Sunday, May 31, 2015

On Negative Interest Rates

Reading Tuure Parkkinen's Fixing the Root Bug exposed me to a new idea: the notion that lowering interest rates actually can improve the economy, and that the only thing holding it back is the zero percent lower bound, that it is possible that a negative interest rate on risk free credit is necessary to bring the supply of and demand for labor into balance (that is, to bring the economy into a state of full desired employment). Initially, it seemed like an insane idea, my background favoring Austrian Business Cycle Theory, which proposes that it is excessively low interest rates that cause market crashes, and that more of the same can only set the market up for an even worse crash in the future. But I suspended my disbelief long enough to fully appreciate his argument. And further reflection on the idea made me realize that it's quite possible that, once risk factors are discounted out of the going rate, negative interest rates can and do exist, in the absence of government monetary and/or fiscal policy creating a "floor" on interest rates.

Imagine the following scenario. Parkkinen's argument takes hold, and a policy of pursuing negative interest rates (either through higher rates of inflation, or through nominally negative interest rates in a cashless currency system) is enacted. Maintaining cash balances may cease to be a method of preserving wealth. I am assuming here that the interest rate is stable; this is not a hyperinflation scenario. I am also assuming that gold is no longer taxed like an investment (people can buy and sell gold freely without having to report or pay taxes on it). Let us suppose certain people decide that, rather than holding their wealth as money, or buying a risk bearing real investment, they decide to preserve wealth as a stockpile of gold. Have they dodged the "inflation tax"?

That depends on the exact real interest rate, security costs, and so on. For the hoarder of gold is not without expenses. Gold can be stolen; it must be stored in a secure fashion. This cost must be discounted out of the benefit of evading the negative interest rate. And even with that cost covered, there is still a risk that security measures will fail; thus, the cost of insuring against such a loss must also be discounted out. Thus, holding one's wealth as gold has costs built into it, and these costs must be compared against the cost imposed by a negative interest rate in the government's money (and the opportunity cost of buying gold, as opposed to a real investment in productive activity, or even a desired consumer good).

It isn't necessary to include the government's money in this analysis. All this does is demonstrate that, in the absence of the government imposing a zero percent lower bound (through such measures as providing security for property and deposit insurance without corresponding user fees), "aggregate" negative interest rates can and will exist (even if it is borne unevenly by those who fail to secure their stockpiles against theft).

Additionally, costs of securing and insuring stocks of a commodity money are not fixed, but rather vary by circumstance. And one factor that should strongly influence the costs of security is the ratio between the potential rewards of larceny and the potential rewards of productivity. The more that can be had stealing from those who already have, relative to the rewards that can be had engaging in productive activity, the higher the costs of securing stockpiles of money. In other words, as the wealth gap grows, ceteris paribus, the lower the "aggregate" "risk free" interest rate becomes, potentially going well into the negatives.

Government credit with a negative interest rate can be seen as a competitive option, in this case. There are times when one is less worried about the return on one's money than the return of one's money. And I can't help but think it would be preferable, even for those who have money to save (and particularly those who lack the skills to provide their own security), for this negative interest rate to be expressed in a regular, central price, rather than being little more than the balance of successful and unsuccessful efforts to protect a stock of commodity money against theft. The former encourages people to "flee" into real investments; the latter, an ever spiraling cycle of envy and jealousy.

Thursday, March 26, 2015

A change of heart: Government and Monopoly

Anyone who has perused this blog at any length will note my rather extensive libertarian background. Heck I was once a Libertarian, a member of the party. I attended meetings and everything. That was years ago, but I still carry the basic impulse to shun the centralization of power and value freedom over all else.

But over the years, I've explored many other areas. The work of Henry George was what got me started on this path, and the work of Tuure Parkkinen has taken me even further. I've been following the Comcast scandals. I'm deeply concerned both by ISIS and the possible unintended consequences of actively supporting their only marginally preferable opposition. In short, my views have become substantially muddied from my early anti-State origins.

One thing I've decided is that "government" vs. "private" is a false dichotomy. It doesn't really exist. What matters is "monopoly" vs. "competition", and whether a particular service is offered more competitively or monopolistically is dependent not upon the laws of men or the evils of industry, but upon the unique characteristics of that particular industry.

Monopolies will tend to arise in any area where three factors are present.

The best known but, in my opinion, the least important is a high cost of entry, which can slow the emergence of competition. I call it least important because even if it takes time for competition to emerge, if the potential profits of a competitor are high enough, and if the financial system facilitates it, a competitor will emerge.

The second, more important factor (particularly in combination with the first) is network value: when a product is literally more valuable because more people use it. In this case, even if one can bear the expense of entering an uncompetitive industry, it can be very difficult to establish a sufficient customer base to entice customers to switch to their product. Things like communications networks and (patented or copyrighted) computer development environments have this quality.

The third, most important factor is the ability of an existing provider to physically exclude competitors. This would include roads, particularly when space for a route is limited (a mountain pass, for example). It also includes communications networks, due to the fact that the electromagnetic spectrum is not infinite, and neither is space for cables.

Restaurants have a fairly low capital cost to get started: ingredients, cooking tools, skills, and just a little space, and you're good to start. If people like it, then you can expand. But a man can sell sandwiches out of a truck if he wants. And it doesn't really matter how few or how many people favor the restaurateur's services; a meal is just as good (or bad) if only one person eats that type of meal as if thousands, millions, or even billions.

Contrast that with a telecommunications network. Laying cable is expensive. Acquiring the right of way to lay cable is expensive, and potentially exclusive. Even without cable, the electromagnetic spectrum is limited. In short, establishing a network is very, very expensive. On top of that, firms with more customers can, by the very nature of the industry, offer superior service to firms with fewer customers; you can contact more people on the big network than the small network. While any new industry will have a competitive phase, any industry that has these three factors will tend toward the monopolistic, as the largest company can provide the most valuable service, and the costs of competing are prohibitive. There is just too much more profit available to a monopoly than to any other form of organization.

As I mentioned in a previous entry (The Anarchist Underpinnings of The State), protection from violence also tends toward monopoly.

First, a clarification on the nature of "monopoly". "Monopoly" is not a global phenomenon. There has never been a global monopoly on anything. This is not the same thing as saying there has never been a monopoly. Monopoly is a local phenomenon. If there's only one cable company in town, that's a monopoly (and if there's only two ore three, that's an oligopoly). It doesn't matter if the next town over is serviced by a different company. It's the same thing with roads and rails: whoever owns the road that leads to your house has a monopoly. It's the same with whoever owns the only bridge over a particular river in a particular place; the existence of other bridges in other places is irrelevant to the person who must cross that bridge. It's the same thing with health care under the old US model. If your company only does business with one company, and that's your only choice, its a monopoly. It doesn't matter that you could do business with a different insurance company if you had a different employer; if you only have once choice where you are, that's a monopoly. You don't even need to append "local" to the term; all monopoly is local. Even if there was one global company that did all business in a particular industry, it would still be local... to Earth.

And the theory of monopoly is the reality of monopoly: the customer gets screwed, in price, in service, or, most likely, both. Whether we call it "government" or a "private company", the unaccountable provider of a vital service has no real incentive to treat its customer with respect. And while the monopoly provider of violent protection can, if it chooses to do so (and it often does), create artificial monopolies, oligopolies, and otherwise zones of restricted competition, there are industries where a certain level of monopoly is unavoidable, without some form of violent intervention.

And this is the traditional (Modern tradition, anyway) response to the threat of private monopoly: regulation and anti-trust law. Break up the monopoly, put them under the partial control of some (tax funded) government agency. And though it doesn't work that well in my opinion, it's still better that the alternative: totally unaccountable monopoly. But is it the best alternative?

My libertarian past cannot explain why my favorite sources of news are the BBC, the CBC, and NPR. My libertarian past cannot explain my disappointment with the behavior of companies in non-competitive industries. My libertarian past cannot explain how to avoid the inevitable monopoly on the provision of violent protection. My libertarian past can explain my Geoist beliefs... but I haven't found that explanation very useful for anyone other than myself.

I reject my libertarian past.

The chief difference, I think, between what we call "private" and what we call "government" is that government, at least in theory, has responsibilities beyond providing profit to principals. It is enmeshed in an ancient tangle of reciprocal responsibility, most recently expressed through the popular election of representatives in the West. It must consistently balance its desire to provide benefits to its factional supporters with its need to avoid provoking a loss of legitimacy among the masses. The monopoly on violence is a tenuous thing, and its most important asset.

What I figure is that, if monopoly is inevitable in a given industry, if we're pretty well guaranteed to get screwed by whatever company has control in a given area, why should we consent to both pay the expense of doing business with an oligopoly (since that seems to be the best government can manage) and the expense of paying for a regulatory infrastructure? What if, instead, we got screwed by government owned monopolies (in those industries that are going to inevitably be monopolistic) in exchange for more public services and/or lower taxes?