Sunday, March 19, 2006

Economic misconceptions to beware of

I was performing the search engine queries by which people found my blog, and I came across this thread at Wal-Mart Watch. There are a lot of comments, but the first few dozen illustrate the moonbat mentality at its finest. There's also at least one obvious troll by a Wal-Mart basher who tries to look like a Wal-Mart supporter.

The Wal-Mart-bashers have so many economic misconceptions, like the nature of trade deficits, and how the higher wages they advocate would actually raise Wal-Mart prices out of reach of the poor that the Wal-Mart-bashers claim to want to help. But what always makes my shake my head is their belief that Wal-Mart "forces" people:
What they don't seem to understand is that Wal-mart forced suppliers that also supply to Target and the others to relocate to China to keep Wal-mart's business. Target and the others have no choice but to get their stock from China thanks to Wal-mart.
Forced? Forced? Wal-Mart didn't force anybody. There are only two ways by which anyone can force me to give him my business: physical coercion or a government charter (i.e. monopoly). Since Wal-Mart does not have people dragging me to their nearest store or at least threatening me with bodily harm if I don't shop there, how can it be forcing me? And that thread alone proves that Wal-Mart is far from a monopoly. If someone is willing to spend $40 more at a small store because he doesn't like Wal-Mart, that's fine. It's his purely voluntary choice.

When competition is unfettered, there's no such thing as "force." There's persuasion, but it's not force. Suppliers shifted their operations to China whether they sell to me, Wal-Mart or Bo Diddly. By taking advantage of lower operational costs in China, they could offer lower wholesale prices, gaining Wal-Mart's business because they wanted to, not because they had to supply things at no higher than what Wal-Mart demands.

I question whether any of these people ever helped run a business (I have), because they'd otherwise know this: if a customer won't pay more than x, but you can't sell it to him at x and make enough profit to stay solvent (or if you can sell another product more profitably, whether to him or someone else), then no matter what your customer demands, you just won't do it. No business is going to accept reduced profit just to sell to Wal-Mart, but it will sell at a lower profit per unit to Wal-Mart if the larger volume means higher net profit.

Frankly, it's idiotic to think that because Wal-Mart said, "We'll pay only $x for y of z," that it "forced" the supplier to find a cheaper way of making the product. If the supplier realized it could move operations overseas and sell for less, it would do so regardless of who its customers are. Again, it would do so to gain Wal-Mart's business, competing with others for a piece of the pie, but not because it's "forced."

In another example of a misunderstanding of what "force" is, my best friend at work rails against "dollar hegemony" (which I think is a stupid term) and claims other nations are "forced" to invest in dollar-denominated assets (especially U.S. Treasury securities). But who is "forcing" other nations and their central banks? The U.S. is criticized for sending its military around the globe, but I've yet to see our Marines storm the Bundesbank or the Bank of Japan, demanding they hold a minimum percentage of dollars. Since it's impossible (so far, without a single world government body that can enforce this) for a nation to have a monopoly on currency, and since there is no threat of military action, the U.S. is simply not forcing other nations.

Other nations invest in dollar-denominated assets because they acquire more dollars than they can spend. If they don't want those dollars, then it's very simple: they have the freedom of choice to stop acquiring them. If they don't want dollars, then they can demand to be paid in their own currency, or they can sell fewer goods and services to Americans that are paid for in dollars. But it turns out that many foreigners are the complete opposite of "forced." They accept dollars in payment because they want to invest in dollar-denominated assets.

The subsequent question isn't as obvious to some: why do foreigners want to invest so much in the United States? It's for the same reason I think Henry Liu's "dollar hegemony" is a stupid term based on a jealous fear of the American economy. The United States is the economic backbone of the world, and other than two short downturns in 1991-1992 and 2001, it's had uninterrupted growth for well over two decades. They know that U.S. stocks, corporate bonds and real estate are, in general, great additions to an investment portfolio. And should they invest in Treasury bonds, they know they're effectively a can't-lose thing. They're the safest in the world, because the American economy is so strong that the government can count on tax revenues.

Our friend Josh Hendrickson recently noted how the media isn't reporting on the good news of the American economy. I had some comments, agreeing with it. Last fall I briefly touched on how when the media does report on good news, it always follows with a caveat. Usually that high GDP growth will lead to inflation, and that the Fed will then have to raise interest rates (causing stocks to decline), which are Keynesian baloney.

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