4,000 Years of Price Controls: A Brief Glance

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7 MIN READ - Kamala Harris’ recent announcement that she wants to take the USA back to the 1970’s prompted CO himself to address the subject from Cautious Optimism World Headquarters.

The Cautious Optimism Economics Correspondent had planned to post a series of articles later on price controls and the subject of supply and demand, but given how hot the subject is right now he’d like to build on CO’s excellent column of Friday.

1970's USA: One of world history's more recent price control failures

The subject of price controls is rooted in the concepts of supply, demand, and equilibrium price which are themselves pivotal foundations of the field called microeconomics.

The law of supply, law of demand, and law of supply and demand are so immutable and inseparable from human nature that they’ve been proven out by literally 4,000 years of human history. And unlike certain theories in the field of “macroeconomics” (the discipline that attempts to explain larger economy-wide movements in unemployment, interest rates, spending, investment, and output), supply-and-demand microeconomics has been dubbed by economist Benjamin Powell as “the nonfiction part of the curriculum.”

The Economics Correspondent agrees with Powell’s assessment.

At its simplest, there are two forms of price controls: price ceilings and price floors. 

Kamala Harris’ blueprint to halt prices from rising alongside a historic expansion of the U.S. money supply since 2020 is a price ceiling proposal. It’s referred to as a “ceiling” because you can picture prices trying to rise higher but bumping up against a government-imposed ceiling through which they can’t pass further.

Price floors, through which prices can’t fall any lower, are the reverse: an attempt to force prices higher than the market wants to set them.

Government price controls have more commonly taken the form of price ceilings to appeal to the masses of voters. Who doesn’t want lower gas prices, lower food prices, lower rent, lower toilet paper prices… other than the producers and sellers of those things? And since consumers outnumber producers on Election Day politicians are more fond of price ceilings than floors.

However the U.S. federal and state governments have imposed price floors from time to time as well. Minimum wage, which forces wages for unskilled workers higher than they otherwise would be, is a good example.

Also during the Great Depression both the Herbert Hoover and Franklin Roosevelt administrations imposed thousands of price floors throughout the economy in a naïve attempt to force prices up after the deflation of the early 1930’s. Their efforts simply resulted in millions more unemployed, warehouses full of unsold products and rotting crops, and economists cite the price floors as a crucial factor in deepening (Hoover) and extending (Roosevelt) the Great Depression.

ANCIENT HISTORY

So just how far back do price ceilings go? 

Historians have found records from the ancient Sumerians and Babylonia, the latter’s Code of Hammurabi (1750 BC) setting prices and wages for a litany of products and services.

There are too many to include here but a few examples are:

Code 121: ”If any one store corn in another man's house he shall pay him storage at the rate of one gur for every five ka of corn per year.”

Code 268: “If any one hire an ox for threshing, the amount of the hire is twenty ka of corn.” 

Code 275: “If any one hire a ferryboat, he shall pay three gerahs in money per day.”

French historian Jean-Phillipe Levy gives us a more detailed account of price ceiling policy from ancient Egypt’s Lagid dynasty (306 BC):

”…there was a real omnipresence of the state…. The state … intervened by employing widely all its public law prerogatives … all prices were fixed by fiat at all levels.”

”Control took on frightening proportions. There was a whole army of inspectors. There was nothing but inventories, censuses of men and animals … estimations of harvests to come…. In villages, when farmers who were disgusted with all these vexations ran away, those who remained were responsible for absentees’ production… [one of the first effects of harsh price controls on farm goods is the abandonment of farms and the consequent fall in the supplies of food]. The pressure applied [by inspectors] extended, in case of need, to cruelty and torture.”

There are many more examples from ancient Greece, India, China, and the Roman Empire. The Roman emperor Diocletian, who oversaw a critical episode in Rome’s rapid decline of the 3rd century, debased the coin to fund the empire’s bloated bureaucracy, welfare state, and construction of a magnificent new capital, sparking a hyperinflation.

Instead of backing off cheap coin production and higher stamped denominations Diocletian imposed price controls—a “maximum price” allowed on wages and goods alongside the death penalty for violators. Subsequently, according to contemporary historian Lactantius (314 AD): 

"The people brought provisions no more to market, since they could not get a reasonable price for them, and this increased the dearth so much that … the law itself was set aside."

MODERN DAY

Fast-forwarding to modern times, many older Americans remember the effects of price ceilings on gasoline during the Nixon, Ford, and Carter years.

(The first price controls were actually announced by Richard Nixon in the same 1971 speech when he took the U.S. dollar off the international gold standard)

Instead of paying higher prices that reflected a scarcity of oil brought on by OPEC’s embargo, American commuters were granted lower gas prices by fiat. 

Well, sort of. Churning up their driving in response to lower prices they soon discovered they couldn’t find any gas to buy (see picture). American producers also refused to bring additional supplies to the market since the price ceilings made new, riskier oilfield projects unprofitable.

Price ceilings were also imposed during World War II and shortages resulted then too. 

Casual readers might think shortages were the result of the war, when resources were diverted away from the consumer economy to military production, and this is partly true.

But what historians tend to miss is the federal government paid for a great deal of the war effort with inflation—the Treasury ordering the-then subservient Federal Reserve to lend vast amounts of newly printed money directly to Washington, DC.

Of course all this new money spent into the economy produced rapid inflation, so to counter rising prices the Roosevelt administration imposed price ceilings—and shortages immediately appeared. These were easily blamed on the war and most Americans accepted simply going without as a patriotic duty.

At war’s end the price ceilings were lifted and all the new money that had been held back by price controls, like a rubber band pulled back further and further and then let go, was finally unleashed on the public. The inflation rate rose to 9.4% by July 1946, peaked at 19.7% in March 1947, and by July of 1948 (two years later) had fallen to a still elevated 9.9%.

Prices rising by nearly 25% also had the convenient effect of in just two years wiping out one-fifth of the enormous debt the federal government had incurred during the war. Many war bond investors found themselves underwater since their returns were simply wiped out by sharply higher prices.

By the end of 1947 the Fed clamped down on the inflation with higher interest rates and triggered an 11-month recession in 1948-49.

More postwar misery for Americans.

Incidentally, does this pattern of crisis, printing vast amounts of money, sharply higher prices, a Fed higher-interest-rate crackdown, and recession (the last not here yet) sound familiar?

History repeats itself.

Lastly there’s empty shelves in communist and socialist countries.

Many critics of communism and socialism blame empty shelves on lack of motivation from workers to produce, and they wouldn’t be wrong. When the state pays you the same measly compensation whether you produce one widget a day or one hundred, there isn’t much reason to work very hard.

But price controls were equally guilty.

Given the overall scarcity of production in socialist and communist economies, prices naturally tended to rise. In the USSR the government would then assign a wheat czar or sausage czar or energy czar to enforce state-imposed prices—always lower than the market price to inflict justice on "counterrevolutionary capitalist elements" trying to "exploit" the masses.

Consistent with millennia of history before the communists, the price ceilings created chronic shortages of wheat, sausage, electricity… basically everything.

That’s why we hear stories about Soviet citizens standing in line for hours to buy bread just to find the shelves empty. The Soviets were no more able to defeat the law of supply and demand than any of history's other government bureaucrats.

Even in the 1980’s western visitors to the Soviet Union were warned to bring their own toilet paper which in turn fetched a handsome price on the black market. Toilet paper production in the USSR was undoubtedly lower per-capita than in the West, but government imposed price ceilings transformed scarcity and high prices into empty shelves.

And toilet paper shortages have been a laughing point of the socialist Venezuelan regime as well. The Hugo Chavez and Nicolas Maduro governments nationalized most Venezuelan industries—starting with oil of course, but moving from there to steel, cement, farms, telecommunications, utilities, retail and grocery stores, etc…  

With government now running industry production naturally fell while the socialist state cranked up the printing presses to dole out massive welfare payments to its loyal voters.

The combination of lower production and a lot more money resulted in inflation—hyperinflation actually as the inflation rate neared 1,000,000% in 2018 and 2019 although official inflation was high-double digits even back in the 2000’s with unofficial inflation in the triple digits. Immediately the Chavez and Maduro governments imposed price ceilings, and high prices were transformed into chronic shortages of meat, milk, toilet paper, electricity (constant blackouts), etc…

The Economics Correspondent has included links to inflation and shortage stories and pictures from Venezuela’s Chavez era at the bottom of this article—stories that preceded the American/European socialist's excuse for that country’s economic failure: sharply lower oil prices (which didn’t arrive until 2015) and U.S. sanctions on the Venezuelan economy (which didn’t arrive until 2018).

And now we have Kamala Harris proposing price ceilings yet again in exchange for votes.

Not that the Correspondent thinks Harris has any clue about the history of price ceilings and their inevitable shortages. But even if she did know, if she believes "things will somehow turn out differently in 2024” she will be in for a rude awakening… and sadly so will the United States.

Government-imposed price ceilings, whenever set below the free market equilibrium price, *always* create shortages. It’s an immutable law of human nature that governments have attempted to override or ignore away for 4,000 years—and failed every time. 

Because price controls simply don’t work. But then as Nobel laureate and Austrian economist F.A. Hayek once said “If socialists understood economics, they wouldn’t be socialists.”
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(comment from the Economics Correspondent) Press stories of Venezuelan price controls and shortages, all while Hugo Chavez was still alive:

2006 (food shortages)
https://www.ft.com/content/e0d7320e-7e39-11da-8ef9-0000779e2340

2007 (food shortages)
https://www.theguardian.com/world/2007/nov/14/venezuela.international

2008 (milk shortages)
https://www.npr.org/templates/story/story.php?storyId=91680886

2008 (power blackouts)
https://www.reuters.com/article/us-venezuela-blackout/power-blackout-in-venezuelan-capital-oil-province-idUSN0145186220080901

2009 (food shortages)
http://www.mcclatchydc.com/news/nation-world/world/article24523447.html

2010 (goods shortages, rotting stockpiles)
http://www.economist.com/node/16326418

2010 (power blackouts)
https://www.theguardian.com/world/2010/jan/14/hugo-chavez-caracas-power-blackouts

2013 (hyperinflation)
https://qz.com/125339/hyperinflation-is-forcing-venezuela-to-print-hundreds-of-millions-of-extra-banknotes/

2013 (food shortages)
https://www.theguardian.com/global-development/poverty-matters/2013/sep/26/venezuela-food-shortages-rich-country-cia

2014 (food line, OK this from a year after Chavez's death)
https://i.insider.com/5310c92decad04be055385c2?width=1000&format=jpeg&auto=webp

Media Report: Some California Monthly Power Bills Higher Than Rent… But It’s Not California Government's Fault

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3 MIN READ - A new dispatch from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Yesterday’s Yahoo!/Benzinga story acknowledges California electricity rates are nearly the highest in the nation and that summer electricity bills are now eclipsing monthly rent payments for many Californians.

(story here)
https://finance.yahoo.com/news/electricity-bills-now-surpassing-rent-141519904.html

Yahoo: ”In recent years, many Californians have noticed a troubling trend: their electricity bills are climbing higher than ever, sometimes surpassing their rent. So, what’s causing this spike, and why are California’s electricity prices now among the highest in the nation, second only to Hawaii?”

”…Residents like Jessica Simpson Nehrer in Borrego Springs feel the squeeze in California. She shared with WSJ that her electricity bill soared to $1,873.90 in June, surpassing her $1,200 rent. Grocery store owner Rodger Gucwa, also in Borrego Springs, is struggling with monthly power bills nearly as high as his rent despite efforts to cut costs.”

But hold on, according to the article it’s not really about California’s green energy policies.

”California stands out with a 47.8% increase in electricity prices during this period, one of the highest in the country. The state's push to transition to green energy is often blamed, but a new report from S&P Global shows that this is only part of the story.”

It’s also Swiss-army-knife-boogeyman “climate change’s” fault.

”Over the past five years, electricity prices have soared across the U.S., particularly in California, as extreme weather fueled by climate change has increased energy demand. Record-high temperatures have kept many Americans indoors, cranking up their air conditioners, which only adds to the burden. Nationwide, average household electricity prices jumped 21.9% between 2018 and 2023, according to a recent report from S&P Global.”

The Economics Correspondent sees multiple holes in this story that CO readers have probably already identified. 

1) According to the article itself, household electricity prices have “jumped 21.9% between 2018 and 2023.”

Sure, and according to the St. Louis Federal Reserve the Consumer Price Index (i.e. "inflation") has jumped 22.2% from the end of 2018 to end of 2023.

So national-average electricity prices haven't risen due to climate change, but entirely because of inflation. In fact the national average has slightly lagged inflation. 

Doesn’t sound like climate change is to blame for a nationwide spike that, when accounting for overall inflation, hasn't really happened.

2) Also recall the article mentioned California’s electricity prices have risen much faster… by 47.8%, or more than double the nationwide average.

Since climate change is supposed to be a “global” phenomenon, one would think California and Hawaii wouldn’t be the only states experiencing higher rates due to a fever that we're told envelopes the entire planet.

3) And so long as we’re blaming climate change, a simple search on U.S. states with the highest and lowest electricity rates will help give us some perspective on how universal the problem is. According to saveonenergy.com, the ten states with the highest power rates in May of 2024 are:

Hawaii 44.14 ¢/kWh
California 34.31 ¢/kWh
Massachusetts 28.7 ¢/kWh
Rhode Island 28.09 ¢/kWh
Connecticut 26.76 ¢/kWh
Alaska 25.02 ¢/kWh
New York 23.6 ¢/kWh
New Hampshire 23.01 ¢/kWh
Vermont 22.3 ¢/kWh
Maine 20.48 ¢/kWh

And the ten states with the lowest power rates are:

Utah 11.01 ¢/kWh
Louisiana 11.49 ¢/kWh
Idaho 11.55 ¢/kWh
Oklahoma 11.7 ¢/kWh
Washington 12.16 ¢/kWh
Nebraska 12.22 ¢/kWh
Arkansas 12.27 ¢/kWh
Tennessee 12.46 ¢/kWh
Missouri 12.62 ¢/kWh
Wyoming 12.81 ¢/kWh

The correspondent would also like to add three particularly hot states—Arizona, Florida and Texas—whose rates are far lower than California’s:

Arizona 15.5 ¢/kWh
Florida 13.63 ¢/kWh
Texas 14.74 ¢/kWh

(link to Federal Reserve CPI chart and list of states by power rates available at article's and)

Now if Yahoo's thesis is to be believed, California’s nosebleed power rates aren’t primarily California’s fault. Global warming is to blame along with the consequence of Americans everywhere cranking up their air conditioners to cope with rising temperatures.

Well according to the climate change theory, it’s not just California that’s supposed to get hotter. Florida and Texas are also very hot states (with a lot more humidity for the A/C to wring out) and Arizona is the hottest of them all. Yet all three states’ power rates per kWh are less than half California’s—far below half.

Meanwhile in what’s probably just a huge coincidence, nine of the ten most expensive states are blue/Democrat. In another huge coincidence, nine of the ten least expensive states are red/Republican.

Evidently climate change targets only Democratic states but skillfully bypasses Republican ones.

Verdict: Power rates in the country as a whole have simply kept place with inflation since 2018, and in red states power rates have risen slower than inflation. But feelgood green energy policies and regulations are heavily to blame not only for Californian’s sharply higher electricity rates/bills, but also those of blue states atop the price list. 

The perfectly predictable outcome of consumer stress in heavily Democratic states, which green energy opponents warned of, was easy to see coming. And just as predictably the press has rushed in to paper the story over with damage control.
=====
(reference links from the Economics Correspondent)

1) St. Louis Federal Reserve CPI: EOY 2018 to EOY 2023.
https://fred.stlouisfed.org/graph/?g=1sgNR

2) saveonenergy.com list of states by power rates including ten most expensive and least expensive.
https://www.saveonenergy.com/electricity-rates/electricity-rates-by-state/

How the Hell Can You Stand to Live in San Francisco? Part 8

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5 MIN READ - A few years ago the Cautious Optimism Economics Correspondent ran a series of seven articles on “How the Hell Can You Stand to Live in San Francisco?” outlining insane San Francisco policies that have mushroomed homelessness, crime, open air drug use, housing unaffordability, sky-high apartment rents, high energy prices, expensive and filthy public transportation, poop and syringe littered streets and more.

But one topic he forgot to cover was San Francisco International Airport’s chronic flight delays, an easily solvable problem which of course has been perpetuated by San Francisco politics.

So here it is a few years late: the last in the series (maybe)... on SFO airport.

As anyone who has visited San Francisco has probably noticed, fog is synonymous with the City by the Bay. And while the fog can be quite scenic (until one is inside it), it can wreak havoc with flights into SFO International Airport.

Normally low visibility due to fog or low clouds isn’t a problem as modern aircraft can approach runways using instruments only (so-called “ILS” landings or Instrument Landing System).

However for safety reasons the FAA mandates parallel runways can only accommodate simultaneous ILS landings if they’re built a minimum of 2,500 feet (staggered landings) or 4,300 feet (simultaneous landings) apart.

Well SFO does have parallel runways and they handle parallel landings when visibility is good. 

But they were originally built 750 feet apart which falls far short of the minimum safe distance. So when the fog rolls in—which it does frequently—SFO shuts one of two runways down for landings, slashing the airport’s capacity by half.

This wreaks havoc with flight schedules as the Correspondent himself can attest to from his business travel days. Coming home from a work trip on a Friday night it wasn’t uncommon to change planes in Chicago O’Hare or Dallas/Fort-Worth Airport just to find the reader boards advising the connecting flight to San Francisco was delayed from, say... a 6 PM departure to 9PM or 10PM.

Meanwhile flights into Oakland Airport, which has very few flights on major airlines other than Southwest, continued to operate normally since OAK has only one runway.

Incidentally SFO is also United Airlines’ major West Coast hub, so all those delays generate lots of misconnections, stranding passengers in the airport.

SOLUTION

The dual runways problem is easily solved by building a new runway (and possibly dismantling an old one) with a minimum parallel distance of 2,500 feet. 

In fact, this solution was identified decades ago by the airport authority and a diagram of the proposed runway is attached to this column. The new runway would eliminate literally tens of thousands of annual flight delays and reduce fuel consumption by planes that are caught by sudden ATC adjustments while approaching San Francisco and forced to circle while waiting their turn.

So after all these decades why no new runway to solve the problem?

Left wing environmentalists of course!

The local greenies have stymied the new runway proposal at every turn, the big complaint being that the new runway would require dumping mud into the bay and building out into the water. The most ambitious plan would require paving 1.5 square miles into the bay.

This, the environmentalists say, is an unacceptable pollution of San Francisco Bay which, by the way, is nearly 1,600 square miles large. Hence the new runway would intrude into 0.094% of the bay’s surface area (yes, that’s less than one-one thousandth).

In return for permitting runway construction into the bay the San Francisco Airport Authority has promised to buy 1.7 square miles of North Bay farmland, which was dyked and drained decades ago, and restore it to wetlands with a permanent “no development" status.

But of course that too is unacceptable to the environmental lobby which doesn’t care about wetlands or nature preserves because their goal is really just stopping human progress.

When asked what’s wrong with the wetlands proposal, environmentalists then pivoted to complaining that trading water for land isn’t the issue. The problem, they say, is that building the new runway into the bay might interfere with the operation of Coyote Point Marina, a nearby harbor that houses mostly yachts.

Aside from the point that Coyote Point is far away from the proposed new runway and the Economics Correspondent doesn’t see how the harbor could be heavily impacted, the real laugh is San Francisco progressive greenies suddenly say they care about a yacht playground for San Francisco’s super wealthy.

Next up they’ll express concern the new runway isn’t big enough to handle Trump’s private 757 and needs to be expanded.

To read a more detailed story about the rejected land-for-water deal from 2001 (yes, they were even holding up airport improvements that long ago), see linked article at the end of this column.

So the massive flight delays continue as San Francisco's Board of Supervisors have used environmental concerns as a pretext to kill all attempts to relieve the bottlenecks with a new runway. SFO remains (according to the Correspondent’s count) only one of four major city airports without two parallel runways separated by the FAA minimum safe distance—the other three being New York LaGuardia, Boston Logan, and Newark. Neither of the first two handle either the same air traffic or hub traffic as SFO, and Newark, which is neck and neck with SFO for takeoffs and landings, doesn’t have the problem of constant low fog.

In fact LaGuardia doesn’t even have parallel runways at all, so they schedule landings based on their actual capacity. Unlike SFO they don’t have a second runway to shut down under low visibility conditions, making SFO unique among all major U.S. airports in its leading share of arriving flights impacted by low visibility.

UPSET PASSENGERS

And the greatest irony of all is passenger anger with the delays.

The Correspondent has experienced many of these fog related delays from his business travel days and seen a lot of irate passengers. He’s seen/heard them lambasting the airlines (it’s not their fault) either verbally at the gate or on the phone calling their friends/loved ones waiting in SFO.

Now it’s hard to say how many of these angry passengers actually live in San Francisco or the Bay Area. For non-United flights (where SFO is almost certainly a terminus) something probably slightly less than half the passengers on every flight live in the Bay Area while the other half are visiting, but over time that still adds up to a lot of people; enough that there’s no doubt many the Correspondent has listened to blasting the airline reside in the Bay Area itself.

Hence simple math, given the large majority of Bay Area residents who are themselves left-leaning environmentalists, informs us many of those complaining passengers support the very policies that delayed them by three or four hours getting home.

Yet, in progressive fashion, they blame the airline and probably “capitalism” for the delay since they’re usually clueless about the connection between their own policy/voting preferences and the consequences they create—such as sky high housing prices, sky high rents, out of control property theft, ballooning homelessness, human poop and syringes on the sidewalks, and yes… three and four hour flight delays to get home whenever the fog rolls in.
====
Example of environmentalists stopping construction of new runway to reduce flight delays:

"SFO officials dump 1 of the 4 runway-project plans / But environmentalists still not happy with size of the others."

https://www.sfgate.com/bayarea/article/SFO-officials-dump-1-of-the-4-runway-project-2891381.php

Another Bay Area Company Leaves: Chevron Headquarters Moving to Texas

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The only thing that surprises the Cautious Optimism Economics Correspondent, who lives in San Francisco, is that it took this long.

Read more details from the San Francisco Chronicle at:

https://www.sfgate.com/bayarea/article/chevron-leaves-san-ramon-moving-to-texas-19616020.php

A Political and Economic History of China, Part 24: The Qing Dynasty’s Legacy

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9 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff closes out his history of the Chinese dynasties, this time with his own two cents: a longer analysis of how the last dynasty’s “Century of Humiliation” has rightly and wrongly shaped present-day Chinese attitudes and CCP policies towards the West.

The Economics Correspondent has devoted a lengthy thirteen articles to the Qing dynasty of 1644-1912, more than all the other dynasties combined, because in his opinion the Qing is both more interesting and more relevant to today’s China than all the others combined.

Poring through the work of western China historians one will find the focus of their work also heavily weighted towards the Qing.

The reasons aren’t hard to grasp.

Prior to the Qing there was little contact between China and westerners, mostly Silk Road merchants and the occasional Jesuit scholar-priest.

That all changed during the Qing when contact and interaction with the West soared, and the end result was western dominance over China with the so-called Great Powers winning frequent military conflicts and encroachment upon Chinese territory.

Another element that adds to the intrigue: the Qing rulers weren’t even ethnic Han Chinese but instead Manchurian invaders from the north, eventually leading to secret Han plots to overthrow and expel their alien overlords.

Then there’s the decline of the Qing and China itself, a topic that stirs resentment among Chinese even today.

Before the late 18th century China, even when ruled by other dynasties, had always been the dominant Far East power, interrupted briefly by the chaos of insurrections when dynasties were overthrown every few centuries. China had overshadowed the region for thousands of years, and historians believe it was likely the richest and most powerful nation on earth during the golden ages of the Tang, Song, Yuan, Ming, and Qing dynasties.

The decline of the Qing changed all of that.

Not only did China fall into the same disarray that typified the declines of most other dynasties, but this time it was subjugated by foreign powers from the West or, in the minds of 19th, 20th century, and present-day Chinese, “humiliated.”

Hence the widely-used term “Century of Humiliation,” invoked repeatedly by the CCP and defined as roughly 1839 to 1949, from the First Opium War to the establishment of the People’s Republic of China.

How is the Century of Humiliation viewed by the Chinese public and the western public? Or by the Chinese communist government and western governments? 

Quite differently.

CHINESE ATTITUDES

While western academics and history buffs recognize the past misdeeds of the European, Russian, and Japanese governments who carved up Chinese territory and even exported opium to China, most Chinese make no such concessions regarding the Qing’s many blunders.

According to most Chinese the West is completely at fault and China was entirely the victim.

The CCP pushes the same narrative via its propaganda, in part because it’s useful for Beijing.

China is becoming more assertive in the 21st century and butting heads with the USA, Australia, Japan, India, and other neighbors, some of whom have asked for US military protection. Given its ambitions the CCP knows more confrontations are inevitable and uses “Century of Humiliation” propaganda to stroke resentment and anger among its own people whose support they will rely on during future conflicts. Xi Jinping has also preemptively multiplied public references to the Opium Wars, citing it more than any of his predecessors.

And it’s not just mainland Chinese.

While Hong Kong Chinese and non-indigenous Taiwanese, who haven’t been bombarded by communist propaganda for 75 years, may hold a more balanced view of the West, nationalistic sentiment still runs deep for some. Ethnic Chinese are generally a very proud people with, in the Correspondent’s opinion, a great deal to be legitimately proud of given China’s magnificent history and culture. So it’s easy for even non-communist Chinese to harbor feelings of resentment when discussing the Century of Humiliation. Nationalist fervor can sometimes cloud their perspective as well.

As historian Stephen Platt has mentioned, westerners watch the recent ascent of Chinese power with interest, but Chinese see nothing interesting about it at all. In their view history is simply reverting back to the norm, when China was the dominant power in Asia and even the world—a norm that was rudely interrupted by the malfeasance of predatory foreign powers during the 19th and early 20th centuries.

WESTERN ATTITUDES

Well the Correspondent differs with most Chinese, whether they be mainland communist Chinese, Hong Kong, or Taiwanese. And this difference of opinion has invoked a lot of discomfort and even anger among some Chinese the Correspondent has corresponded with and even knows personally.

But so be it. The facts are not on their side.

First, it’s important to establish that the West was still *mostly* at fault. This was the period of European and Japanese colonialism, when world powers competed with one another by conquering faraway lands and expanding their empires.

Although Great Britain never “conquered” vast territories within China, it did gain complete control over Hong Kong—not to “rule” but to establish a safe haven for trade free from the massive Qing corruption that had prevailed in Canton for nearly a century. However Russia, Germany, France, and Japan outright grabbed land, and a lot of it. Germany colonized Shandong province, Japan grabbed Korea and Taiwan, France extracted most of Vietnam from China, and Russia took the most of all: over one million square kilometers, mostly in Manchuria.

The British also exported vast quantities of opium into China to solve its trade deficit problem—with the explicit approval of Parliament—effectively turning China into a nation of drug addicts. The American government didn’t adopt a policy of opium dealing and opium didn’t grow in American territories anyway, but in the spirit of laissez-faire its politicians ignored the opium shipping activities of private American merchants.

On this front the Correspondent believes Chinese have every right to complain about misconduct by western powers.

But the Qing dynasty screwed up plenty too leading, in the Correspondent’s opinion, to perfectly avoidable conflicts and China’s downward spiral. The examples that follow have been covered in the Correspondent’s previous columns.

First, the British sale of opium to China didn’t originate from wanton greed and avarice. 46 years before the First Opium War Britain sent a diplomatic mission to Beijing to establish free trade and formal relations. The Macartney Embassy of 1793 wished to trade British manufactures, the products of its first industrial revolution, for Chinese tea, silk, and porcelain.

The Qianlong emperor not only rejected all British proposals (including diplomatic relations), he dismissed the ambassadors and Britain itself as a horde of lowly barbarians, using the word barbarian repeatedly when writing to King George III that (paraphrasing) “China has everything and needs nothing from your country” and renouncing the industrial revolution.

Meanwhile Qianlong had allowed a professional flatterer to gain full control of the Qing finance ministry who in turn literally bankrupted the empire through embezzlement (another mistake).

To solve the Qing’s self-inflicted fiscal crises, the Jiaqing and Daoguang emperors adopted a formal trade policy of protectionism—keeping western goods out of China while selling vast quantities of silk, tea, and porcelain to the West—to run perpetual trade surpluses which were still unable to offset the vast corruption draining the imperial treasury.

When the British returned and requested free trade and formal diplomatic relations again (1816), the Jiaqing emperor also rejected their overtures and the meeting got held up over Qing demands that the British barbarians, now vastly superior economically, technologically, and militarily, perform the kowtow.

The British in particular, tiring of losing silver to China year after year due to Qing protectionist policies, resorted to opium smuggling to resolve the trade imbalance and the rest is history. But had the Qing accepted free trade earlier no such conflict over opium would have taken place.

Some Chinese argue that even if free trade flourished between the two nations the predatory British would still have forced opium on China out of pure greed. While it’s impossible to go back and conduct a grand counterfactual experiment changing some of the variables to observe the new outcome, the Correspondent believes history has already dispelled that theory.

All one has to do is look at Japan.

When American Commodore Matthew Perry sailed his “black ships” to Japan in 1853—ships capable of moving under their own power which terrified many Japanese—and fired his guns in Tokyo Bay, Japan immediately realized it had fallen behind the rest of the world and quickly embraced free trade with the West. In a more farsighted decision Japanese officials, including the great Meiji emperor, understood that Japan would benefit most by importing western technology and learning from it, and within less than fifty years Japan rose from an isolated agricultural island to a major world power.

Despite Japan opening its markets, both imports and exports, the West never forced opium on Japan nor did the Japanese become a nation of opium addicts.

In the Correspondent’s opinion, had the Qing had not closed China off from the world while engaging in blatant protectionism, Britain would not have tired of an unequal trade arrangement and resorted to opium to balance it. China would also have strengthened herself immeasurably.

There were more mistakes.

In the years before the First Opium War British officials happily allowed Qing officials to ride their warships in a demonstration of western technology. The ship “inspections” were primarily an attempt to convince the Qing government that open trade with Britain would bring tangible benefits to China.

Qing officials relayed detailed reports back to the emperor that British naval vessels were vastly superior to Chinese junks, noting they didn’t require favorable winds, were capable of “fantastic speeds,” and employed cannons with superior firepower and range which could be pointed in any direction. In other words, the westerners can’t be subdued militarily.

Yet when the first conflict over opium broke out, the Daoguang emperor and his imperial court were so deluded they actually *welcomed* the war and instructed their navy to “subdue” and “destroy” the British. The result, of course, was a humiliating rout that ultimately delivered Hong Kong to the “big nosed barbarians.”

In the Correspondent’s opinion, living delusional fantasies about your own country’s military capabilities is a huge mistake under any circumstances. But welcoming a war with a superior navy, one whose government you’ve been playing protectionist games with for decades and degrading as “inferior barbarians,” is an even bigger mistake.

Another blunder: when the Second Opium War broke out the British sent an expeditionary force to Beijing to negotiate terms to end the fighting. The Xianfeng emperor sent emissaries to meet the British and agree to the terms, proposing the negotiators proceed to Beijing for talks while the larger expeditionary force, which moved more slowly, would catch up a few days later for the final signing ceremony.

But instead of negotiating in good faith the Qing tortured and executed most of the negotiator party which had entered Beijing under flag of truce. Qing cavalry then launched a sneak attack against the smaller British expeditionary force from both sides but were repelled (actually devastated) by Britain’s new Armstrong artillery guns.

When the expeditionary force got to Beijing the imperial court had fled and the British found most of their comrades executed with their bodies mutilated. British troops were so outraged that they wanted to burn down all of Beijing but the embassy’s leader, Lord Elgin, convinced them to punish only the emperor by sacking and burning down his summer vacation palace.

Again, the Correspondent considers the Qing ruse, torture and killing of diplomatic negotiators under flag of truce, and surprise ambush, especially against a military they had known for over two decades was vastly superior, a foolish mistake.

As the decades dragged on the Empress Dowager Cixi, who ruled China for 47 years, continued to resist trade with the West and even stymied internal reform and modernization of China itself. She embezzled state funds on a vast scale including, famously, money appropriated for modernizing the Qing navy which instead built her notorious “floating marble palace” to throw lavish parties at her summer resort. 

One year later the Qing Navy was routed by the Imperial Japanese Navy and China was forced to cede Korea and Taiwan to their increasingly belligerent neighbor.

Another huge bungle on part of the Qing.

Although there are countless more errors that would have produced far better outcomes for China had the Qing sidestepped them, we’ll focus lastly on the Boxer Rebellion.

When a pro-Qing secret society moved to violently expel all westerners from China the Empress Dowager Cixi, knowing the West was now even more superior militarily than ever, took a quiet noncommittal stance.

Her silence, interpreted as tacit approval, encouraged the insurgents (known as the Boxers) to begin massacring western civilians, diplomats, priests, nuns, and thousands of Chinese Christian converts.

Seeing the suffering of westerners and their Christian churches burning, Cixi openly supported the Boxers and urged them to continue killing civilians until all westerners were gone, another huge mistake that set China back.

Predictably the western powers, hearing their civilian subjects were being beheaded all over northern China, sent a multinational allied expeditionary force to Beijing which easily defeated combined Qing-Boxer fighters. China was forced to pay a huge monetary indemnity which the United States partially refunded to build Qinghua University in Beijing, China’s most prestigious learning institution today.

Had the Qing simply embraced free trade and diplomatic relations with the West in the late 18th century all of the wars, ceding of territory, monetary reparations, and loss of life would have been avoided (in the Correspondent’s view).

Mention of these Qing mistakes and their consequences is nearly guaranteed to incense most mainland Chinese and even some Hong Kongers and Taiwanese. But in the Correspondent’s opinion they are undeniable facts and Chinese would be better served learning from them instead of more commonly lashing out in anger. 

In the end, the West was still mostly at fault, but the Qing dynasty made fatal mistake after fatal mistake—in sharp contrast to Japan which opened up to the world and subsequently modernized and prospered.

Unfortunately given the CCP’s incessant propaganda, which reinforces the narrative the West was completely in the wrong and China was entirely the victim, the prospects for greater Chinese introspection, more nuanced reflection on the Century of Humiliation, and a moderation of today’s anti-Western rhetoric are not very good.

Unemployment Creep and Recession Statistics

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As of June 2024 the official U.S. unemployment rate is 4.1%, up 0.7 points from the April 2023 post-Covid low of 3.4%.

Why is this interesting?

First of all unemployment virtually never jumps through the roof right before a recession. That always happens during the recession itself (see attached St. Louis Federal Reserve chart).

https://fred.stlouisfed.org/graph/?g=1q0rV

Preview:

However one might notice that unemployment does creep up slightly right before recessions begin. When the recession starts, other economic indicators also suggest a slump may be starting but since unemployment remains relatively low—albeit not an absolute low—debate usually rages as to whether a recession is coming or not. The debate is usually settled six months later when it's obvious to everyone.

But here’s an interesting factoid about the recent 0.7% increase in the unemployment rate:

Going back to the 1980’s, the unemployment rate has never risen 0.7% from a cyclical low without entering a recession.

Before the 2007-09 recession, unemployment bottomed out at 4.4% in May of 2007. By the time it had risen 0.7 points to 5.1% it was March 2008 and the economy had just entered recession—although the NBER didn’t make its official recession announcement until eight months later.

Before the 2001 recession, unemployment bottomed out at 3.8% in April of 2000. By the time it rose 0.7 points to 4.5% it was June 2001 and the economy had also just entered recession. Once again the NBER didn’t make its official recession announcement until six months later.

Before the 1990-91 recession, unemployment bottomed out at 5.0% in March 1989. By the time it rose 0.7 points to 5.7% it was August 1990 and the economy had just entered recession. Once again the NBER announcement came much later.

The 2020 Covid recession was unique in that it was manmade with states shutting down their economies due to Covid. However the pattern remains: by the time cyclically low unemployment of 3.5% (February 2020) had risen 0.7 points to 4.2% (4.5% one month later) the economy was in recession, although given the sudden nature of the pandemic there was no “creep up” period prior.

Unemployment bottoming out and rising 0.7 points adheres to the same predictive pattern in the 1981-82 Volcker recession, the 1980 Jimmy Carter recession, the 1973-75 OPEC recession, the 1969-70 recession, and the 1960-61 recession—basically all nine recessions going back to 1960.

The first and only exception occurs in June 1959, 65 years ago, when unemployment rose from the June low of 5.0% to 5.8% by November without an official recession, although it was close: Q3 and Q4 GDP growth in 1959 was just +0.07% and +0.28% respectively.

The pattern then resumes without exception during the recessions of 1948-49, 1953-54, and 1957-58.

Additional Fed tables indicate the pattern continues without exception during the recession of 1945, and economic historians’ unemployment estimates continue to match the 0.7% pattern during the Great Depression: in the Depression of 1937-38 and Herbert Hoover's Great Depression contraction of 1929-1933.

One last “exception” (which really isn’t an exception) was a rapid 5% increase in unemployment during 1934 after Franklin Roosevelt signed the National Industrial Recovery Act. The slump was swift, rapid, and painful, but because contraction only lasted a few months it didn’t meet the “two consecutive quarters” definition and wasn’t officially recorded as recession. i.e. contraction began the last month of Q1 but Q1 as a whole was left barely positive, there was a massive contraction in Q2 which was dizzyingly negative, and contraction the first month of Q3 was followed by two months of growth leaving Q3 also barely positive—the net result being a 2007-09 sized Great Recession compressed into a five-month period that didn’t produce two consecutive negative quarters.

But it was a recession, and a big one at that.

So the pattern holds up for 15 of the last 15 recessions going back for a century, with a single false signal in 1959. And once unemployment was 0.7 percentage points above the cyclical low, the economy was already in recession in 15 of the last century's 15 recessions, not "about the enter one."

Disclaimer: Although the Economics Correspondent thinks the U.S. economy has entered a time window where the beginning of recession is highly likely—April 2024 to December 2024—he doesn’t claim this unemployment statistic guarantees recession has begun, only that, like so many indicators we’ve seen the last year or two, it’s yet again consistent with imminent recessions of the past.

Past performance is no guarantee of future results, but if the economy doesn't enter recession in the next 12 months this particular case will be a statistical unicorn.

A Political and Economic History of China, Part 23: Sun Yat-sen and the Anticlimactic Collapse of the Qing Dynasty

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff reaches the end of China’s last dynasty (at last).

Nationalist Party flag... in China?

At the turn of the 20th century China lagged hopelessly behind the western powers and Japan. Its ruling dynasty, the Qing, was irredeemably corrupt after 256 years in power. Great Britain enjoyed control of Hong Kong and Kowloon while large swaths of Qing territory had been swallowed up and colonized by Russia, Germany, France, and Japan (the latter seizing Korea and Taiwan from China after a brief war in 1895).

For over a century ethnic Han Chinese formed secret societies dedicated to overthrowing the Qing, and in that time multiple failed rebellions broke out costing literally tens of millions of lives.

As the new century began a small, seemingly insignificant anti-Qing society—started in Hawaii of all places—was co-founded by an insurgent who would later become the unlikely hero of modern Chinese history, akin to George Washington in the United States.

His name was Dr. Sun Zhongshan, better known in the west by his Cantonese name Sun Yat-sen.

A GLANCE AT DR. SUN

Before we get into a brief account of his life we should mention that Sun Yat-sen is a nearly unique Chinese figure, revered by both the Communist Party in Beijing and the Nationalist Party in Taiwan (formerly led by Chiang Kai-shek). The two sides don’t agree on much, but they’re unified in their praise of Sun as the founding father of modern China.

Sun was born in 1866 in a poor section of Guangdong (formerly known as Canton province) in Southern China. As a child his studies focused heavily on science and in 1878 he followed his older brother to study in Hawaii. It was during these preparatory years that he learned English and, more importantly, was exposed to western political philosophy.

Afterwards he returned to Guangdong to study medicine, but during his early twenties Sun became more enamored with revolutionary politics and a hardening view that China must transform itself into a modern, democratic state.

On a side note the Correspondent remembers reading long ago passages from Sun’s personal journals about western encroachment. He disliked British colonialism in Southern China, yet he observed that Hong Kong was clean, modern, safe, and prosperous while Guangzhou, just an hour’s train ride inland and under Qing jurisdiction, was poor, filthy, disease ridden, and technologically backwards. The contrast between British-administered and Qing-administered China convinced Sun that his country had to change course and adopt many western institutions.

In 1894 Sun wrote a lengthy letter to Li Hongzhang, the Qing’s top military official and also known to be a reform sympathizer, outlining his plan to modernize China. Being a virtual nobody at the time, Sun received no response. He even traveled north to Tianjin to meet with Li who never received him.

Faced with rejection via the inside route Sun gave up medicine and devoted his life to overthrowing the Qing. He returned to Hawaii in 1895 and co-founded the Revive China Society, at that time just another insignificant one of countless anti-Qing societies agitating for revolution.

Sun used his western education and knowledge of English to travel the world and raise money for anti-Qing activities, mostly from overseas reform-minded Chinese. Once Sun felt he had raised enough he sent the money back to China with which the society sponsored two uprisings (1895 and 1900), both of which failed.

By this point Sun was on the Qing government’s enemy radar and living in exile, spending his time in Europe, the United States, Japan, and Southeast Asia. His Revive China Society merged with several other secret societies to form the larger Tongmenghui group which funded six more uprisings in 1907 and 1908, all of which failed.

All the organized attempts to overthrow the Qing fizzled out, and the situation didn’t look hopeful. Yet, in one of those many strange turns of history, another seemingly fated uprising in 1911 unexpectedly worked.

THE XINHAI REVOLUTION

The so-called Wuchang Uprising, named after the city where it took place, initially failed. But when the local Qing viceroy ordered his troops to execute captured rebels the soldiers, who had not been paid for some time, mutinied on October 10th and the viceroy fled.

Word quickly spread of the insurrection and Qing soldiers began mutinying in city after city, most of them also having worked without pay.

Although soldiers in a few cities and provinces refused to turn against the government, the Qing collapsed throughout most of China in a rapid domino fashion. It seems the Qing's hold on China was a house of cards just waiting for a breeze to knock it down and Wuchang provided it.

Mental note: history has repeatedly shown governments that don’t pay their militaries run a much higher risk of being overthrown.

The collapse of Qing authority is known as the Xinhai Revolution and it marks probably the most bloodless end of a major dynasty in Chinese history. Although the history books tally perhaps 100,000 dead in those areas where Qing soldiers were willing to fight, the death toll is insignificant when compared to the blood shed during the falls of the Qin, Han, Tang, Song, Southern Song, Yuan, and Ming dynasties (i.e. all the other big ones).

Although the Correspondent won’t rehash the details of the end of every one of those dynasties, the Qin, Han, Tang, Yuan, and Ming involved nationwide rebellions that often laid waste to China while the Song and Southern Song were both finished by bloody, outside invasion (the first by Jurchen tribes from the north, the latter by Kublai Khan and the Mongols).

October 10th is now celebrated by the Taiwan Nationalist Party as “Double Ten Day” commemorating the end of thousands of years of imperial rule in China.

Ironically, in another one of those strange twists of history, Sun Yat-sen wasn’t even in China on October 10th but rather Denver, Colorado raising money. Hearing about the Xinhai Revolution, Sun rushed back to China to capitalize on the situation before the country fell into leaderless chaos.

On January 1st, 1912 Sun Yat-sen declared the establishment of the Republic of China and one month later the Qing boy emperor Puyi officially abdicated the throne. Shortly thereafter Sun founded the Nationalist Party of China, known in Chinese as the Guomindang (gwoh-mihn-dahng).

In the 21st century the Guomindang, or Nationalist Party, remains one of the two major political parties of Taiwan although it hasn’t occupied the president’s office in Taipei since 2016.

Regarding the Nationalist Party’s name, its different Chinese romanizations are also worth discussing.

“Guomindang” is the spelling under the current PRC romanization system of pinyin. However before pinyin was invented, the older Wade-Giles system spelled it "Kuomintang" which some CO readers might recognize as KMT.

Anyone reading older history books on China and Taiwan might see references to “Kuomintang” and KMT, but even under Wade-Giles the correct pronunciation was always “gwoh-mihn-dahng,” even if journalists and politicians unfamiliar with Wade-Giles’ strange rules pronounced it (incorrectly) as “koo-mihn-tang.”

SUN’S CHINESE LEGACY

Sun’s political career after 1912 mirrored the politics of China: chaotic. We’ll get to that in upcoming chapters about the Chinese Republican and Nationalist eras. But last we’ll say a few words about his enduring legacy.

As the Correspondent noted earlier, Sun is celebrated by both the Chinese Communist Party and Taiwan's Nationalist Party, currently political adversaries and previously mortal enemies.

It’s no surprise that the Nationalists love Sun since, after all, he founded their party. The communists are a bit stranger story. Why would they worship the founder of an adversarial party who wasn’t a communist himself?

The CCP claims they venerate Sun for his work overthrowing the imperial system and writing the opening chapter of modern China. It also helps that Sun spoke about a vague form of “socialism,” although its Chinese interpretation more closely resembles “welfare of the people" and again, Sun never embraced Marxist communism.

Chinese president Xi Jinping also held a huge ceremony in Beijing for Sun’s 150th birthday, full of speeches and a giant portrait of the late revolutionary.

Whatever the reasons, the Economics Correspondent suspects the communists’ admiration for Sun is for real.

First, Mao Zedong also openly lauded Sun as a great revolutionary.

There are also Zhongshan Parks everywhere in China, borrowing Sun’s mandarin name.

And on a personal note, the Correspondent witnessed more evidence when he visited Dr. Sun’s mausoleum in Nanjing many years ago. 

After climbing up a gazillion stairs there’s a large hall with a sitting statue of Sun much like the Lincoln Memorial.

Surprisingly, painted on the ceiling of the hall is a giant blue and white Nationalist Party star, the same symbol flown on today's Taiwan flag (see photo).

Sun’s sarcophagus is in a smaller room behind the main hall, a circular rotunda with his coffin lowered in the center, visible but inaccessible to viewers who are blocked by high stone handrails. But once again, the circular rotunda ceiling is blue with the white Nationalist star.

The CCP has had 75 years to erase the Nationalist star and replace it with the CCP’s hammer and sickle but hasn’t, in the Correspondent’s far-from-perfect estimation out of respect for Sun’s legacy.

Today the outstanding outlier regarding Sun’s standing is Taiwan’s ruling Democratic Progressive Party, or DPP, which has held power for the last eight years. The DPP shares no such enthusiasm for Dr. Sun.

Since the DPP not only believes in Taiwanese independence but doesn’t even consider Taiwan to be part of China politically, historically, or culturally, they have little interest in revolutionaries who fomented political change on the mainland.

And true to form Sun’s legacy has become a tangential lightning rod in Taiwanese politics.  Along with removing Chiang Kai-shek statues all over Taiwan and renaming Taipei’s "Chiang Kai-shek airport" to “Taoyuan airport,” the DPP has also tried to remove monuments to Sun, all to howls of protest by KMT officials.

Also at least two former KMT leaders have visited Nanjing to pay their respects at Sun Yat-sen’s burial site, both times with CCP approval and major controversy in Taiwan.

The first, Lien Chan, was greeted warmly by CCP officials when he landed in 2004—in contrast to his departure from Taipei where protestors threw eggs and called him a traitor.

The second, former Taiwan president Ma Ying-jeou, visited in 2024 leading to more DPP criticism. And so Taiwan’s domestic politics rages on.

"Greedflation" Math Gets an F

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff calmly shreds the latest left-wing accusations of food “greedflation”... with simple math.

Lately the “greedflation” crowd (i.e. anyone who doesn’t realize inflating the money supply by 44% in two years causes inflation) has resorted to some homespun “evidence” that greedy companies are responsible for jacking up food prices in particular on American consumers.

The attached meme about General Mills is an example the Correspondent came across posted by someone trolling a free market page.

Of course none of the quoted statistics, all designed to shock readers into thinking General Mills is greedy—dividend payments, stock buybacks, CEO pay, and net income, all of which happen every year regardless of whether annual inflation is 1% or 9%—have anything to do with whether or not inflation is impacting the company’s cost and pricing structures.

Well fortunately the Correspondent has a few decades worth of experience with something the greedflationists have evidently never looked at in their lives: publicly traded companies’ SEC filed finances.

In less than 60 seconds the Correspondent retrieved General Mills’ most recent SEC-filed annual report, the 10-K. 

The company’s consolidated income statement is at this link on page 42.

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000040704/5ea56bcd-aa55-4648-9181-789bf48d4b2e.pdf

Generally accepted accounting principles lay out very simply how much General Mills, or any company for that matter, is charging customers (“net sales” or “revenues”) against how much they’re paying to procure the final product they sell to the same customers (“cost of sales” or “cost of merchandise”):

FY2021 Net Sales: $18.1B
FY2023 Net Sales: $20.1B ( +11.0%)

FY2021 Cost of Sales: $11.7B
FY2023 Cost of Sales: $13.5B ( +15.4%)

Yes that’s right, during the two worst years of America’s recent inflation General Mills had to pay 15.4% more for the goods they sold their customers, but they only charged 11.0% more.

In other words, their wholesale costs rose faster than their revenues and their gross profit margins shrank.

(On a side note, companies have additional costs they must pay out of gross profits that whittle their bottom line down to a smaller net profit. A list of those other costs, and why they aren’t a good gauge for measuring the effects of inflation, is available at the end of this article.)

Also two weeks ago a Cautious Optimism reader/commenter made a similar comment about the greed of grocery stores driving food prices higher.

The accusation was that “Kroger’s profits have risen 49% since 2021 and Publix’s profits are up 45% since 2022.”

Now the identity of the commenter is not important here, and even if it was in error (it was) civil discourse still helps us all arrive closer to the truth, even when social media tries to censor it.

But once again simply checking Kroger and Publix’s SEC-filed financial statements we can get to the heart of whether “corporate greed” is to blame.

Kroger FY2023 10-K, page 56

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000056873/6b0fa036-24ed-4c1e-b7de-e02ca22d356c.pdf

Publix FY2023 10-K, page 20

https://www.publixstockholder.com/financial-information-and-filings/sec-filings/sec-document/%7BBCEFD003-67A2-4D13-AC7C-9FB8F0665AD3%7D/html

For Kroger:

FY2021 Net Sales: $137.9B
FY2023 Net Sales: $150.0B ( +8.8%)

FY2021 Cost of Sales: $107.5B
FY2023 Cost of Sales: $116.7B ( +8.6%)

So Kroger’s gross margin was virtually unchanged and hardly “49% higher.”

(For the record Kroger’s gross margin rose 1/6th of one percentage point in two years)

Now for full disclosure, Kroger’s “net profit” rose more sharply. Still not “49% higher” but net income did rise from $1.66 billion to $2.16 billion or up 30%.

But there’s more, and much more important, full disclosure: 

FY2021’s net results were depressed by Kroger’s one-time unrealized $821 million loss on its portfolio of investment securities. And FY2023’s net results were inflated by Kroger’s one-time unrealized $151 million gain on its same portfolio of securities, none of which have anything to do with price-gouging or greedflation.

So backing out the volatile movements of its securities portfolio, something Wall Street analysts do regularly, Kroger’s core business net income actually *fell* by 19% from FY2021 to FY2023 ($2.48B down to $2.01B).

The Correspondent suspects the commenter wasn’t aware of the standardized accounting and probably saw the “Kroger’s profit was up 49%” shock number on an ignorant left-leaning meme somewhere, or even less reliably from MSNBC.

Lastly there’s Publix’s 10-K finances.

The Correspondent thought it odd that Kroger’s alleged profit gain was “since 2021” but Publix’s was only “since 2022,” and his suspicions about cherry-picking years to manipulate a desired result proved warranted. 

Yes, as suspected Publix had a $1.262 billion one-time loss on its 2022 securities portfolio which artificially depressed its net income, providing the perfect platform for an impressive “gain” in 2023. Further boosting the "gain" was Publix's investment loss swung to an $863 million gain a year later.

But once you back out all those volatile one-time securities portfolio movements Publix’s net income also fell by 16% from 2022 to 2023 ($4.18B down to $3.49B).

And looking again at Publix’s much more meaningful gross metrics across two full years we get:

FY2021 Net Sales: $48.0B
FY2023 Net Sales: $57.1B (+18.9%)

FY2021 Cost of Sales: $34.8B
FY2023 Cost of Sales: $42.1B (+21.0%)

Publix’s cost of merchandise also rose faster than the prices they charged.

BTW Kroger’s 2023 final net income (adjusting for securities gains/losses) generated a net profit margin of 1.3%. Publix’s was 6.1%.

Publix seems to have a higher-margin business model, but neither company’s net margin is a portrait of “greed,” especially when considering liberal favorites Google, Facebook, and Netflix—all three of whom have lobbied the federal government heavily for favorable Net Neutrality regulations—enjoyed FY2023 net profit margins of 24.0%, 29.0%, and 16.0% respectively.

(links to their 10-K financials available on request)

Now the Correspondent is sure that if some greedflation loon turns over enough rocks he might find a consumer company or two out there among hundreds that really have expanded gross margins nicely in the last two years. After all, in any given period some companies are growing margins while others are narrowing.

But the larger point is that of the three consumer companies the Left has chosen to accuse online of massive greed, which in turn they blame for rising food prices, all three are a giant fail when analyzing what the greedflationists seem to have no clue about: standard corporate accounting. The Correspondent suspects if one looks at a larger number of other retail grocers and food companies, most will show similar results.

Because as Milton Friedman settled decades ago, but which most leftists refuse to learn from:

“Inflation is always and everywhere a monetary phenomenon…”

…and (in his words) inflation is not caused by “greedy businessmen” or “grasping trade unionists” or “spendthrift consumers” because…

“None of these groups possesses a printing press on which it can turn out those multi-colored pieces of paper you call money.”
=======
(Comment from the Economics Correspondent regarding additional corporate costs):

After gross profit companies typically subtract additional costs:

-Selling, general, and administrative
-Research and development
-Depreciation and amortization
-Interest expense
-Onetime gains and losses on asset sales and investments
-Corporate income tax

Most of these metrics, and the net income that results once they are all accounted for, are typically unreliable for measuring the impact of inflation on a company’s finances because they are highly variable from year to year.

For example interest expense can rise rapidly if a company takes on new debt one year, or if it refinances at a higher interest rate. It can fall rapidly if a company pays off its debt or rolls over debt to a lower interest rate.

SG&A expense can rise or fall rapidly one year to the next if a company decides to undertake a new marketing campaign or wind down an old one.

Depreciation and amortization can rise rapidly if a company buys a lot of capital assets and suddenly has new depreciation to log.

Income tax expense can vary wildly if a company defers taxes by a year or two.

There are other examples but you get the idea.

For measuring “greedflation” there are no better metrics than topline net sales/revenues and topline gross cost of sales.

2023: San Francisco Shoppers Finding Human Waste in Downtown Mall Elevators

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"Shoppers are getting a foul surprise."
-KGO Channel 7 San Francisco

"Must've been those San Francisco white supremacists again."
-Cautious Optimism Left Coast Correspondent

Admittedly this story is a year old, but the Left Coast Correspondent has visited this downtown mall many times and it's an absolutely beautiful building.

Was.

Not only is the mall now 90% vacant, an eerie ghost town inside, but evidently some locals have found the privacy of its elevators a convenient place to pay fertile tribute to San Francisco's successful left-progressive policies.

San Francisco Mayor London Breed, who defunded the police in 2020 and is now backpedaling to keep her job in November, has proposed tearing down the mall and replacing it with a soccer stadium.

At least the local tribute will be better for grass than elevator flooring.

Watch more on KGO News below.

A Political and Economic History of China, Part 22: The Boxer Rebellion of 1900

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6 MIN READ - As part of his continuing history of China series, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff discusses a seminal upheaval during the last years of its last dynasty.

Western troops defend Beijing's diplomatic
legations from the Boxer siege

As the turn of the 20th century arrived China’s hopelessly corrupt Qing dynasty, which had ruled the country for 256 years, was in the twilight of its power. China was backwards, its economy, military, and institutions decades behind the western powers and Japan. The country was run by the reactionary, xenophobic, and corrupt Empress Dowager Cixi, and the periphery of the empire had been carved up by the likes of Great Britain, France, Germany, Russia, and Japan.

Against this backdrop a bizarre and unlikely uprising would make history: the Boxer Rebellion.

Full disclosure: the Economics Correspondent has never been that enamored with the Boxer Rebellion of 1900, but the incident has fascinated historians for over a century and Hollywood even produced a 1963 film about it starring Charlton Heston, Ava Gardner, and David Niven (“55 Days at Peking”). So regardless of the Correspondent’s lukewarm interest in the subject, the Boxer Rebellion is viewed as a major historical event and warrants a column.

THE BOXER SOCIETY ORIGINS

Of the many Chinese secret societies that emerged in the 19th century, a peculiar one known as the “Society of Righteous and Harmonious Fists” would soon gain international notoriety. This society, better known as the Boxers due to their practice of martial arts, was nearly unique in that it was dedicated not to overthrowing the Qing dynasty but instead expelling all foreigners from China.

For decades the “unequal treaties” that had ceded Chinese territory to the western powers and established western trading ports, the growing presence of westerners and their strange clothing and strange culture, legal extraterritoriality for westerners, and in particular the construction of western churches on Chinese soil all became points of resentment among the Chinese population at large. Even as a modest 100,000 Chinese had converted to Christianity, baseless rumors began circulating of Christians kidnapping Chinese babies for sacrifice rituals and even ending their ceremonies by eating the babies themselves.

By 1899 Boxer organizations began agitating for openly attacking westerners and destroying western property with the goal of driving foreigners out of China completely.

The Empress Dowager Cixi, when briefed on the growing numbers and belligerence of Boxers across China, hesitated to either suppress or support them.

Given her initial hands-off policy, Boxer aggressiveness increased and erupted into nationwide violence by 1900. Chinese Christian converts were attacked and killed by the thousands. Churches were burned down and dozens of westerners beheaded. The Boxer slogan justifying it all was “Support the Qing government and exterminate the foreigners!”

IMPERIAL SUPPORT

Soon the violence spread to the capital city of Beijing. 

Cixi, watching from her balcony in the Forbidden City, could barely contain her pleasure at the sight of smoke billowing from western churches and the sounds of chaos emanating from the surrounding city. Cixi always hated the presence of westerners in China but until now had been powerless to evict them. Seeing the Boxers as a means of finally ridding herself of the westerners she threw her full support behind the rebellion, urging the Boxers to expel the barbarians once and for all and declaring:

”The Boxers… …are men of the people… …When these troubles are over we intend to bestow on them special marks of our favor. Let these people’s soldiers still continue, with united hearts and utmost efforts, to repel aggression and prove their loyalty, without failing, to the end.”

The Boxers also claimed that their martial arts calisthenics made them impervious to western bullets.

To demonstrate their magical powers one of Cixi’s generals lined several Boxers against a wall in the Forbidden City, and when shot with rifles the Boxers predictably crumpled and died. Then, in a fatal application of the no true Scotsman fallacy, the general explained that “they must not have been real Boxers” or “the true Boxers will return from the dead and fight the foreign devils.” 

So the rebellion continued, culminating in a Boxer siege of the Beijing Legation Quarter that housed the diplomatic offices of ten western countries plus Japan.

Meanwhile the western powers, hearing reports of tens of thousands of Chinese Christians, hundreds of westerners, and dozens of priests and nuns being killed in Beijing alone, unified to defeat the Boxers and relieve the Legation Quarter from its siege. Eight nations, some of which were adversaries, joined forces to form the “Eight Nation Alliance” representing Britain, France, the United States, German Empire, Austria-Hungary, Italy, Russia and Japan.

Gathering 54 warships the Alliance landed approximately 19,000 troops in Tianjin who fought their way to Beijing. Killing thousands of Boxers and Qing army regulars along the way, the combined western armies reached the capital a month later to relieve the Legation Quarter which had successfully held out.

With the tide turning against the rebellion Cixi about-faced, declaring the Boxers had risen up without authority and the Qing government had done everything in its powers to protect foreigners. In letters to the governments of France, Germany, and the United States she portrayed herself as a victim of circumstance, opposed to the raucous Boxers whose violence had spread beyond her ability to control:

”We have repeatedly issued edicts to protect the Ministers of the different countries. We have also ordered the missionaries in the various provinces to be protected.”

Then Cixi and the imperial court fled Beijing. As they left the prisoner emperor Guanxgu’s favorite concubine Zhen, who Cixi had always hated, pleaded with her to stay in the capital to help negotiate with the western powers. Enraged, Cixi ordered the palace eunuchs to throw Concubine Zhen down a water well where she drowned. The Correspondent has visited “The Well of Concubine Zhen” in the Forbidden City along with the exhibit telling her tragic tale.

Cixi and her officials retreated deep into the western province of Shaanxi to hide from the allied armies. Only later, when she learned the allied retribution would not fall upon her personally, did Cixi return to the Forbidden City, thanking the western powers for saving both her and China from the unruly Boxers.

AFTERMATH

As with so many previous western conflicts, the Chinese defeat produced another unequal treaty. However, unlike the others China was not required to cede territory this time (although Russia had used the opportunity to seize the all-weather port of Dalian, know then as Port Arthur) but the Qing government was required to make another huge indemnity payment to all the allied powers.

The United States received a large payment of $30 million, but Secretary of State John Hay argued the reparations were too large. President Theodore Roosevelt, understanding he lacked constitutional authority to forgive debt either for foreign governments or 35-year old college grads with useless degrees, convinced Congress to return $10.8 million to China but, given the Qing government’s reputation for corruption, under the condition the money be spent to found a new, modern learning institution: Qinghua University in Beijing (Wade-Giles: Tsinghua).

Today Qinghua is arguably the most prestigious university in China and accepts only the highest echelon of students.

The Economics Correspondent has wondered if the top young minds of China are even aware that the elite school they attend was financed by the United States’ refusal to accept such a large payment during China's “century of humiliation” at the hands of the West.

Not having visited Qinghua while in Beijing but checking Qinghua’s website, specifically the “About” and “History” pages, there is no mention of American funding on either the English or Chinese language sites, only the following passage:

”Tsinghua University was established in 1911, originally under the name ‘Tsing Hua Imperial College’. The school was renamed ‘Tsing Hua College’ in 1912. The university section was founded in 1925. The name ‘National Tsing Hua University’ was adopted in 1928.”

Omitting any positive role for the United States is consistent with the propaganda strategy the Correspondent mentioned in a previous column on the ruins of Beijing’s Old Summer Palace: the CCP’s primary objective is to maintain as large a popular reservoir of animosity and resentment as possible towards western countries. Disclosing that the United States paid for the founding of China’s most prestigious university, all for the betterment of its younger generation and the nation’s modernization, counteracts that goal so it comes as no surprise that such an essential part of Qinghua’s history has been stricken from the school’s webpage.