Monday, January 16, 2017

Basic Economic Understanding

Last time I wrote about the “cola tax” in Philadelphia, how it went wrong and how the flaws were obvious when it was passed last June.  It took just a little economic understanding, which the lawmakers in the city seemed to lack.

To be able to look at economic decisions and foretell possible problems does not require advanced study of the subject.  Ordinary citizens can develop adequate skill to help them make better everyday decisions and notice the errors of others by understanding a few basic principles.

First, assume that only people have money.  Businesses and governments spend money and move it around, but that money comes from people.  By considering it our money, money that was taken from us through taxes or won from us by offering a tempting product or service, we are able to look at economic decisions and see the link back to our wallets and bank accounts.  There is always a link.

When people (or businesses) invest money, they balance risk and reward.  A bank account pays little interest for low risk.  Corporate bonds pay higher interest for a little more risk.  Return from investments in stocks over a long period is considerably higher, but sometimes you lose.  Running an established business is risky and the return is generally higher.  Starting a new business is even higher risk and may bring a larger reward, but most disappear in the first two to three years.  Higher reward is generally expected (and deserved) when taking higher risk.

The concept of supply and demand is straightforward.  If something is rare or hard to get, the supply is low and the price is high.  If something is common, the supply is high and the price goes down.  If something is popular, the demand goes up and people are willing to pay more, otherwise the price will go down until buyers emerge.  Diamonds are rare and popular, so they are expensive.  Great quarterbacks are in demand by many teams, so they too are expensive.  Ordinary water is common – it falls from the sky – and very inexpensive at the tap; but the fussier you are about the source, purity and packaging, the more you will pay.

Supply and demand in a free market usually work together to set a price where both the buyer and seller are satisfied with the outcome.  Problems arise when someone starts tinkering with this balance.  Last year the price of oil stayed low due to more production in the US and the lifting of sanctions on Iran.  OPEC agreed to restrict their operations hoping the reduced supply would push prices up.  Officials in Philly imposed the tax on sugary drinks hoping the higher price would reduce demand, leading to healthier citizens.

Laws in some states forbid private enterprises from moving food, water or generators to a disaster site and selling them at a profit.  There is already a low supply, and those who could afford it might be willing to pay a little more but they can’t.  So everyone, rich and poor, waits in longer lines for the official relief.  The well-intentioned law hurts everyone.  Where there is no disaster, retail stores do exactly the same thing, ship goods from far away and sell them at a profit – and no one complains.

It is also important to understand business.  Businesses are relatively high-risk operations.  This is clear from the number that are forced to cut back or go out of business each year.  Profit is not a dirty word.  It is the return they get for the risk.  The profit comes from selling goods or services at a price people are willing to pay.  There is no force or coercion.  You buy brand A or Brand B from Store A or Store B, or you don’t buy at all, or you buy a similar product that is almost as good.  It is a free exchange.  In millions of transactions a day, both parties are satisfied.  When you check out, they say thank you (for the purchase) and you say thank you (for the product).  But we hear on the news only of the scams or illegal operations, just like we hear only about the few airline crashes and not the millions of safe landings.

Most businesses are not greedy and evil.  Most business people are no more greedy and evil than anyone else.  Smart businesses know the key to their success is a group of loyal, satisfied customers who return and spread positive comments.  Again, it’s often the tinkering – government favoritism, crony capitalism, regulations that impede competition or favor a small group – that screws up the balance.

Those, very briefly, are the keys to economic understanding:  only people have money, risk/reward, supply and demand, business and profit in a free enterprise system and the dangers of tinkering with the balance.  Thinking about these principles helps anyone do a respectable job of predicting the future.

Friday, January 13, 2017

How to Predict the Future

In June of last year I wrote about a proposed beverage tax in Philadelphia.  These were my comments at the time.

“The new mayor of Philadelphia wants to impose a special tax on non-diet soda and other sugary drinks.  The new tax is expected to “generate more than $400 million over the next five years” to help fund a plan for universal pre-K and community schools among other benefits.  Using a good cause will bring goodwill toward paying the tax, right?  I doubt it.  This action is much more intrusive than just requiring warning labels.  The new beverage tax will not only double the cost of soft drinks and juices, it will have some interesting, unintended side effects.  Those who are better off financially can afford to drive outside the city limits to buy their cola.  The ones who will be hurt most are first, the city grocery stores which lose business as the special tax drives grocery shopping out of the city for some and second, the poor whose options are limited, ironically the same people who the universal pre-K programs are intended to help.  When you consider human behavior, the $400 million looks like a pipe dream.”

The overall theme of this June 3, 2016 entry was that if we don’t exercise responsibility and take proper care of ourselves, someone will feel obligated to step in and force the proper behavior on us – on everyone, not just those who need it.  Irresponsible behavior by many leads to across-the-board loss of freedom.

The tax became effective with the new year, 1.5 cents per ounce – that’s per ounce, not per can or bottle.  The people in Philadelphia are upset!  Did they sleep though the discussion and announcement last spring?  It was not a secret and the outcome was easily predictable.  Now the cost of a soda is up more than 50%, about a one dollar increase on a two-liter bottle.

In this Fox News video the host asks the opinions of two sources that they brought in to comment on the tax and the reaction to it.

The first commentator points out that these programs, like cigarette taxes, are designed to change behavior as they are passed along to the consumer.  In doing so the tax is supposed to go away with the change.  The idea of trying to make it more palatable by tying it to a new education program is crazy.  If it’s successful and consumption is reduced, and with it the taxes, the great new programs will quickly become underfunded.  Then what are they going to do?  Also when a tax is limited to a particular locale, those who are able will naturally make short trips to avoid it (as I said above).  It also may encourage smuggling as a black market develops.

The comments of the second individual are interesting in a different way.  She defends not the tax, but the intent and the need to do something.  She insists that obesity due to too much sugar is such “a very serious issue” that it’s the duty of government to fix it.  (That is exactly my point about loss of freedom.)  She goes on saying that we are not healthy in America and that it’s “a fair thing for the city to address,” that the city has to take more responsibility for this.  She believes the goal is a reasonable one, because in our society we give the states and localities police power to keep us healthy and safe.  “They deal with our moral wellbeing as well as our physical wellbeing.”  This tax is not the answer but it’s such a big problem it must be addressed (somehow by government). 

Back to the tax itself, to quote a conclusion they both agree on:  “It doesn’t work.  It’s a bad plan.”  So if it is so obvious now, why couldn’t the mayor and city officials see this coming?  The answer is a deficiency in the dimension of economic understanding.  As long as we have citizens weak in economic understanding, we will elect government officials with the same shortcomings and continue to face the same kinds of problems, while wrongly calling predictable outcomes unintended consequences. (More on this next time.)

Monday, January 9, 2017

Superstition and Health

Last time I gave an example of how one food company tried to use modern day superstitious ideas about genetically modified organisms (GMOs) to try to hype their tomato products.  They touted the fact that none of their tomatoes were genetically modified, in the sense of being tinkered with in some lab, implying that others were and the only way to be sure is to use their products.  They were caught in the act, so to speak, because there are no genetically modified tomatoes; and even if there were, scientists have concluded that GMO products are safe.  The fear of GMOs is a good example of food-related superstition.  If their errors had not been so obvious, they may have slipped by the critics leaving misinformed people to the mercy of more misinformation.

Closely related to food superstitions are those about health and longevity.  Everyone is interested in living longer and healthier, but different people go to different extremes, some wasting money on worthless and potentially dangerous products.

One example that came to my attention recently is essential oils.  Used in aromatherapy, they are believed to produce numerous health and wellness benefits from pain relief and antidepressant effects to digestion aid and hormone enhancement.  One website shows a grid of over 40 aromas with a check in the box showing which of 27 benefits each provides.  That they may be an effective deodorant is not a stretch, but at least one is listed as having both calming and stimulant effects.

Of course the National Institute of Health (NIH) sees it differently, concluding after extensive study:  Lack of sufficiently convincing evidence regarding the effectiveness of aromatherapy combined with its potential to cause adverse effects questions the usefulness of this modality in any condition.”  Another website discusses further disappointing study results.

Another area of health that is all the rage is detoxing.  This CBS news item highlights a couple of people who were hospitalized as a result of following the herbal, all natural detox plans.  Experts told them, “while ‘detoxing’ can be a necessary process for people addicted to drugs and alcohol, the average person does not need to take extreme steps to cleanse so-called 'toxins' out of their system. In fact, the body detoxes naturally” nor is there any way to artificially enhance this process.  They also remind readers in the course of the explanation, “Despite marketing suggesting otherwise, all-natural products are not without side effects.”

A second site is even more blunt on the subject.  “Products that promise ‘detox’ are a sham. Yes, all of them.”  It’s not magic; it’s a rip-off and potentially dangerous.

Finally, here is an example from Consumer Health Digest (#17-01).  It describes the website of a doctor (MD) who offered alternative health solutions and was recently charged with unprofessional conduct and refusing to release records to investigators.  “In 2013, the DeOrio Wellness Medical Center Web site offered a ‘comprehensive holistic evaluation and treatment program’ that included ‘specialized laboratory testing,’ Oriental pulse and tongue diagnosis; homeopathic interview and treatment; acupuncture; nutrition and diet consultation; ‘structural and biomechanical integration’; ‘emotion and spiritual counseling’; and ‘infra-red sauna baths combined with IV vitamin therapy for the newest, safest and most effective detoxification program available.’ "

When you see a laundry list of magical health remedies like this, run! 

A century ago it was called “snake oil.”  A slick salesman drove his wagon into town touting the wonders of who-knows-what in a bottle, often arranging for a shill to be in the crowd to praise the product.  Then he would drive away with the cash and disappear before anyone could complain.  Now, even with better education, it’s the same; except the slick salesmen use the Internet with endorsements coming from Facebook to lure the desperate or others susceptible to the quick-fix enticement. 

The ones above and many other wonderful cures based on ancient wisdom and clinically proven treatments are looking to use the placebo effect to separate you from your money.  Due to the web, 24-hour news and social media, critical thinking was never so important in keeping us safe from the health-related superstitions of the day.

Friday, January 6, 2017

You Say Tomato...

I went to to find a definition for “superstition.”  It told me that it is a “belief or notion, not based on reason or knowledge, in or of the ominous significance of a particular thing” or “any blindly accepted belief or notion.”

So when I saw a Forbes article scolding Hunts for a marketing campaign stating: “No matter how far afield you look, you won’t find a single genetically modified tomato among our vines,” it is pretty clear that the company is trying to use superstition to sell its products.

First, an exact definition of genetically modified organism (GMO) is hard to pin down.  Recently when people see the term they tend to think of genetic engineering in a laboratory, sometimes introducing the genes of another species to enhance the characteristics of an organism.  This, however, is not the only definition.  Technically speaking, any tinkering with the genes of a plant, whether artificial or natural, can be considered genetic engineering (GE).  And tomatoes are well known for the crossbreeding done to improve them.  These are usually referred to as hybrid tomatoes, like the ones usually sold as small starter plants at your local nursery every spring – the Better Boys and Early Girls.

Consider this description of a hybrid from a national seed catalog.  The tomato is advertised as having a broad disease resistance package with “high resistance to alternaria stem canker, fusarium wilt races 1, 2, gray leaf spot, nematodes, tobacco mosaic virus, and verticillium wilt.  This just didn’t happen.  Plant scientist worked tirelessly to bring together all these beneficial characteristics while maintaining the size, shape, color, taste and juiciness of the original tomato.

Second, technically speaking, all tomatoes are hybrids. This article explains. “Even the most cherished, oldest, and knobbiest heirloom tomato is a hybrid of the original South American fruit. Tomatoes are one of those plants that people love so much; we’ve been tinkering with its genetics basically since the plant was first cultivated in Peru and Central America before the fifteenth century.  That’s right.  Anyone can look up pictures on the Internet of the original fruits and vegetables taken from the wild by our ancient ancestors.  Not only are they uglier, but also far less tasty and nutritious.  Over the eons, better and better plants were developed either by preserving accidental mutations or by intentional crossbreeding.

Furthermore, attempts to apply the latest laboratory GE techniques have not produced anything better, and there are no GMO tomatoes being grown commercially anywhere in North America or Europe.  So what Hunt is saying is also true of every one of their competitors.

Finally, as I pointed out last time, “GM crops are just as safe to eat as their conventional counterparts.”  This is supported by other authoritative sources (referred to here).

In the Hunt article, they called it a marketing blunder, just because it was so easily refuted, but that’s the way advertising is.  Hunt got caught trying to use fear mongering based on modern superstition about the dangers of GMO.  If they could have gotten away with it, there’s no telling how much profit they would have made by duping a gullible public.  (Look at all the products that never contained gluten in the first place but are newly labeled gluten-free to take advantage of another fad. 

Even major garden seed catalogs proudly advertise that none of their seeds are GMO, just to play to the uninformed audience.  And many of their customers are serious gardeners who should know better but just go along with the popular myth, never taking a little time to educate themselves.

Unfortunately, that’s where we seem to be heading; advertisers playing to and promoting the latest superstitions to make a buck.  Will we stand for it?  Only critical thinking keeps us from being manipulated by these unscrupulous methods.