10A013 Ripoffs by Jim Davies, 8/30/2010

When is a ripoff not a ripoff?

That question came up at the weekend when a friend pointed out to me that a nationwide buyer of unwanted gold jewelry generally paid only 20% of spot, yet sold it for 100%. "Spot" is the current price of gold.

He had a point. That dealer would be buying for $1 something he'd sell for $5 - quite a markup. Was that a ripoff? - I said, no. Reason: the jewelry seller can, if he doesn't like the offer, shop around for a better one - and probably find it. Local jewelers typically offer 40% or 50% of spot, twice as much. So the first test for a ripoff is: can one go elsewhere, for a better price? - is the market competitive? or in different words, a ripoff is a denied choice. In that example, it is not denied.

Another example: houses, in the decade preceding 2008. I thought their prices were outrageous, out of sight. A nice home built a few years earlier for a cost of $300K might be selling for two or three times as much. Was that a ripoff?

The housing market is competitive - one can shop for hundreds of properties in a given area, so that condition seems to be met. But look closer: all of them operate in the same mortgage environment. If money is easy and cheap to borrow, buyers will bid prices up (since zoning restrictions and building codes heavily limit new construction.) So naturally, easy money pushed prices up. Who provided the easy money? - government! Government licenses the Federal Reserve, which sets interest rates and the quantity in circulation, and makes the rules (like the one that obliged lenders to lend, regardless of how big a risk the borrower poses.) It wasn't possible to bypass that gross distortion, so in this case there was a ripoff; the market was not free and competitive. I wrote about how the "housing bubble" was in progress in 2006, not long before it burst, in The Real Estate Racket.

There's a ripoff in progress whenever choice is artificially restricted, whenever the offer is one "you can't refuse." Except for the Mafia (to which government bears a striking resemblance) there's only one outfit that can impose such a restriction, and that's government itself. Want to plan for a prosperous retirement? - tough luck; you will pay 15% of your earnings into Social Security, the government scheme, leaving little over for your own plans. Want a good school for your children? - tough luck: you will pay around 1% a year on property you own, to fund the government school monopoly - whether you like those schools, or use them, or not. Few have money left over after doing that. Choice is denied.

To see a gigantic ripoff, we need look no further: government is Ripoff Central.

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