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A Proper Perspective of Industry Bailout

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I’m rereading Economics In One Lesson by Henry Hazlitt – an absolute must read.

I was compelled to share his explanation of industry bailouts to shed light on a topic that has stolen the wealth of the American people.

This is an excerpt from the book concerning the bailout of The X industry (any industry).

After showing how a bailout of The X industry can only be done at the expense of all other industries, Hazlitt goes on to say…

Similar results would follow any attempt to save the X industry by a direct subsidy out of the public till. This would be nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. There is far less opportunity fro the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing, or monopolistic exclusion.

It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

These results are virtually inherent, in fact, in the very arguments put forward to subsidize the X industry. The X industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.

We do the same thing, however, when we try to prevent any industry from dying in order to protect the labor already trained or the capital already invested in it. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often, in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.

Hazlitt goes on to explain how nearly all forms of government interference in the free markets are harmful, and he does so with such ease and clarity.

The book is easy to understand and fun to read; which is saying a lot for an economics book.

It’s a must read for anyone looking to understand the desperate situation our economy is in after a century of increased bureaucratic interference. It should also be required reading for anyone looking to serve in public office.

Check if your local library has a copy or buy it on Amazon.

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Resources and further reading

“I strongly recommend that every American acquire some basic knowledge of economics, monetary policy, and the intersection of politics with the economy. No formal classroom is required; a desire to read and learn will suffice. There are countless important books to consider, but the following are an excellent starting point: The Law by Frédéric Bastiat; Economics in One Lesson by Henry Hazlitt; What has Government Done to our Money? by Murray Rothbard; The Road to Serfdom by Friedrich Hayek; and Economics for Real People by Gene Callahan.

If you simply read and comprehend these relatively short texts, you will know far more than most educated people about economics and government. You certainly will develop a far greater understanding of how supposedly benevolent government policies destroy prosperity. If you care about the future of this country, arm yourself with knowledge and fight back against economic ignorance. We disregard economics and history at our own peril.”

– Ron Paul, Representative from Texas

Credit Card Minimum Payment Disclosures – Will They Help?

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This is a guest post from Kevin Bowen, a content writer for RESQdebt.com and employee of Greenshieldfs.com

Will greater disclosure of the dangers of minimum payments affect how people react?

CARD Act of 2009

Earlier this month, the Federal Reserve issued new rules that set out the practical procedures to enforce the Credit Card Accountability and Responsibility Act of 2009, a sweeping round of new reform laws that will change the way that the credit card system operates.

The long-range effects of these rules will not be known for some time to come.  How many of these changes will prove a benefit and how many of them will prove a disaster remains to be seen. However, there appears to be one thing that seems like an instant winner for the consumer – the new disclosure rules for minimum payments on a credit card account.

Minimum payments benefited credit card companies

The minimum payment has long been a tool that credit card companies have been able to use to rack up large sums of interest on some accounts. By giving some cardholders the opportunity to pay a very low minimum on a very large bill, the companies have been able to charge interest on significant amounts of money.

If done bill after bill over time, paying the minimums can throw consumers deeply in debt. For this reason the minimum payment has gained scrutiny from both academia and legislatures. A law was passed several years ago that required companies to raise the dollar figure on the minimum payment, in order to try to limit the amount of interest being charged to cardholders buried in debt. An English University also found that a minimum payment has a psychological “anchoring effect,” getting consumers to write checks for less money than if no minimum payment appeared on the bill.

Minimum payments – healthy new disclosures

Now, according to a Federal Reserve website, the look and substance of your credit card bill are about to change to help consumers understand this issue. These new Fed rules will require credit card companies to give consumers more information about how their payment choices affect their ability to pay and the length of their debt.

For those stuck making minimum payments, the new information could be eye-opening. For instance, the new bill will reveal the time needed to pay off your current balance if the consumer consistently makes only the minimum payment from month to month. This number could surprise some credit card users, unaware of the sometimes lengthy time frames – and the resulting high interest payments – that minimum payments invite.  The new bill also will show the dollar figure that the cardholder would need to send in each month in order to pay off the balance in three years worth of time.

The bill will also have two warnings. The first is a late payment warning that explains that a late fee and an interest rate hike are possible effects of making a late payment. A minimum payment warning tells consumers that they will have interest added and a longer payoff time frame if they only make the minimum payment.  While these things might seem obvious to a seasoned credit card user, less experienced users might not be familiar completely or at all, with how things work.

In the past, credit card companies have been able to prey on the ignorance of some of its more vulnerable cardholders. The new rules rightfully make it more difficult for a credit card issuer to take advantage of inexperienced or unwitting cardholders, who might make that payment without understanding that it could sink them further into debt.   With the new payment information cardholders will be warned about the dangers of missing minimum payments; if they choose to make that payment, they will do so in an informed fashion. That seems only good for the consumer and fair for all parties involved.

What do you think?

Will this positive change in bill reporting make any difference in how unseasoned credit card users view and approach their debt payments?

photo by libertyslens

$6,500 Tax Credit – Save More $ by NOT Claiming

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Rather than taking a $6,500 government tax credit and buying now, do we stand to save more money by waiting until the housing market stabilizes itself?

First thing’s first:  I realize that $6,500 is $6,500 any way you slice it, but in an effort to examine things more thoroughly let’s consider how claiming the $6,500 homebuyer tax credit for existing home owners may not be our best option in the long run.

Don’t succumb to pressure to buy!

If we would not buy a home without the credit, then we should not rush out and buy a home just because of this credit.  Doing so is not wise.

While I understand the desire to claim the credit, is it in our best interest to do so?

Let’s take a closer look…

Fiscally responsible reasons to REJECT the Homebuyer Tax Credit

  1. The $6,500 is percentage based. This means that the more we are looking to pay for a new home, the less of an impact $6,500 will have on our actual purchase.  Example 1: if I buy a $150,000 home – $6,500 will give me just over 4% toward my down payment.  That means I still have to come up with the other 16% to even be considered for a loan.  Example 2: if I buy a home for $300,000 – $6,500 will afford me barely 2% down, leaving the remaining 18% up to me.  Bottom line? When considering the purchase of a new home, $6,500 needs to be viewed from the proper perspective and should very seldom be a deciding factor in our ultimate decision to purchase.
  2. House prices are still going down. At the end of the day, this is the concrete reason the federal government is intervening by offering tax credits.  The credits are basically incentives to get us to buy in an effort to artificially stabilize a tumultuous housing market.  Government intervention, especially in matters of economics, is a matter that should be tread upon with great caution rather than reckless abandon.
  3. Government Tax credits create false demand. When we rush to buy homes, motivated in part by homebuyer tax credits, a false demand is created.  Actual demand is met when we buy homes because we need one and are financially ready to buy… independent of government credits.  Sometimes the tax incentive can push a teetering homebuyer over the fence and cause him to buy, but many times it simply encourages those who cannot afford to buy, into buying.
  4. By not claiming the credit prices will continue to fall. If we wholly reject the notion of government intervention by way of a measly credit, and instead choose to let the market correct and stabilize itself… housing prices will continue to fall until actual demand is created – at which point people who buy will likely have saved much more than $6,500.
  5. Our government cannot afford it! Where is all this money coming from?  Good question, I’m glad you asked.  Unfortunately, that is a complicated question and hard to properly answer in a single bullet point.  Suffice to say that they will have to either borrow money or print the money… they do not have it sitting in a savings account somewhere!
  6. You will save more money by not contributing to the false demand. If more potential buyers reject the tax credit, housing prices will continue to trend downward.  The more prices fall, the more money we stand to save when we do go to buy.  It is important to remember that taking the tax credit will work against this natural correction by artificially stabilize housing prices.
  7. Government intervention in “free market economy” is almost always unwise. The doctrines of Laisser-faire teach the aberration of government intervention into economy.  Ofttimes the market is better off correcting itself.  History records for us time and time again how government intervention into the ebb and flow of national economic policy is rarely our best long term course of action.

When considering a home purchase we should be driven solely by our independent need and ability to purchase when ready!

Always seek trusted professional counsel

Hopefully this article has helped you to step back from the attractive shock value of $6,500 in FREE MONEY and grab hold of a more sustainable concept of economic policy in this matter of homebuyer tax credits.

When it is all said and done, opinions are opinions and your best option remains professional counsel.  At the end of the day… the best way for you to make your decision is to immerse yourself in the counsel of those you trust and those who walk daily among the matters at hand.

Would you consider forgoing the credit?

Based on the information given above, would you consider opting out of the credit even if you did qualify?  Could the issues of long-term economic health and proper consumer purchasing overshadow the immediate draw of a $6,500 tax credit?

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.