefeller) contributed to society and made people's lives better, all the while getting rich for their trouble.

Another interesting part of the article I picked up on was the reference to Gordon Gecko's speach from Wall Street. He says that business is a zero-sum game: There are winners and losers in every transaction. But when you stop and think about it for a minute you can see from real-world examples and the example with the milk that Stossel provides that this is not true. Businesses create wealth, not only for themselves but for their customers and in turn for society.

Ayn Rand's book, Atlas Shrugged, wholeheartedly subscribes to this business philosophy and her heroes describe this detail at times within the story. I posted an example of one monologue and you can find it here.

Get LinkedIn

A friend of mine, Jacob Schenkel, introduced me to this on-line service called "LinkedIn." It is a "networking" site that helps you keep track of the people you know and what they do. It adds power by keeping track of the connections between all of these people. This allows you as a user to search this network to find people in a job field you might be interested in or maybe find someone who offers a service you (or your company) are interested in securing.

By posting a mini-resume, people you've worked with or you know can give you feedback and "endorsements" of your work. LinkedIn is also connected to major job search engines like Monster.com and CareerBuilder.com. If you find a job on either of these sites, you can search your network for people that might work in the company you are applying to. They are also expanding "linking" LinkedIn with other sites.

From their own site:

LinkedIn Announces Relationship with the AESC
The Association of Executive Search Consultants is the global professional organization for retained executive search firms, representing over 4,000 search professionals in more than 70 countries. Make your information available to AESC member search consultants via the BlueSteps.com executive career management system.

It seems to me that the site works hard to make keeping track of people, finding a job, and just staying in touch a lot easier for anybody. The more people you have in your network, the better (just make sure they are high-quality contacts). Also blog here has posted etiquette for networking on LinkedIn. Some interesting tips are included.

Check it out and send me an email, so I can join your network!

Google launches new service

Google Base has been launched today. It offers the opportunity for people to post anything they want to a large, searchable database. Certain large, on-line retailers, auction sites, and job search companies are beginning to feel the heat and potential pressure of a competitor (*cough* E-bay *cough* Careerbuilder *cough* etc.).

Google's stock is trading just under $400 next to its all-time high of 398$ a share. Will this behemoth ever stop expanding or growing? I hope not.

Causes of inflation: The US Government

Inflation numbers were released today that show inflation is lower than many had first suspected and better than September (last month). A previous post by myself explains inflation and traditional ways of combating it here.

A great article by Walter Williams talks about the causes of inflation. He theorizes that inflation is only caused by an increased supply of money. This, in turn, causes prices to rise. He then asks where the money comes from? The U.S. Government or more precisely, the Federal Reserve board, the organization that controls the production of money and interest rates.

He then goes on to show that the government acutally likes some inflation, because it helps it pay off debt faster. This portion is great:

When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I pay you back with dollars with reduced purchasing power. Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation's primary beneficiary. That identification is easy if you ask: Who is the nation's largest debtor? If you said, "It's the U.S. government," go to the head of the class.

Einstein Quote

"Compound interest is the most powerful force in the universe."

--Albert Einstein

Bush's Tax Reform Announced. Is This a Step Forward?

President Bush's panel on Tax Reform released their recommendations on November 1. This has caused a number of different groups to respond (some of which I've listed below) in a variety of ways.

Remember, nothing has been implemented yet. These are only suggestions following President Bush' s guidelines of finding an easier way to collect taxes (simplify), and without raising taxes while continuing to collect the same amount. He specified that charitable giving and investments should also be encouraged.

Essentially, what they have suggested seems to be positive (in my own opinion). 75% of tax payers will fall into the lowest bracket which appears to be a %15 income tax. I myself would benefit tremendously as I now pay about 23%.

They have recommended getting rid of the AMT or Alternative Minimum Tax. What this does is force some people to pay a higher tax even if they have deductions on their standard income tax return. This has become a burden for more and more people as they earn more income.

Unfortunately, many deductions would be eliminated. I rent so I wouldn't be affected by this, but mortgage interest would not be a deduction anymore. Instead, you would have deductions based on charitable giving and family size. You would also lose deductions for state taxes.

If you invest your money in housing or the stock market, they would also be lowering capital gains tax and dividend taxes to 15%. This would have a significant effect on encouraging people to invest their money rather than spend it. Related to this, 401(k), IRA's and other pre-tax savings tools would be consolodated into three different accounts, each with a higher cap, effectively providing more incentive for people to plan for the future and save money.

The panel also have decided to forego the suggestion of a national sales tax. I posted a few months ago about this issue and feel that it might still be a better solution, but overall the ideas of the Panel should cut in half the amount we, the citizens, spend on tax software or tax preparers. All this saved money could be invested or used to better our standard of living.

Corporations are also rewarded in the proposal with a decrease in tax rate from 35% to 31.5%. This could have the effect of allowing companies to reinvest the money otherwise spent on taxes.

A great article here produced by the Tax Foundation goes into far more detail on pros and cons and their likely effects.

The Heritage Foundation has also released a critique of the suggestions where they grade each of the individual proposals based on an ideal, business and consumer friendly model. Give it a read.

Robert Novak, a conservative pundit, thinks the plan is dead in the water and is not afraid to tell people here. He believes the people on the commission did not consider all of the options because of their prior political leanings.

Google Starts Book Search Service

Google today launched their "Google Print" search service which searches books the company has scanned. It is causing a bit of controversy due to copyright law, but for the moment, Google has only scanned public domain books.

I've tried the service out and it seems that this is going to be really nice. Google's stock is currently trading at an all time high of $384 a share and has risen 1.34% today.

Iowa Rainforest Project Site

I wanted to link to this blog following the developments related to the Iowa Rainforest Project, a massive undertaking planning on producing a tourist trap/research project that would create an enclosed rainforest in Coralville, Iowa.

I've been skeptical of the project from the start, primarily because I'm fairly skeptical of the government in general, especially when they announce big spending projects. My main beef with it is: if Iowa really needed a rainforest, wouldn't some enterprising business person come along and build one? Wouldn't he or she charge and make a profit off of it? The answer to both questions is "no." So then, I ask, why do we need this again?

People say that it will provide jobs and increased revenue due to the flocks of tourists that will want to see it. These are benefits (unproven though they are), but I feel guilty spending federal dollars (of which a tiny percentage I myself contributed to) on this "pork project." I certainly wouldn't want someone to use my money and build this in Alabama or Alaska. However, just like all pork projects, this is what happens.

John Stossel wrote a great opinion piece today on just this topic. Click here and give it a read.

Iowans Have the Lowest Insurance Rates

An article in the Press-Citizen cites a survey claiming that in Iowa we have the lowest average insurance rates. In case you're wondering, the average Iowan pays $676 a year. New Jersey, the most expensive state, pays double that, on average. With all the money we save here in Iowa, what should we do? Fill up the tank, of course!

Gold's price is rising. Why? There may not be much left to mine.

You may have received an email/spam touting the wonderful investment opportunity that gold provides. Some investors think that gold is a good hedge against inflation (it really isn't any more). Some people think that gold is one of the worst investments, as it fluctuates often and has a poor record of return in comparison with the S&P 500. An article in the Economist points out that gold has underperformed even inflation of the US Dollar (meaning if you have bought gold in the past, you have actually lost money, as the value of what a dollar could buy drops).

This article in the Independent talks about gold mining and how at this point and technology level, mining companies can barely get an ounce from 30 tons of ore. The price of gold, the article speculates, is primarily driven by increasing demand for jewelry around the world, but also in developing countries like India and China. Does this mean that the price of gold will increase even further? It might, especially if environmental regulators begin to crack down on the use of cyanide in mining.

So should you invest in gold? Keep an eye on demand. If countries like China continue to want more and the supply increasingly becomes depleted, then naturally, like any commodity, the price will rise. You may make some money, but there are also better ways.

Economics Professor Weighs in on Municipal Power

Jane Driscol sent me this article by John Solow, a professor of Economics at the University of Iowa. I took a class with Prof. Solow and while he may not be the most interesting person to listen to, he has some good arguments in this article.

Thursday, October 20, 2005

A 'yes' vote not prudent

During the past several months, supporters of a municipal utility have gone to great lengths to make a political case for a government take-over of facilities of MidAmerican Energy Company, Iowa City's electricity supplier. They have turned what should be a serious public policy question into a referendum on "big business." Now, as citizens face their only opportunity to vote on the issue, Citizens for Public Power claims a "yes" vote allows them to see whether they can come up with a viable business plan.

This is seriously putting the cart before the horse. No intelligent business person would approach a lender or investor without a financial plan, but that is exactly what CPP is doing. Iowa Citians deserve to have the facts in front of them before they decide whether to support this scheme. Yet when pressed for details, CPP's response is, vote "yes" to give us an opportunity to figure that out, trust the City Council to only go forward if the numbers work out, and count on the Iowa Utilities Board to prevent us from making a mistake.

Here are just a few of the biggest questions that ought to be answered before we authorize the City Council to establish a municipal utility:

- What will it cost to buy MidAmerican's distribution system?

The Latham Report assumes it will cost roughly $11 million to purchase the necessary MidAmerican facilities. This is a gross underestimate. More than a decade ago, the Iowa Utilities Board told Sheldon, a town of roughly 5,000, that it would cost residents almost $14 million to purchase the assets they needed to municipalize. How much are we, a city of more than 60,000, going to have to pay?

- Where will Iowa City purchase its electricity, and how much will it have to pay for it?

Iowa City's average load in 2003 was 94 megawatts, and the peak load was roughly 180 megawatts. The companies in the best position to supply this amount of power to Iowa City are, of course, MidAmerican and Alliant. Buying power from more distant utilities is more expensive and less reliable. On hot summer days when power supplies get tight, our municipal utility would lack sufficient secure supply and would have to purchase additional electricity at higher spot-market prices. Or we could build our own peak load generating capacity. What will this cost?

- What other facilities will Iowa City have to build, what additional employees will we have to hire, and how much will that cost?

A municipal utility will need additional facilities, such as a control center and emergency back-up generators. What will this cost? MidAmerican has a staff of 37 people who work around the clock to monitor their power system, a billing department, a customer service department and so on. A municipal utility will have to provide those services as well. How big will that staff be, where will it be housed, what equipment will it require and how much more will this cost?

- Who will provide the service, both on a day-to-day basis and in the event of an emergency?

The IBEW, our electrical workers' union opposes the formation of a municipal utility because its members receive better pay and benefits from MidAmerican than they would as municipal workers. Our local electrical workers have publicly stated they will stay with MidAmerican. Where will a municipal utility find the workers needed to keep our electrical system up and running, and what will it have to pay them? Following the 1998 windstorm, MidAmerican was able to draw workers from surrounding communities and states to restore power, at a cost of more than $1 million, without raising rates. If a similar catastrophe were to occur, how would a municipal utility provide an equally quick response, and at what cost?

Ordinarily, the City Council would study the costs of establishing a municipal utility first. If it chose, the Council would put forth a detailed proposal for establishing a municipal utility, and, under Iowa law, the citizens would vote on whether to "authorize the City Council to establish a municipal utility." By forcing the vote through a referendum, CPP is making the voters use their only opportunity to speak without the facts they need to make an informed choice. CPP says that a "yes" vote is only to allow further study, but we don't need a vote for that. Nothing prevents the City Council from researching the costs of municipal power now.

Starting a municipal utility is not a simple matter. CPP has failed to provide any credible evidence that doing so is in the best interests of Iowa City electric customers. We don't know what we are buying, what we will need to build, what will it cost to buy and operate, and who's going to be in charge.

These fundamental questions need to be answered before we have any idea whether this is a worthwhile endeavor. Until they are answered, it is premature and unwise to authorize the City Council to establish a municipal utility. A "no" vote on Nov. 8 is the prudent course of action for Iowa City voters to take.

John L. Solow is an associate professor of economics at The University of Iowa and a member of the Coalition to Preserve Safe and Reliable Energy.

The article comes from the Iowa City Press-Citizen.

Economics from an Austrian Point of View

A recently released white paper summarizes the view of the Austrian School of economic theory. I must admit that I never knew about this area, but reading the summary (only 4 pages long) gives a good idea their theory. It is often credited with predicting the downfall of the Soviet Union and has inspired many free-market capitalists and entrepreneurs.

Delphi and GM: To Buy or Not to Buy?

Many of you are aware of the recent news about Delphi filing Chapter 11 bankruptcy. A friend of mine who works for Delphi assures me that this is one of the better things that could have happened for the company. He says that the bankruptcy will allow them to renegotiate their union contracts, renegotiate their sales contracts, especially with GM, and remove the enormous pension liabilities they had on their accounting books. He suggests picking up shares of Delphi at a bargain 30 to 40 cents a share and esimates a rise of at least $2.00 a share in the next two years.

There is good news for Delphi in that that no longer have the pension liability. Their new CEO, Steve Miller, has a strong history of working with distressed companies like Bethlehem Steel.

According to the Economist, the combined liability of GM and Delphi's pension liabiltiy is about $450 billion. This is insane and might finally be a wakeup call to people who think that their pensions will be around when they retire. Even more reason to take steps to secure alternate means of retirement protection, like investing in an IRA. But this does not seem to be good news for either company.

GM has also announced that they are negotiating hard with the Union of Auto Workers (UAW) to get concessions and cuts in order to just stay afloat. With falling sales, increased raw material costs, and these continuing liabilities, they may not be around much longer. Some say their chance of filing chapter 11 is at least 30% now that Delphi has done the same.

Should you buy the Delphi stock? Or even GM? It is risky. Because of the Chapter 11 filing, the people who hold Delphi's bonds get first dibs on any money produced by the company. The shareholders get whatever is left. Any money/dividends paid out to shareholders will only be made after the debt obligations can be settled. Because a stock's value is based on its perceived future dividends, the stock will probably remain low for quite some time (it has actually been delisted from the NYSE. It now trades on a "stock clearning house," basically for pennies on the dollar). Will Delphi rise again? They make good parts, they have a lot of customers, they also might get paid for what their product is worth, now that they can restructure their contracts. Miller also has a fairly good track record. He's even decided to take a salary of $1 a year. I'll let you be the judge.

Run Schools Like a Business

The CEO of Central Educational Center in Georgia writes a commentary about ways to change the public school system to reflect and utilize successful business practices. He cites Jim Collins' book Good to Great as a model for school superindendents and principals to follow. He also mentions supporting teachers more and allowing them to be more independent in the classroom.

At Cashtalk, we value education, particularly when it comes to financial and business-minded topics. We also believe that there is a lot to be learned from the "real" world, like business. Through education, you empower yourself to control your destiny. Without teachers and a system that supports them, this becomes more difficult. Consider the ideas by Russ Moore and get involved in improving your local schools.

Rising Inflation and Some Suggestions on How to Deal With It

According to the Washington Post, consumer prices have risen faster in September than they have in the last 25 years (1.2% in one month). Obviously if you've been around in the United States, you can guess that Hurricane Katrina cuased most of this increase becuase of the effects from rising fuel costs (12% last month). This in turn has an effect on the price of goods that are transported across the U.S., like food.

Inflation is a reality that most people are aware is inescapable. What I ask myself is, "is there a way to avoid it or protect my money from it?" Inflation destroys cash. Or more accurately, it destroys your purchasing power. The longer you hold money with inflation as a consideration, the less that money can buy.

So how can I protect myself from inflation? Well, first you could look at investing. Normally, when you invest in stocks, bonds, mutal funds, etc. they generally have a higher return than what the inflationary rate is. There are even inflation-linked indexes that gaurantee a higher rate of return than the inflation rate. What these options boil down to is this: if you own something tangible with a commonly perceived value, you can beat inflation.

If you have ideas on how to beat inflation, please post them in the comments section.

Municipal this, Municipal that...

(Sigh) Okay. I just came across this article at Wired.com written by Jennifer Granick, a Stanford University Law School Professor. She is an advocate for municipally funded Wi-Fi access, or as she puts it, "free wireless internet access." She equates this service with public toilets, drinking fountains and park benches. She also states that the only major argument against this is its potential for abuse (i.e. people downloading illegal material, hacking, etc.).

I would like to propose that an even greater argument strikes through the heart of her primary assumption that we are entitled to free Wi-Fi: "nothing in life is free." I find it preposterous that she believes Wi-Fi could be deemed a "need" that our city council members or mayor should have an obligation to provide to their constituents for "free."

Let's take a macroeconomical perspective for a moment and look at a hypothetical procedure for setting up this "free" service. First, the city would need to purchase the infrastructure from the current providers or another wholesaler (roughly in hundreds of millions of dollars). Then they would have to install that infrastructure (wireless servers with enough power to broadcast over the air) and maintain it (a line item in the city budget). I don't know about your own experience, but at my company, our servers occasionally crash and maintenance is constantly being done on them. Finally the true cost to you. Perhaps a few cents added to the city sales tax, or maybe a few dollars onto the property tax, or maybe just an overt "Wi-Fi" tax on your next tax return. Any way you slice it, you're going to pay. And what I find even more outrageous is that not everybody has Wi-Fi; I sure don't and I don't want to pay for someone else to have it.

This isn't a need. It's a want and a frivolous one at that. In the cities considering these proposals, you already have service providers, sometimes more than one (which is a good thing if you believe in competitive capitalism). In Iowa City, you can go to a local coffee shop or Panera Bread Company. They provide the service for free because they know it will lure customers who will in turn buy products to help subsidize that "free" service. This, in my opinion is the route to go. If there is a demand, a private company will provide. Obviously in Ms. Granick's hometown, there is a demand because there are two companies offering the service that the city wants to grab.

Sure, some municipal power companies charge less than the going rate, some municipal telephone companies have great service, but people are always paying for it in the end and why take a gamble? These companies don't necessarily innovate and bring out new products (Plus, water, power, sewage, garbage disposal and the such are needs of a city). The private sector is usually the driving force behind innovation. All those revenues and profits they're making is the motivating factor to better their products, make them cheaper, and expand their service. When was the last time a municipal utility came out with a revolutionary breakthrough in the way they do business?

Ms. Granick looks to the government to solve her problems and make her life better. I look to myself and those with a track record for success.

Baseline Budgeting: A Contemporary Illustration

Have you ever heard of basline budgeting? The majority of programs funded by the federal government use this principle to determine how much their budgets will be in subsequent years.
Because of the recent hurricanes in the southern United States, President Bush has asked Congress to "slash spending," in order to provide monetary relief without raising taxes. I applaud President Bush for not forcing me or a business to pay extra for this burden. Critics of the president say that the programs he is cutting are necessary and that any cuts will cause mass riots, millions to go hungry and countless others to be homeless. While I'm not sure about those claims, if we look at the details of these "cuts" we will find that they really aren't spending cuts at all. They are, in fact, a decrease in the amount of the budget increase.

Citizens Against Government Waste (CAGW) is a non-profit group that monitors the budget Congress submits and the President signs every year. They point out wasteful spending and unnecessary programs that our representatives sometimes sneak into the budget. They also point out ways to cut spending and thus have the Federal Government be less a burden to the common citizen.

CAGW points out that Baseline Budgeting is a way for Congress to increase spending when they really claim to be decreasing it. How does it work? Let's say that a specific department, let's say, the Agriculture Department's foodstamps program is expected to grow $100 million next year. In fact, we project that its need will grow $100 million every year. But this year we only increase its budget by $30 million. The headlines will exclaim that we just cut $70 million out of the Ag. Dept. budget! The example in the link says its like expecting to gain 100 pounds, only gaining 75 and then claiming to have lost 25 pounds! Absurd!

Well, the foodstamps program is in fact a nice target for the Congress to do such a cut. Last year, $2.1 billion went unclaimed and unused. Why? This article claims that it is because of lack of knowledge or language difficulties. My guess is that the budget has continually increased irregardless of the number of people that actually need or use this subsidy. This practice should stop!

So how should Congress go about finding the proposed $62 billion in aid without raising taxes? House Majority Leader Tom Delay (R -TX), after increasing the budget deficit up to over $400 billion with the proposed aid, said he would be willing to accept suggestions on locations to cut. The Cato Institute, a free-market think-tank, has offered these suggestions. While these are legitimate cuts, even decreasing the total amount of Baseline Budgeting increases would be sure to find the $62 billion.

A worthy (and wise) goal of any individual, business or organization is to have a balanced budget. What you spend should only equal what you take in. I myself have a balanced budget and it is treating me well. It is also responsible. Is it possible to balance the Federal Budget without raising taxes? Yes. Another paper, dated 1995 has seven suggestions on finding ways to keep the government in line and prevent such frivolous spending and irresponsibility. It is as relevant today as it was then.

Next time you hear about spending cuts and the horrors that might befall us all if they are allowed, remember baseline budgeting and look into the issue some more to be sure that the Congress or other special interest groups aren't pulling the wool over our eyes.

Retailing Uneasy About the Near Future

An article in the Economist points out a worldwide trend of consumer confidence dropping. In Germany consumer confidence has dropped for its third straight month. In America, confidence is down in October almost 15%. Retailers are worried about this trend, especially as the Christmas spending orgy, er, "buying season" nears.

The thing I find most useful in the article is that from the perspective of the consumer the growing retail establishment and their catering to the specific tastes of the consumer (mostly because the market is growing more competitive) is a real boon for consumer advocacy. The article talks about Target comissioning their own fashion designers and other stores around the world are looking at local fashion providers instead of Chinese imports, because they are more timely and in tune with finicky "consumer trends." Wal-mart is looking into carrying organic foods to compete with some specialty chains. Wal-mart is also exploring the idea of having consumers send their digital photos to them over the internet, to be produced and picked up within the hour at their local store. Brilliant!

Each of these efforts will most likely decrease the overall costs of these traditional "specialty" goods and bring their prices down to earth. And with lower prices comes greater economic value for our hard-earned dollars.

Wine: The Expression of Civilization

Wine has interested me for a while. The way it has begun to impact and grow in cultural relevance is curious to me. I don't claim to be an expert, but I am fascinated by this "living, breathing thing. Constantly able to change and gain complexity." That quote is from the movie Sideways (2004). The movie follows a wine Conessiur, Milo, and his friend on a tour of wine country. It touches on some cultural issues that surround wine drinking and the wine community. The movie alone may have caused an increase of 147% in sales of Pinot Noir, the movie's unofficial star.

Wine is also a business. Last year, the Californian wine industry was estimated to be worth $45.4 billion. Traditionally an old world specialty, wine has increasingly become more popular in America and so has its production. America, Australia, and South America have really begun to see sales of their wines take off. While in France, the government had to bail out their wine industry last year. And America is also the largest consumer of wines in the world.

Another film, Mondovino (2005) explores the differences between small wineries and large companies such as Mondavi and EJ Gallo. It interviews small vintners and they claim that the wine industry is falling apart and that there is no personality left in wine. Large companies are happy with their sales and strive to increase their market share. The movie explores the idea of terroir, literally "soil" in French, but has increased in meaning to the taste that an agricultural product takes on based on where it is located. The small wineries claim that they have a rightful claim to terroir and that is what produces the tastes of a Burgundy or Bordeaux. Large companies use technology to make up for their lack of geographic location. Mondavi and Rothchild for example, add new oak to their production process to add flavor to their wines.

An article in the Economist points out another issue affecting the wine industry. In California, grapes are able to grow larger and contain more sugar. When fermentation takes place, this causes more alcohol to be produced, which generally does not taste good in a wine. Some wineries in California are adding water to their batches in order to "mellow" the alcohol content. Most of the wine world frowns upon this practice, but consumers might not tell the difference, and it is wondered if they even care.

Wine is also sometimes seen as an investment. You can buy a good bottle of wine, place it in a safe location for a few years and then sell it at a higher price. While I don't know much about this process, it intrigues me and I have posted some websites that explain more about the differences of wine.

The Internet Wine Guide
A Guide to French Wines
A Guide to Italian Wines

Check out the above sites and go out and enjoy the world of wine!

Manufacturing Jobs Disappearing: That's a Good Thing!

This article from the Economist calls attention to the high number of manufacturing jobs disappearing in highly-developed, richer countries.

It suggests that less than 10% of jobs in America are of the manufacturing variety, yet America still leads the world in manufacturing (by dollar amount). This gets to the heart of an observation and its implications.

The article implies that manufacturing in richer countries is inefficient. Change is a good thing and those economies are changing toward more service-oriented economies. R&D, marketing, and management are becomming the strong points of the American economy. Putting together shoes or cars is left to economies that may have an edge on wages, but don't necessarily have an edge on inovation.

With respects to the common worry about China taking everyone's jobs the article has this to say:

a basic principle of economics, proven time and again, is that even if a country can make everything more cheaply, it will still gain from specialising in goods in which it has a comparative advantage. Developed economies' comparative advantage is in knowledge-intensive activities, because they have so much skilled labour. For years to come, China will be more likely to assemble the best computers than to design them.

Tom Peters, a management guru, in the book Re-Imagine! talks about a white-collar chateclism, which will change all our jobs forever. He forsees a world where companies are no longer eternal entities. People will come together with a good idea, produce the idea, and when the idea is beaten by another or becomes obsolete the "temporary company" will disolve and those workers will move on to other projects. His point is that business and the world change. It is up to us to change with it.

The Economist article illustrates this point at the closing:

People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer.

Municipal Power Utility in Iowa City?

Iowa City will be voting on the following two questions on November 8th:

Shall the City of Iowa City in the County of Johnson, Iowa, be authorized to establish as a city utility and power plant and system?

and

Shall the management and control of an electric light and power plant city utility be placed in a board of trustees consisting of five trustees as provided by law?

The reason this vote is being put to the people is because a certain group perceives our utilities prices as being too high in Iowa City. I've linked to some sites below that cover a range of opinions on this issue:

MidAmericanEnergy
Press-Citizen OpEd piece about the confusing wording of the ballot.
An Iowa City Law Professor talking about the implications of a "yes" vote (and favoring one).
A letter refuting the above letter.
Citizens for Public Power website. I encourage you to check the "Reasons to Vote Yes" section and the "What people you know and trust say" section.
Finally, a letter to the editor from a candidate for the Iowa City council.

Personally, I agree with the final letter. I like the points he makes about not all communities using public power have rates lower than Iowa City. A significant number have higher rates.

I also do not like the idea of a municipality claiming to be able to run something better than the private sector. Often times, people believe when the government steps in to run things, all their troubles and cares will disappear. A brief glance at the State and Federal government's handling of the Katrina disaster should snap them back to reality. Bureaucracy and delay is all they know how to do well.

The article by Rick Dobyns rightfully points out that to purchase the energy from a co-op or from an energy broker, the citizens will have to pay for it (in this case with bonds sold to make the purchase. Hopefully, the income from the public utility will meet the costs of interest and principle, while allowing the energy rates to stay lower). The power wholesalers are not going to give Iowa City power for free, just because we've taken a more "progressive" view of distribution.

Another fact Rick points out is the almost $100 million discrepancy between both camp's cost estimates for acquiring MidAmerican's distribution means. The "Yes" group says Iowa City will save $60 million dollars and the "No" group says the city will lose $58 million. This is just too large a gap between estimates, leading me to believe that neither is true.

A neighbor of mine is a strong advocate for the "yes" vote. She came around and knocked on our neighborhood's doors trying to gain support for the two initiatives. I told her I was leaning toward voting "no." She explained that MidAmerican Energy has a 12% profit margin and that was too high. She also said that we shouldn't trust a large company.

Had she let me get a word in edgewise, I would have replied that profits for a company are good and that even she could participate in those profits by purchasing stock in Berkshire Hathaway or even the company itself. Those profits aren't just squandered. They are reinvested in the infrastructure and used to fund R&D in order to provide more efficient and cost-effective ways to continue to deliver power.

By the way, I'm sick of people demonizing large companies. See my post about Wal-mart for more in-depth opinion on the issue, but it is because of these large companies that we are able to live the lifestyles we do. These companies are able to deliver to consumers what they want or need. Yes, they do it for profit. But only the foolish, shortlived companies would not use that profit to seek better ways of "delivering the goods." I'm not naive. I know about Enron and Worldcom, but please, these examples are few and far between when taken in the context of the number of capitalistic and entrepreneurial companies in America.

I'm still keeping an open mind and reading the local papers and talking to friends, but as of today, I'm probably going to vote "no."

The Economic Pulse of the Country

The Congressional Budget Office last week released a summary of economic indicators in the United States. Check it out here. Especially interesting is the unemployment rate and the number of new jobs created over the last two years.

Devils on the Deep Blue Seas

I read an article about the true financial windfall that Katrina enabled the Cruise industry to collect on. The federal government is leasing the three ships from Carnival to aid in the relief and rebuilding effort for Katrina. From Carinval's perspective, the money is just making up for the lost profits.

This reminded me of an interesting report from "The World" on NPR I heard about the way a cruise ship is run. The number of crew on a cruise is amazing. Cruises are also highly diverse. The report comes with a Marxist slant, but it is interesting nonetheless. I'd love to hear your perspective.

Avian Flu epidemic

I don't want to scare anyone, and this may be a bit off topic for the blog, but I thought I would post some links to articles about the H5N1 flu virus. It is transferred to humans from ducks and has already killed a number of people in Southeast Asia. So far it is not made the mutation to be able to transfer from human to human, but as most viruses do mutate constantly, many people think that time may not be far off.

This virus has a high death rate (over 50%) and the symptoms are similar to pneumonia. Scientists have been studying the virus and have been unable to create a vaccine for it. They have, however, identified a medicine which has a high success rate at treating the symptoms. The drug is called Tamiflu and is manufactured by only one company in the world: Rosche.

A number of news sites have posted articles about the potential economic and physical devastation a human outbreak could cause. ABC news ran a report on Primetime about the virus. Prudent people will prepare accordingly, possibly acquiring a Tamiflu regimen and preparing for possible social unrest and disruption of daily life.

Here are some articles:

CDC website
AP News article about U.S. potential response (not enough, in my opinion)
Council on Foreign Affairs article
Asian Times article
CNN website

Financial Aid for Casinos

Financial aid for casinos in New Orleans? The below email was copied me by a friend. I tend to agree with it. However, casinos are businesses too, and they weren't spared the wrath of Katrina. What do you think?

Please forward this to Representative Lewis:

Dear Mr. Lewis: I petition you to join with Rep. Frank Wolf of Virginia in opposing the half-billion dollar tax credit for the casinos on the Gulf Coast included in the GO Zone legislation. Government has avoided giving tax aid to the gambling industry in the past, and they should continue to do so. This is a misuse of tax money, especially in light of the fact that the casinos didn’t even ask for it!

Please support legislation that will put the money toward reconstructing the infrastructure, not toward a group of financially robust giants whose industry is known to increase crime rates and poverty within any society in which it is introduced. If indeed this is true, and there are many studies that show it is, then casinos actually exacerbated the problems caused by Katrina because many of those who did not leave the region didn’t do so because of financial woes probably indirectly or directly caused by casino industry.

This is an important issue for me and my family. Thank you for your time and I look forward to hearing from you.

Ayn Rand's Philosophy on Money: Not the Root of All Evil

As promised an expert from "Atlas Shrugged" by Ayn Rand. Here the character Francisco D'Anconia is explaining the value of money and where that value comes from to guests at a dinner party, who are saying that money is the "Root of all Evil."

"So you think that money is the root of all evil?" said Francisco D'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor - your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money. Is this what you consider evil?

"Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions - and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth.

"But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man's capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is made - before it can be looted or mooched - made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.

"To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of you effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit, not for their own injury, for their gain, not for their loss - the recognition that they are not beasts of burden, born to carry the weight of your misery - that you must offer them values, not wounds - that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade - with reason, not force, as their final arbiter - it is the best product that wins, the best performance, the man of best judgment and highest ability - and the degree of man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?

"But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality - the men who seek to replace the mind by seizing the products of the mind.

"Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he's evaded the knowledge of what to value, and it will not provide him with a purpose, if he's evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason you call it evil?

"Only the man who does not need it, is fit to inherit wealth - the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason you call it evil?

"Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men's vices or men's stupidity? By catering to fools, in the hope that getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment's or a penny's worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you'll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of hatred of money?

"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money?

"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorable; the man who respects it has earned it.

"Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another - their only substitute, if they abandon money, is the muzzle of a gun.

"But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich - will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt - and of his life, as he deserves.

"Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: 'Account Overdrawn.'

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world?' You are.

"... Throughout men's history, money was always seized by looters of one brand or another, whose names changed, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves - slaves who repeated the motions once discovered by somebody's mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer. Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers - as industrialists.

"To the glory of mankind, there was, for the first and only time in history, a country of money - and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man's mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being - the self-made man - the American industrialist.

"If you ask me to name the proudest distinction of Americans, I would choose - because it contains all the others - the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity - to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words to make money' hold the essence of human morality.

"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns - or dollars. Take your choice - there is no other - and your time is running out."

Pretty powerful view of economic theory and the value of people in relation to money, no? The above expert comes from pp 411-414 of Atlas Shrugged. A good book, in my opinion.

Let me know what you think of the above passage by leaving a comment below.

More astonishing housing market statistics

This article in the LA Times surveys a cross section of people to discover their housing purchasing plans and stories. It gives a number of statistics about home ownership and the increasing reliance of Americans on debt.

Toward the end of the article, the risk of all of this debt is mentioned. While debt can be perceived as a tool, it should also be perceived in the context of its inherent risk. When you borrow money, you have to pay it back. If something happens to your income stream (you get laid off, you need to change jobs, an accident, etc.) that debt that was liberating you and helping you have the lifestyle of your dreams becomes a weight around you neck dragging you down and forcing you to either try and sell what you bought or declare bankruptcy.

If the market turns down and people's houses are "flipped" the opposite way (they owe more than the house is worth), we as Americans are going to see a lot more bankruptcies and hard times.

It makes me mad and sad at the same time when I read about why people are living this risky lifestyle. Here's a quote:

Irvine-based Financial Freedom Corp. says one of the major reasons people buy its reverse mortgages is "lifestyle enhancement" — extra money to have fun. Financial Freedom says it is on track this year to nearly double the 5,000 reverse mortgages it sold in 2004 in California.

Read the article and leave a comment.

Alan Greenspan warns of potential housing market crash

At a speech in Wyoming, the chairman of the Federal Reserve Board, Alan Greenspan, warned that the housing market could suffer from a serious crash. He warned of people buying houses as a "one-way bet" on making money. Greenspan mentions that "history has not dealt well with investors who ignore risks."

The article, from the (London) Times mentions that over a third of US housing markets are overpriced. I don't own a home, but sometimes, I wish I had bought one three years ago when I moved to Iowa City. This market has grown rapidly during that time and I probably would have seen a nice appreciation. At this point, though, if prices do fall or flatten, I might be better off. We'll see.

Econ4U helps educate people about money

I received this in my inbox this morning and thought it was appropriate to post here. Looks like an interesting program and one that is right in line with the goals of this blog. Visit them and let me know what you think:

Econ4U Takes Unique Approach to Increase Financial Literacy Among Nation’s Youth

With a steady decline of financial literacy among young Americans there should be little doubt as to why our personal savings rates are at an all-time low and bankruptcy rates are at an all-time high. Basic economics classes are only required in 15 states, and studies prove those who need this information most aren’t getting it elsewhere.

Many may say “information is out there, it’s not my problem.” But in fact it is an American problem that’s not going away on its own. American consumers now spend a record 18.1 percent of after-tax income just to cover existing debts! What does that mean for you? As their disposable income decreases they are most likely borrowing more and more just to stay afloat. We as consumers end up paying for their “forgiven” debts through higher fees and interest rates when they get in too deep and file for bankruptcy.

As many American families try to “keep up with the Jones,” they find themselves in a cycle of debt, passing their bad financial habits onto their kids. And how would they know any better? Media culture encourages spending, not saving. Young people are marketed to with promising offers like “no payments for one year” without understanding that when they don’t pay off the entire balance within that year they’ll probably be charged 20% interest from the date of purchase. Unfortunately many young Americans see these offers as free money today that they’ll worry about tomorrow. And frankly, nobody’s stopping them.

If you don’t know better you can’t do better. There are volumes of information available on how to repair credit scores and file for bankruptcy, but if this is the information you need, you’re probably already in over your head. You’re wishing you had better information before you made bad financial decisions in the first place.

Econ4U is a public economic education campaign designed to do just that. It brings basic economic facts to young Americans—those who will not seek this information on their own until it’s too late—when they are captive and comfortable. Most young people find economics courses complicated and dry. That is why Econ4U takes an innovative approach to teaching about personal finance, government spending and business economics.

For example, instead of unscrambling movie titles as they wait for the feature presentation to begin, a moviegoer will now learn that it will cost them 46 years to pay off that $5,000 credit card bill if they only pay the minimum balance each month. Teens are exposed to the miracle of compounding interest on their tray liners in fast food restaurants. Average profit margins are explained on scoring machines as bowlers wait for their scores to be calculated. By putting this information in front of people in a way that they can easily understand and retain, Econ4U reaches young people with vital financial information before they make mistakes we’ll all pay for.

Go to econ4U to learn more about how you can support the Econ4U program. And while you’re there, tell us what you think young Americans should know about their finances. Submit new questions by September 7, 2005 for your chance to win business-class airfare to anywhere Delta flies worldwide, tickets to the Outback Bowl in Tampa, FL with a ride on the Outback blimp, or round-trip tickets on JetBlue Airways.

University of Iowa a good ROI

Here is an expert of an article Agent Disco sent me:

Forbes Magazine Ranks Tippie MBA An Excellent Return On Investment

Graduates who receive their MBA degrees from the University of Iowa's Tippie School of Management received $102,000 in additional pay between 2000 and 2005 as a result of the degree, according to a new survey by Forbes Magazine. That figure places the Tippie MBA in the 12th spot overall in Forbes ranking of business schools, up from 26th in the magazine's most recent survey in 2003. That ranks the program third among public universities, behind the University of Virginia and the University of Texas; and second in the Big 10, behind only Northwestern.

Check out the entire article here.

Being a student of the University of Iowa, I sure hope this is true. Wouldn't want to get out into the real world and realize I've wasted my time!

Vioxx to cost Merck at least $250 million in jury case

According to this article, the wife of a man who died from taking Vioxx, a pain-killer, was awarded $253 million for lost wages, lost companionship and emotional anguish. While Merck should have tested their drug better, and the FDA obviously let the ball drop on approving this medicine, I think the award is significantly severe and a bit over the top. This case has obviously hurt Merck, as their shares dropped more than $2 to $28.06 today.

Wired News added to Cashtalk's list of links

Wired News on-line is a great, alternative site to keep up with fads and trends in the technology and business worlds.

This article talks about Amazon.com getting involved in the DVD rental business as a direct competitor to Netflix. Agentdisco and I have done a little research on this. We speculated that Netflix ended its relationship with Wal-mart because of this impending move by Amazon.

Is futuristic, 3-D, full sensory television going to be on the market by 2020? According to this article it will be.

With the impending end of the Space Shuttle program, NASA turns to smaller companies to offer up ideas on cheaper, safer ways to carry supplies into space. Read about it here.

I've added the link to those at the right and encourage you to check it out.

Gas Prices Keep Going Up...

Some people might find that living in Venezuela would be nice right about now, as their average gas price is only $0.12 a gallon. The most expensive place in the world for buying gasoline is the Netherlands at $6.48 a gallon! An interesting spectrum of prices CNN posted on this list. Check it out and let me know how much you're paying for gas right now. (I'm paying $2.49 a gallon in Iowa City.)

It's been a while...

Hi everybody! I hope everyone is having a good summer. I just got back from a trip to sunny Mexico. We did a little snorkeling, swimming, climbing and a whole lot of relaxing. Fun stuff!

I'm reading Ayn Rand's masterpeice, "Atlas Shrugged" as my summer reading material. It is a very interesting book with a lot of ideas about the way business and ultimately society should be run. I don't agree with everything she says, but a lot of it makes sense from a practical point of view. I'll post an exerpt I found quite interesting about the philosophy of money. I'll try and get that up in the next few days.

Agent Disco and I would like to start another Stock Market contest. We learned a lot from the last one, and want to continue to learn about stocks, bonds, options, and all the related stuff. We hope this one will go longer than a month and we'll have a lot of people participating. I'll post more details in the near future.

I hope you are all having a good summer. If you have any questions or thoughts on the economy, business, or money, feel free to post!

GM's Marketing Ploy a Success!

Ah...summer. Hot, humid days, outdoor cookouts, swimming pools and...new cars? If you've been watching TV lately, you may have noticed car commercials that offer a great rate on their models: you get the same discount that the employees do. Its a creative tactic and apparently its working. GM has increased their sales 41% last month. Chrysler and Ford have followed suit (even after Ford initially declined to copycat. I guess the numbers that GM put up convinced Ford to change its strategy) . Apparently feeling like an employee of a major car company is what the American public wanted? These are some serious discounts: A Ford Explorer normally goes for $32,895 but with the dicount it costs $28,739 (still too rich for my blood). Read the articles here and here.

Google: What an amazing company!

"If only I'd bought," you might think to yourself. Well, that's what I'm thinking. Google just keeps going up and this article from the Economist might have an explanation as to why this company's stock keeps rocketing higher. Right now, Google is worth over $80 billion dollars. More than Yahoo!, Ebay, Amazon, or even "brick and mortar" companies like Time Warner. And as long as the price keeps going up, and as the article alludes to, more and more innovations are made public, Google will be valued higher and higher.

Summer Sunshine: What the FDA doesn't want you to know

John Stossel wrote a great article here about Mexoryl, a sunblock ingredient that helps block UVA rays. Most of the world uses this ingredient, coupled with others to effectively block out all harmful effects of sunlight. But the FDA has refused to approve it. It has even refused to explain why it isn't approving it for public use. So Americans can just get more wrinkly, I guess.

Everything an MBA should know

QuickMBA is a great site that allows anyone to see the typical topics and subjects that are covered in major MBA programs across the country. What it does is break the classes out into what is expected of the students to know after they have paid thousands of dollars for the class and taken the tests. If you don't want to make that kind of comittment, I suggest you check it out and even bookmark the site.

A friend of mine from my most recent MBA class directed me to this site when we realized the teacher wasn't actually going to teach us anything. I used the site to peruse the subject matter and it helped with getting a grasp on the material, as well as figure out what we should have been learning.

Cashtalk will add the site to the list of links on the right side. Make sure you look at it and if you have any questions about the topics, I've almost got my MBA, so feel free to ask!

A Comprehensive Survey of the Worldwide Housing Market

The Economist, two weeks ago, published a fairly comprehensive survey of the world housing market. They believe that for the most part the "bubble" has peaked. What I find staggering is the amount of equity they estimate could be affected (in the trillions). They say that this is the largest "bubble" in history and is being caused by low interest rates, distrust of stocks as an investment tool (and therefore people tend to look at houses as an investment rather than a place to live) and the use of second-mortgages or home equity loans to fuel consumer spending.

This is one of the better written historical and predictive surveys I've seen on the topic. If you haven't really understood the implications about all the talk around the housing bubble, this would be a good place to catch up, as well as read about potential future scenarios. Check it out and let us know what you think. (I've posted the article in the comments section).

A Wake Up Call from the Fool

Ah, retirement. For most of us, it seems to be a long way off, for others it is right around the corner. Some of us think about it and plan for it (as we should) and others just hope the dice land with favorable numbers.

The Motley Fool has an article with some pretty surprising numbers about how many people in the US are not planning for retirement, even though they have access to 401(k) plans or IRAs. The article points out that you will need $1 million dollars by the time you are ready to retire, in order to cover your living costs and other expensive needs (medical coverage, anyone?).

I contribute the maximum amount to my 403(b) (I work for a non-profit company) and am preparing to invest additional after-tax money in a Roth IRA. My goal is to have around $1.5 million by the time I retire in order to take care of myself and my family (selfish reasons) and to be less of a burden on society (unselfish reasons). I hope the rest of you are just as "foolish."