Econ 101: Interest Rates and Credit

Posted: May 7, 2013 by davishipps in Economics

Interest rates play a major role in our economy. We often hear of the Federal Reserve Bank raising or lowering interest rates in an effort to stimulate the economy and reduce unemployment in bad times, or to try and “slow the growth” in good times. I’ll attempt to explain how that works in a future post, but for now, I want to focus on what interest rates are and why they matter.

To put it as simply as I can, interest rates are the price of money. More specifically, an interest rate is the price you pay in the future for money you get now. If I go to the bank and ask for a loan of $1000 at 10% interest to be paid off in one year, that means that they give me $1000 now in exchange for $1100 later, specifically a year from now. This transaction is mutually beneficial because of our different “time preferences.” In this instance, I prefer to have a smaller amount of money as long as I can have it right now, and the bank prefers to have a larger amount of money and doesn’t mind if they have to wait until later to get it. Similarly, when you deposit money in a savings account that earns interest, you are granting the bank the use of your money now in exchange for some additional money that gets paid over time.

Although some of us manage to be savers, these days interest rates enter our experience most commonly through our use of credit. Credit dominates our economy in big and small ways, from multimillion dollar construction loans to packs of gum bought with a credit card at the grocery store. As the Law of Demand would suggest, as interest rates get lower, other things being equal, we tend to find that credit is used more frequently, with people borrowing money in larger amounts and doing so more often. They tend to charge things to credit cards more readily as well since the price of repayment is relatively low. As interest rates increase, we tend to find that people save more because they can get a higher price for their money, and they tend to use credit cards less often.

I’ve left out a great many aspects of Economics in these posts due to space and time concerns, but I wanted to cover what I consider to be the basics. In the next few articles, I’m going to be applying these basic concepts to the role of unions, government, and the banking system to show the effects of these institutions on the economy.


Econ 101: Monopolies and Cartels

Posted: May 3, 2013 by davishipps in Economics

In Competition and Prices, I wrote that “competition is the mechanism for setting prices in a free market.” But what happens when there is only one provider of a good or service? In this case, that provider is said to have a “monopoly” on the market for that product. What if all of the suppliers of a good or service band together so that there is no competition? These suppliers would be involved in a “cartel.” When a monopoly or cartel exists in an industry, then the prices of the products they offer will tend to be higher than they would in a free market. Let’s look at the effects of these situations individually.

In a free market, monopolies don’t tend to last long, for the reason mentioned earlier: as soon as one company is seen to be making a profit, other companies will enter the market for that same product, hoping to copy the original producer’s success. The entry of other companies into the industry will eventually drive prices down to market-clearing levels, and when the only company in an industry originally has set their prices too high, this process proceeds even more rapidly than usual. Only the government can sustain a monopoly, and it does this by granting the monopolizing company exclusive patent rights for their product or else creating high regulatory barriers to entry into the industry.

Cartels usually break up the moment one member realizes that they can increase their profits by offering the product for just a bit less than the cartel-agreed price. As soon as other members see that one company has lowered its price, they must follow suit or risk losing business, and the cartel is dismantled. However, even if all the cartel members stuck to their agreed upon price, the same issue then arises that the monopoly faced: in a free market, some entrepreneur is bound to notice that all the companies in a industry have set their prices too high and decide to enter the market himself, offering the product for a lower price to satisfy the demand. The cartel must now lower their prices to market-clearing levels or risk losing business, and the cartel is effectively dismantled. The only way for a cartel to remain in force is, again, through the intervention of the government via legislative or regulatory barriers to entry into the industry.

Econ 101: Example Issue – Minimum Wage

Posted: May 2, 2013 by davishipps in Economics

The first example issue I wanted to discuss, since it has come up somewhat recently, is the idea of a minimum wage. It can be a controversial topic, so I will simply discuss the economics involved and not attempt to say whether it is good or bad to have such a wage.

President Obama announced his support for an increase in the Federal Minimum Wage – from the current $7.25/hour rate to $9/hour – during the first State of the Union address of his second term. House Minority Leader Nancy Pelosi favors a plan that would see it raised to $10/hour, and Senator Elizabeth Warren has suggested that it should be as much as $22/hour. To see what the effects of such an increase might be, we need to look at this with the Laws of Supply and Demand in mind. We’ll use the President’s suggestion for our example.

In this case, the Supplier is the worker and the Buyer is the employer. The Buyer, as ever, has only so much money to spend on his purchases, and he would generally prefer to spend as little money as needed. The Supplier, as ever, would generally like to receive as much money as possible for his services. These two must come to an agreement known as the “price” for the services to be exchanged. In the recent past, the Buyer has purchased the Supplier’s services for the price of $7.25/hour, and the Supplier has been willing to accept this arrangement. If the Federal Minimum Wage has just been raised as proposed above, the Supplier is now legally prevented from selling his services for anything less than $9/hour, and the Buyer must make a decision.

The Buyer may decide one of three things: A) He may decide to forgo the Supplier’s services altogether based on his belief that those services are not worth the new rate in any quantity, B) he may decide to cut back on the quantity of the Supplier’s services that he will purchase, or C) he may decide to continue to purchase the full previous amount of the Supplier’s services and cut back in other areas. There can be no other option for the Buyer because, as has already been mentioned, he has only so much money to spend. And, in fact, if we look closely at option C, we find that it also eventually results in option A or B.

If we suppose that the Buyer determines the full amount of the Supplier’s services to be absolutely required in order to meet the Buyer’s needs, then other areas will necessarily be cut back. Remember, though, that the Buyer is the employer, and the reason for the employment is to assist in the production of a good or the offering of a service. In this case, “cutting back in other areas” means that less money is spent on other components that are needed to produce the good or service, and ultimately less of the good or service is offered for sale. Alternatively, the price of the good or service could be raised to try and offset the increased cost of production. Remembering our Laws of Supply and Demand, however, we find that either of these options necessarily reduces the amount of total revenue for the employer, since either less is offered for sale at the same price (the supply is lower) or the price is increased (which tends to lower demand). Lower revenues, in turn, mean that there is less of the “only so much money” to spend on paying employees, and ultimately there will be less employment as a result.

So we see that, really, the Buyer has only option A or B from which to choose. An increase in the price of the Supplier’s services will result in the Buyer purchasing less of those services, other things being equal. Employment is subject to the Law of Demand just like any other service offered for sale. As this is the case, it may be worth noting that a decrease in the price of the Supplier’s services would likely result in the Buyer purchasing more of those services, other things being equal.

Econ 101: Competition and Prices

Posted: April 30, 2013 by davishipps in Economics

Competition is the key to making the free market work.

In simplest terms, when a company makes a product that turns out to be profitable, other companies wanting to copy their success will drive prices lower in order to take some of their business. This kind of “price war” tends to go on until prices are as low as they may be while still allowing the producer to make a profit. In fact, the most efficient producers will tend to drive the less efficient ones out of business by their ability to sell the product profitably at prices that the less efficient producers cannot match.

Competition among buyers also greatly affects the market, though in modern society this is less obvious than it may have been in the past. Higher demand for goods and services drives those prices up these days when the producer notices that their supply is unable to keep up. The producer doesn’t want to miss out on profits, so when they notice the shortage they will both a) try to provide more of the desired good or service and b) raise the price so that they can maximize the profit they realize on the goods and services sold. If they overshoot the mark and raise the price too high or produce the good or service in too great a quantity, they will eventually notice this overage and lower the price again until they can sell all the products for the most profit.

The price settled on is known as the “profit-maximizing price” or the “market-clearing price,” since it should allow all units of a good to be sold without any shortages or surpluses and thus “clear the market” for that good. When this price is settled on, the market is said to be in “equilibrium.” The thing is, the process for arriving at this price is never perfect, and indeed, as peoples’ tastes change, the profit-maximizing price may change as well. For this reason, the free market is said to “tend towards equilibrium,” but should not actually be thought of as being “in equilibrium.”

My point here is that competition is the mechanism for setting prices in a free market. Prices are extremely important for determining whether the market for a good or service is cleared, for determining whether a seller is seeing profits or losses, and determining which goods and services continue to be produced. Without competition and a price system, there would be no way for producers to know for sure that they were using their resources wisely in ways that would satisfy demand. More on this in future posts…

Econ 101: The Basics

Posted: April 29, 2013 by davishipps in Economics

If you’ve ever had the slightest introduction to Economics, you’ve probably heard of Supply and Demand. Simply put, Supply is stuff that’s for sale, and Demand is the buying of that stuff. Said stuff can be physical things (called “goods”) like chewing gum or cars, or it can be work you want done (called “services”) like bookkeeping or computer repair.

The most basic concepts in the study of Economics are the Law of Supply and the Law of Demand. In simplest terms, the Law of Supply says that as the price of a good or service goes up, producers will offer more of it for sale, other things being equal. The Law of Demand says that as the price of a good goes down, buyers are willing to buy more of it, other things being equal. If I were to merge the two, I might phrase it as follows: Sellers generally want to get the highest price possible for the stuff they’re selling, and buyers generally want to pay the lowest price possible for the stuff they’re buying. Eventually the buyers and sellers meet somewhere in the middle to agree on a “price,” which is the point at which each party to the transaction feels like they’re getting more in value than they’re giving up. If there is no such point, no sale/purchase is made.

Pretty simple, right? It makes sense, and you’ve probably experienced both of these laws in your own life, especially if you’ve ever had a yard sale. A case could be made that every aspect of economic activity hinges on these two laws. If you can keep the implications of these laws in mind, you’ll have a firmer grasp on the economic issues of the day than most of the political figures at all levels of government and, sadly, even many professional economists seem to have.

Over the next several posts, I’m going to write about what some of those issues are, and how they relate to Supply and Demand.

*side note*: As someone who is fascinated by the English language, I absolutely love the terminology of the free market economy. It clearly shows who’s in charge. The consumers “demand” certain goods or services be produced. They place “orders” for those goods or services. The producers provide “service” to try to “satisfy the demand.” The consumers are kings and masters; the producers are servants, rewarded (with profits) if the masters are pleased and punished (with losses) if not.

What’s Next for Roofer With a Mortgage

Posted: April 25, 2013 by davishipps in Uncategorized

Hello, everyone. It’s been 6 months since the last post on this site. Exactly two weeks before that post, my wife had our fourth child, a sweet little baby girl. Just over 2 weeks after that post, Ren announced that the radio show was going to be on an indefinite hiatus while he devoted some time to other things. And with that, we’ve pretty much been silent. Other than updating the Listen! page to reflect the hiatus and eventually creating the Reading List page that Ren mentioned on the last episode of the show, we haven’t done a thing with Roofer With a Mortgage, other than wear the hats and drink from the coffee mugs.

What often happens with websites/blogs where the project has been laid down for a while is that you’ll see an entry posted many months after the one immediately prior to it, promising to get back in the swing of things or apologizing for the absence. And then you’ll realize that the post your looking at was, in fact, written many months ago itself, with the follow-up never having been accomplished. This is not that post.

I can’t promise a steady stream of articles from now until the end of time, or even over the next few months. With the busy season at work ramping up, I don’t feel like I can even promise to try to keep up with that. However, when I finally got around to creating the Reading List page and was thinking about which short books were the best introductions to this important topic, it occurred to me that one way to promote an understanding of the subject might just be to post it myself. So I gave it a start, but without the deadline of an upcoming radio show to try and hit, I’ve dragged out and delayed the publication of the articles. In short, I let my motivation falter. So, in order to get the motivation in gear again, I’ve decided to give myself a deadline. That being said, here’s what I will promise:

Over the next few weeks, I will publish at least eight short articles on the basics of Economics. Three of these have already been written and will be published every day or two starting Monday, April 29th. After that, they will be posted as they are completed, with the last one posted no later than May 31st.

My hope is that these articles will help readers to better understand the economic issues being debated (or that should be debated) today and that it will provide a jumping off point for discussion in these areas. See you back here next week!

The Choice Is Clear

Posted: October 25, 2012 by davishipps in Getting Involved, National

With a very short less-than-two weeks to go until the big Presidential election, it’s time to make your choice. And, for those without a strong party affiliation already, those who claim not to be interested in party politics but in choosing the best candidate, the choice can be a tough one. People are calling this the most important election of our lifetime. People are saying that this is the election where our nation chooses between the paths of bigger or smaller government in a permanent way.

To quote a dear friend, “Hogwash!” Part of the reason the choice is tough this year is because the Democrat and Republican candidates are virtually identical. One has sons; the other has daughters; other than that, all the differences between them are superficial. Let’s take a look at the two broadest areas of agreement:

1) Foreign Policy: Mitt Romney spoke in the primaries about increasing military spending, and in this week’s foreign policy debate, he suggested he would continue using drone strikes. This is hardly an area of contrast between himself and the President, who promised in 2008 to end the Iraq and Afghanistan wars, only to initiate and support hostilities in Libya, Yemen, Egypt, and Syria, and who inaugurated the use of drone strikes. In that same debate, the President boasted that “our military spending has gone up every single year that I’ve been in office… We spend more on our military than the next 10 countries combined.” These two agreed so strongly that Jon Stewart of the Daily Show remarked, “Mitt Romney’s basically come around to Barack Obama’s position on foreign policy, and Barack Obama’s pretty much come around to the Bush administration’s policy on aggression overseas.”

2) Domestic Policy: In 2008, Candidate Obama referred to adding $4 Trillion to our national debt over 8 years as “irresponsible” and “unpatriotic.” As President, however, he has overseen the addition of another $5.5 Trillion in half the time. Still, this is no reason to think Romney would be much better, as Business Insider’s best-case analysis of his plan shows that it would add roughly the same amount over the same time period, and more realistic cases show it would add more.

I could cite many more examples, but the point here is that both these men actually have remarkably similar visions for our country, despite some relatively minor differences. More troubling to me is the idea that neither of them want to take the country in a direction it wants to go; more to the point, almost no one reasonably expects their actions to match their words on any given issue.

There is, however, one candidate who will be on the ballot in all fifty states who has been a successful businessman, who has been a successful two-term Republican governor of a majority Democrat state, who has a proven track record of turning around his state’s budget deficit and leaving with a surplus without raising taxes, and who generally seems to say what he means and do what he says. I refer, of course, to Gary Johnson, the Libertarian Party’s candidate for President.

Some would argue that a vote for a third-party candidate is wasted. I would argue that no Presidential election has ever been decided by one vote, nor has any state’s Electoral College vote been determined by a one-digit difference in the state’s popular vote. My state of Georgia, for example, will probably go for the Republican no matter how any individual voter votes.

It may seem like I’m saying your vote doesn’t matter. It depends on how you want it to matter. My vote matters to me as an expression of my political opinions. Statistically, my vote does not matter towards determining who becomes President. In this case, there is no reason for me to vote for someone that I do not believe would be a good President. I vote for the person that I want to be President. I do not vote to prevent someone from gaining or retaining the Presidency. I do not vote to say one person might be less bad than another as President. If there is no candidate who would be a good President, I don’t cast a vote for President.

In this way, the choice is clear. Neither of the major-party candidates is a good choice to be President based on either their rhetoric or their records. The election of one would lead to only marginally different results than the election of the other. The election of Gary Johnson, on the other hand, would bring about a change of direction for the better in both foreign and domestic policy. If you’re the type of person who looks for the best candidate regardless of their party, please research Gary Johnson for yourself and consider casting your vote for him on November 6th.

Civil Discourse

Posted: September 13, 2012 by davishipps in Chicken Little, National

Ren mentioned on the show last week – and on this week’s rebroadcast of the same show – that I have several articles floating around in my head. This is true. Over the past month or so I’ve planned an article on Paul Ryan, one disputing the claims made by a popular Internet sign about why the sign’s creator is voting to re-elect President Obama, one about the shoddy treatment of several state delegations to the Republican National Convention by the RNC itself, and, most recently, one on a surprising similarity between the Democratic and Republican conventions, plus a few on more general topics. However, this has been a very busy time at my work and with my soon-to-be-expanding-again family, so I haven’t felt like I’ve had time to properly research and flesh out these articles. I hope to be able to get to them all at some point before the election.

Today, though, I wanted to tackle a broader topic. I’ll try to keep it short, and I’d like everyone to be in the proper state of calm when you read this. So, if you would, please take a deep breath, and slowly let it out.

Now another one.

And one more because I like the number 3.

Okay, now that we’re all relaxed, here’s what I need you to know. When someone disagrees with you on a particular subject, that doesn’t necessarily mean that they’re an idiot… even if it’s a very important subject. If you tend to be more right-leaning politically, you need to know that not everyone who is planning to vote to re-elect President Obama is doing so out of deference to his skin color. Nor is it because they’re Socialists, anti-American, or suffering from wealth-envy. If you tend to be more left-leaning politically, you need to know that not everyone who is planning to vote for Mitt Romney is doing so out of disdain for the President’s skin color. Nor is it that they hate poor people or love corporations.

Now, you may be saying to yourself, “Duh. I already know that.” But, honestly, when I look at Facebook, blogs, and the comments on news articles, this is the level of discourse that I’m seeing. It boils down to “either you agree with me, or clearly I am smarter than you.” I’ve also seen it put this way: “To understand the workings of American politics, you have to understand this fundamental law: Conservatives think liberals are stupid. Liberals think conservatives are evil.”

But can this possibly be true? Think for a moment about the people in your own life – your friends, co-workers, and relatives. Do you know any real people who have different political opinions than yourself? If you’re on the right, would you characterize those people as idiots? Have they ever said or done anything in your presence that would indicate that they are less than intelligent, out to destroy the country, or only looking to soak the rich? If you’re on the left, would you characterize those people as evil? Have they ever, in your entire experience with them, said or done anything in your presence that would lead you to believe that they are racist, greedy, or filled with hate?

I’ve already gone on longer than I intended, but I just wanted to put this out there. Claiming that someone with an opposing viewpoint is evil or stupid is a cop-out. It allows you not to have to consider the merits of whatever argument they’re presenting by labeling them as having a defective character. It prevents intelligent discussion of issues. It prevents you from possibly winning them over to your side, or at least helping them to understand where you’re coming from. Let us remember particularly in this, the silly season of national politics, that for the most part our differences are a matter of beliefs sincerely held about the proper role of government, and not a matter of hatred or ignorance. Please post your comments accordingly.

Why T-SPLOST is a Terrible Idea

Posted: July 26, 2012 by davishipps in Local, State

Over the past few weeks on the show, Ren has discussed the T-SPLOST referendum on the upcoming July 31st ballot in great detail. To state it simply: the proposed Transportation – Special Purpose Local Option Sales Tax is a terrible idea.

I don’t see how this can be better illustrated than by the fact that, in the Atlanta area at least, the Atlanta Regional Commission has admitted that with the proposed projects “the average commute time really doesn’t change a lot.” Compound that with the fact that the Georgia DOT has had 4 straight years of “scathing” audit reports regarding woeful mismanagement of their existing funds, and you come to the laughable-if-it-wasn’t-so-tragic conclusion that we’re being asked to vote ourselves a tax increase so that incompetent bureaucrats can spend our money on traffic projects that won’t solve our traffic problems. Or, for the same results, we might all just get together and start a big bonfire with our money.

I’ve seen several videos describing why the projects for Atlanta are foolish in the extreme, and I’ll link to a few of those below. Some of these videos, however, seem to think that the biggest problem of the T-SPLOST is with the project list, and that we should vote No this year so that the politicians and bureaucrats will come back with a better list next year. That is not the biggest problem with the T-SPLOST.

The biggest problem with the T-SPLOST is that it taxes all of us by increasing the price of everything we buy. This at a time when prices are already rising due to the sagging economy, when Georgia has one of the highest unemployment rates in the country, and thus when Georgians can least afford a tax increase. If there can ever be a good time to raise taxes across the board, surely this is not that time.

The proponents say it’s not much of an increase, just a penny. But, as Ren has pointed out, it’s not just a penny. It’s a penny on every single dollar you spend. It’s an increase of 14% over the existing sales tax in our region, and it affects absolutely everyone, whether they can afford it or not. You are taxed whether you are rich or poor, whether you will ever make use of these projects or not.

In summary, Georgia voters are being asked to hand over more of their hard-earned money to politicians and unelected bureaucrats who have badly mismanaged the state’s transportation systems for years, and these officials are, in effect, promising to take our money and, in return, not fix the problems to any noticeable degree. Is it any wonder they’re having to spend so much on advertising to sell this thing?

Please vote NO on the T-SPLOST referendum. Surely you can think of better ways to spend your money.


Don’t Be Fooled by BIG Money

Atlanta vs. Other Cities

Express Bus vs. Light Rail

The Importance of Staying Informed

Posted: January 24, 2012 by davishipps in GOP, National
Tags: ,

The results are in from Saturday’s “First in the South” Republican primary in South Carolina, and what we saw there has caused me to reflect on the importance of staying informed.

Newt Gingrich won South Carolina with about 41% of the vote. As recently as the previous Tuesday, he’d been polling at around 21%. If you remember, he had experienced a surge in his candidacy back in November and early December after some strong debate performances in which he’d especially gotten a chance to attack the moderators. This seems to have been what happened Saturday as well. The former Speaker is at his best when he’s attacking the media and showcasing his rhetorical skills, and the debates last week allowed him the opportunity to do both.

And the voters respond. He is envisioned as being able to out-debate President Obama, he is given sympathy by a Republican electorate that rightly detests the mainstream media, and his record and his actual policy proposals fall by the wayside, which is a shame.

What really prompted this post was seeing a reporter tweet that “SC Exit polls show Gingrich edge with conservatives, Tea Party & religious voters.” I took this to mean: voters who identify themselves as conservatives have either forgiven or forgotten Newt’s bizarre record of aligning himself with liberals on issues like Climate Change and attacking conservatives on issues like Paul Ryan’s Medicare reform proposal; voters who identify themselves as Tea Party members have either forgiven or forgotten Newt’s (somewhat reluctant) support of TARP and his endorsement and praise of RomneyCare; and voters who believe their President should be a strong Christian have forgiven or forgotten Newt’s various personal moral failings.

My point is not necessarily to bash Newt, but to bring up facts about his candidacy that might get overlooked after a rousing media-bashing debate. He may be a great debater (or not), and he may hate the media with a righteous indignation (or not), but his record (especially over the past decade+) should give Republicans pause, and the lack of specifics in his proposals should concern those voters who are naturally suspicious of politicians’ vague promises. And, lastly, his inability to even appear on the ballot in multiple states and his significant lag behind Obama in national polls should probably prevent all but his most loyal supporters from taking his candidacy seriously.

If we are researching these candidates and have a solid understanding of their history and positions, we won’t be so quick to vote for someone based on their Presidential looks or ability to entertain us. Stay motivated and stay informed.