Archive for December 2nd, 2016

h1

How crony capitalism works

December 2, 2016

Kevin Williamson has a good article about how Trump ‘saved’ jobs at a Carrier plant in Indiana. RTWT.

The Economic Stupidity of the Carrier Bailout

One particularly tough and indigestible nugget of talk-radio stupidity afflicting the guts of conservatism is the idea that there is some sort of fundamental difference between bribing a business with tax cuts and bribing it with a wheelbarrow full of cash. The Trump-Pence bailout of Carrier’s operations in Indiana provides an illustrative case. […]

Republicans might have had a little bit of a point in the question of general tax cuts: A tax cut and spending are different things, even if the budgetary effects are exactly the same.

But in the matter of industry-specific or firm-specific tax benefits of the sort extended to Carrier in Indiana, they do not have a leg to stand on. These are straight-up corporate welfare, ethically and fiscally indistinguishable from shipping containers full of $100 bills. […]

For Carrier’s accountant, any pecuniary benefit will do. So far as the bottom line is concerned, a $7 million tax credit is the same as a $7 million check or $7 million in Apple stock or $7 million in gold. It’s all +$7 million on the line where you want it. […]

This is a case of Frédéric Bastiat’s problem of the seen vs. the unseen. The benefits are easy to see, all those sympathetic workers in Indiana. The costs are born by sympathetic workers, too, around the country, and by their families and by their neighbors. But those are widely dispersed, so they are harder to see and do not hit with the same dramatic impact.

But the math is the math is the math. Trump and Pence are trying to sell you a free lunch, the same way the Keynesians and their magical spending multiplier do when they promise that government stimulus programs (Trump is pushing one of those, too) will somehow magically pay for themselves. […]

I suppose the good news for most of us is that the State of Indiana (and its taxpayers) will be the ones picking up the tab for this.

Bastiat’s That Which is Seen, and That Which is Not Seen.

h1

How a market works

December 2, 2016

This is an interesting story that I read on Dan Lewis’s Now I Know list. (Now I Know is worth a look, if you’re not already a subscriber.)

To set the scene: Herbert Dow, founder of Dow Chemical, came up with a new way to refine bromine in 1891. That was the good news; the bad news was that he got into a trade war with an international cartel when he tried to sell his bromine outside the U.S.

Here’s the bulk of Dan’s article, called The Bromine Gambit:

Before Dow came onto the bromine scene, a German government-backed cartel named the Bromkonvention had a monopoly on bromine. As Investopedia explains, the Bromkonvention “sold bromine at a fixed price of 49 cents per pound, but it would implement a predatory pricing strategy quickly, if challenged.” And Dow Chemical posed such a challenge.

Dow Chemical operated independently of the Bromkonvention, which didn’t make the Germans all that happy, but they were willing to coexist so long as Dow kept its bromine sales within the United States. And considering that Dow was selling bromine at 27 cents per pound — about 45% less than what the Bromkonvention priced it at in Europe — the Germans saw Dow as a real threat. So the Bromkonvention made a threat of their own: if Dow entered markets outside the United States, the Bromkonvention promised to use its huge supplies of bromine to force Dow out of business by selling it cheaply — below cost — in the States.

Dow called their bluff, selling bromine to England. And the Bromkonvention retaliated. The cartel began dumping bromine in America, offering it for sale at 15 cents per pound. Dow couldn’t compete, and it didn’t have any other products to make up for the shortfall. This put Dow’s business in jeopardy — in theory at least.

In practice? Something went wrong, at least from the perspective of the Bromkonvention. American demand for bromine went up, as expected, but by leaps and bounds — no matter how much bromine Bromkonvention sold there, it would sell out, and Dow was still able to find customers at its 27 cents/pound price point. Not only did Dow not go out of business, but it expanded. Dow began selling its bromine — still at 27 cents per pound — in Germany itself.

How was this possible? Instead of dropping its price to meet that set by the Bromkonvention, Dow became buyers, as Investors Business Daily (via the Indianapolis Recorder) explains: “[Herbert Henry Dow] had an agent secretly buy up hundreds of thousands of pounds of the cut-rate imported bromine.” And what do you do with that bromine? IBD continues: Dow would then “repackage [the cheap bromine] and export it back to Europe.”

The Bromkonvention, at first, wasn’t sure where the cheap European bromine was coming from; in that interim period, they also continued their price war against Dow and continued to lower the price in the U.S. (ultimately to 10 cents/pound). In the end, there wasn’t a price low enough to force Dow out of business, as Dow was well-enough capitalized to buy up the dumped bromine and arbitrage its way to success. (And besides, the Bromkonvention made it easier and easier by lowering the price.) A century plus later, Dow is still around; the Bromkonvention is long gone.

Dan writes that Dow Chemical had the capital reserves to buy up the "dumped" bromine. But I’ll guess that in this case it wouldn’t have been to hard to find speculators – or banks – willing to loan the money to buy the under-priced bromine.

%d bloggers like this: