Category: Capitalism

Businesses are people, too.

From Robert Samuelson, here’s an odd column in today’s Washington Post. I’m not interested in tackling specifics because Mr. Samuelson seems to offer mostly his own guesses as to the future of spending in America. But he did amuse me with a contradiction.

To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as a reliable engine of growth. Consumption’s expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Without another source of growth (higher investment, exports?), the economy will slow.

This is an interesting thesis, perhaps. But much later, he offers this:

What can replace feverish consumer spending as a motor of economic growth? Health care, some say. Health spending will surely increase. But its expansion will simply crowd out other forms of consumer and government spending, because it will be paid for with steeper taxes or insurance premiums. Both erode purchasing power. Higher exports are a more plausible possibility; they, however, depend on how healthy the rest of the world economy remains without the crutch of exporting more to the United States.

How is health spending not consumer spending? Economically, is paying a doctor to fix my heart different than paying a mechanic to fix my car’s fuel pump? Both are payment for a service. The importance we apply to the two, as well as demographics in both population aging and car ownership, matters, but not in how we think about spending. In a free market, people will spend on what they value. But people will spend.

Mr. Samuelson’s point that health spending will crowd out consumer spending is strange, coming after he posited that consumer spending is declining. It’s also strange to claim as a blanket statement that higher insurance premiums erode purchasing power. Surely at least some of the risk protection purchased through premiums will be consumed through health spending. How – and how much – does it matter who pays the service provider?

Inevitably that leads to another point. Higher exports are a more plausible possibility. Fine. But to suggest that this is surprising or new requires an unwillingness to define “consumer” as one who consumes rather than an individual who consumes. Does the business creating new products not need equipment to build those products or computers to manage that production? Does the business shipping those products to foreign markets not need trucks and ships? What about packaging material to protect those products during shipment?

It’s possible, maybe even probable, that Mr. Samuelson’s prediction will prove true. It’s problematic because it views specific spenders as the objectively preferable path. It’s better to understand that the economy is large, global, and dynamic. It will change. When allowed to adapt, change will mean long-term progress, despite any short-term bumps. But when viewed as something to be wrapped around a preferred path, problems abound. It’s projecting tomorrow based on yesterday, when every first year finance student is exposed to learns the idea that past performance does not equal future performance.

Mr. Samuelson concludes that “the ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated.” The economy will always challenge the president in ways not yet contemplated. That’s why the president should avoid meddling.

I was teased into a dangerous fixed-rate mortgage.

The narrative is established:

Just as subprime mortgage borrowers were teased into taking out loans they later could not afford when the interest rates spiked, scores of municipalities, schools, hospitals and even museums are now facing soaring interest payments on unconventional bonds that proved too good to be true.

Ready to be unleashed on any and every victim:

The District has begun paying an extra $1.2 million every month because its interest payments have doubled, and in some cases even tripled, on $601 million of these bonds. That represents nearly one-seventh of the city’s total debt and includes $24 million for the Washington Nationals’ new stadium, the District’s treasurer said. City officials were convinced by investment banks that these types of loans would be safe and cheaper than traditional borrowing.

Naturally, deceit (i.e. “teased into”) is the only explanation. We can’t expect politicians to be diligent when subjected to the avarice of evil capitalists. They couldn’t possibly be stupid or greedy themselves.

The surge in the cost of these bonds is the primary way taxpayers are being burdened by Wall Street’s credit meltdown.

The insatiable appetite among all politicians for spending unbounded by tedious constraints like tax receipts is the primary way taxpayers are being burdened. Without debt, there would be no upwardly-fluctuating interest payments.

Ignore the government mandate that created a duopoly. Scream MONOPOLY!

I haven’t posted on Monday’s long-anticipated decision from the Justice Department on the proposed Sirius-XM merger because I didn’t have much to add to the announcement. (It’s also not the final hurdle, so over-analysis, to say nothing of celebration, would be premature.) But Steven Pearlstein’s column is worth dissecting.

The latest example of a government bailout of a troubled industry has nothing to do with Bear Stearns. It is, instead, the Justice Department’s decision to give the green light to the merger of the satellite radio companies XM and Sirius.

It’s already clear that his position will be staked on rhetoric rather than principles. While it’s good to know that from the beginning, it’s bad economics. The goal of Pearlstein’s idea of competition is not to discover winners and losers other winners, but to pick the correct winners and losers. As he makes clear, that means consumers must win and businesses must lose.

For the past several years, these two companies have been competing so hard for talent, distribution channels and customers that neither has been able to turn a profit, and probably wouldn’t have for years. Consumers have been the big winners, with great programming at affordable prices.

Any cursory look at financial results demonstrates that consumers aren’t winning in a vacuum. At least with respect to Sirius, its cash flow is improving. This matters to a growing company more than bottom-line profitability. But why should we expect such an acknowledgment from a business columnist?

All that is about to change now that the Bush administration has concluded that we’ll all be better off if these heretofore fierce rivals are allowed to stop competing and concentrate instead on reducing costs, paring down their combined offerings and finally delivering profit to their shareholders.

This reveals the problem in Pearlstein’s analysis. In setting up the satellite auction that led to the creation of Sirius and XM, the government decided that exactly two competitors was the best approach. It depended on an assumption that two could compete effectively. It ruled out the possibility for a third (or fourth or fifth or …) to compete, possibly encouraging a different development of the market. It ignored the idea that human involvement might take it in a different direction than the ideal world envisioned by the sages at the FCC. And now that reality has messed with the centralized planning, the only response is to knew what it was doing, facts be damned. That’s not convincing.

More importantly, what new innovations in the business will arrive if the combined companies don’t need to waste resources on two ’80s channels, two popular country channels, or two channels carrying C-Span? I trust competition with other competing forms of entertainment to drive the outcome because I don’t pretend to know what is best.

Pearlstein disagrees, going so far as to analogize a combined Sirius-XM to a combined Coke-Pepsi. Yet, I don’t drink either, so I’m fairly certain humans don’t need them to live. Perhaps the availability of alternatives to non-necessities puts pressure on those evil, profit-maximizing corporations. Instead, Pearlstein deems it reasonable to argue that consumers should have ideal conditions for any and all requests. Anything that helps the corporation must, by definition, harm the consumer. It must be regulated, if not stopped.

He uses interesting logic to get there:

… You would particularly want … vigilance in the case of a government-sanctioned duopoly, which is how the Federal Communications Commission viewed XM and Sirius when it granted only two licenses for satellite radio.

This irrational faith in the wisdom of government planning is matched only by his absurdity in arguing that Sirius and XM might develop substitutes for each other if forced to compete.

It makes no allowance for the possibility that, if you force the two companies to compete, XM might come up with a morning host who is funnier and more outrageous than Howard Stern. Or Sirius, lacking a Major League Baseball offering, might take a chance on World Cup soccer or college lacrosse and tap into a whole new audience that nobody knew existed. The prospects for that kind of innovation will be greatly reduced after XM and Sirius merge and the combined company focuses on protecting its existing hit channels rather than creating new ones to displace them.

As if college lacrosse will compete with Major League Baseball. Pearlstein looks at the possibilities (allegedly) eliminated from a merger while ignoring the tangible benefits customers already receive. He also dismisses the notion that the possibility that customers will leave if the channel lineup bores them won’t be an incentive to innovate. He ignores that “free” radio is already following the exact path he fears satellite radio will take and ignores the innovations that satellite radio has given and can continue to give as a combined company. (Uncensored Howard Stern counts as an improvement, as does national access to sports broadcasts.) But why worry about details when this story can just be twisted into another screed concluding that the Bush Administration wants to screw the proletariat at every opportunity?

The FCC should immediately match the Department of Justice’s decision and let the merger proceed.

(Disclosure: I’m a Sirius shareholder and customer. I’ve been an XM shareholder and customer in the past. I also desperately want XM’s Major League Baseball with Sirius’ Howard Stern. Economics and free market competition are still the reasons I support the merger.)

It’s not a “deal” if I don’t get to refuse.

Harold Meyerson’s column in today’s Washington Post is propaganda. It is so obviously biased in its consideration of facts and creation of myths that any other conclusion is impossible. Any essay that begins with this:

Putting together everything we’ve learned over the past 10 days about high finance in Manhattan, one thing is clear: If Eliot Spitzer had saved all the money he apparently paid”Kristen” and her co-workers at the Emperors Club, he could have bought Bear Stearns.

… derives from a partisan ever-interested in stuffing the events of the day through to his predetermined conclusion. In Meyerson’s case, that’s always some derivative of how government must act more, control more, and protect more. His political mind is one giant Care Bear Stare at the problem du jour.

Today, he’s concerned with workers.

The key lesson Americans need to learn from today’s troubles is how to distinguish faux prosperity from the genuine article. Over the past hundred years, we’ve experienced both. In the three decades after World War II we had the real thing. Led by our manufacturing sector, productivity increased at a rapid clip and median family incomes rose at a virtually identical rate. The value of the American work product grew significantly and that value was shared with American workers.

That value that’s shared with workers is generally referred to as a salary. Unless workers have stopped receiving salaries for the work they do, this argument is sophistry. Meyerson isn’t interested in anything more than pushing anti-capitalist, anti-corporate class warfare.

In the broadest sense, the American economy over the past three decades has been powered by ever more ingenious extensions of credit to a people whose incomes were going nowhere, unless they were in the wealthiest 10 percent of the population. There were some limits, as a result of New Deal regulations, on how old-line banks could extend credit, but investment banks and other institutions not legally obliged to keep a certain amount of cash in reserve operated under no such constraints. The risk was that one day, burdened by debt and static incomes, American homeowners would have trouble making their payments and the house of cards would come tumbling down. But what were the odds of that?

His entire argument is built on the italicized statement. To work, he needs both a conspiracy by his enemy class and a lack of self-control within his comrades in arms spending. The former is a pathetic assumption not worth consideration. The latter is worth a simple demolition.

When I bought my house, I had a set income with a projected path of growth. For consistency within Meyerson’s frame, I’ll remove the assumption of growth. I also had a (declining) amount of debt consisting of my car and my education. I took on a fixed-rate mortgage for approximately half the amount a bank would’ve given me in 2005. I’ll also assume what a bank would offer me now is less than what it would’ve offered me in 2005, although it would no doubt still cover my original mortgage with a comfortable margin. My (assumed stagnant) income covered my obligations.

How is “burdened by debt and static incomes” relevant, as opposed to poor judgment and financial forecasting by consumers (and financial institutions)? Meyerson sees only the parenthetical and assumes that amounts to conspiracy. And oppression. The notion is biased.

Meyersons demands are unsurprising. I wonder if he wrote this paragraph first.

Pretty good, it turns out. And out of this debacle emerge two paramount lessons for our highest-ranking policymakers: Regulate the American financial sector, which is now turning to the government for a bailout. And commit the government to doing all in its power to generate broad-based prosperity, through laws enabling workers to bargain collectively, through a massive public commitment to projects “greening” the economy, through provision of universal health coverage and affordable college educations.

The lesson from Bear Stearns is that we need the government to give us broad-based prosperity through a massive public commitment to boilerplate progressive talking points. Yep, further buffering Americans from the costs of their financial decisions is exactly what we need, lest they learn to exercise the self-control Meyerson knows they do not possess because they’ve been conspired against by the goal of oppression executed by our financial elite.

But, if I may, a question. When the government makes a college education more affordable, should it regulate who may study finance, and which branches of finance, since its eventual practice carries the risk of unleashing more evil on workers?

If one bad capitalist indicts capitalism, one bad pundit indicts punditry.

I (obviously) haven’t read everything written on the Fed’s Bear Stearns intervention. No need. Today’s column from E.J. Dionne is the most intellectually dishonest piece possible, relying on a skewed, limited set of the facts. There’s too much to excerpt and comment on to fully highlight its idiocy, but this is close to a summation:

But in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary, and the market system is, on balance, a wondrous instrument — when it works. But the free market is just that: an instrument, not a principle.

Dionne mistakenly assumes that the American economy is a free market. It is among the freest on Earth, but it is not free. The free market is a principle. The American economy is an instrument.

It is an instrument for Wall Street tycoons who like corporate welfare. It is also an instrument for people like Dionne:

So now the bailouts [ed. note: this isn’t a “bailout”] begin, and Wall Street usefully might feel a bit of gratitude, perhaps by being willing to have the wealthy foot some of the bill or to acknowledge that while its denizens were getting rich, a lot of Americans were losing jobs and health insurance. I’m waiting.

If the “wealthy” who will be “asked” to foot some of the bill had no financial interest in (i.e. shares) or transactions with Bear Stearns, why is it her responsibility to pay more for the Fed’s actions? As a response to corporate welfare not benefiting her? And what if she already acknowledges that a lot of Americans were losing jobs and health insurance? Not that acknowledging that matters to anything; why does it matter?

Believing welfare is a dangerous policy for government is a principled stance. Believing that corporate welfare is a dangerous policy for government is a stance that serves as an ideological instrument for further regulating the American economy away from the free market.

XY is not a good starting point for judgment.

Remember what I wrote yesterday:

The only thing I know for sure is that when I see the patriarchy in a debate, I stop to question the receptivity of all participants to the complete, objective set of facts informing the debate.

I left the idea of accepting principles implicit in that. At Hit & Run, Kerry Howley nails the problem with respect to prostitution and claims of patriarchy. There is too much goodness to quote any one specific point. Read the whole piece. But I like this:

None of the slut-shaming makes sense unless you assume women live to give themselves to men in their purest possible form.

Some of the comments at the Feministing entry that Ms. Howell discusses are instructive. First, the comment she references in her entry:

Exactly what is “enough” for a woman’s body? I’m politically liberal, openly feminist, and opposed to sex work precisely because of the “patriarchy, heterosexuality, legalization of sex work and the ethical treatment of sex worker” issues. Oh, yeah, and also the issue of pricing the body as a commodity to be sold in the capitalist market (“if we pay them more, then we must really value them” doesn’t make exploitation any more attractive).

To be fair, the commenter’s second paragraph states that sex work should be legal. But the point is clear, even if a woman sells the temporary sexual use of her body to another, it is exploitation. Can a person be exploited in agreement with her expressed will? This is a fancy way of arriving at the same conclusion as slut-shaming. She may do what she wants, but capitalism will ruin her because she’s not strong enough to overcome it. It’s the same circular, illogical journey to “patriarchy”.

Next, this comment:

Selling sex objectifies women and supports the patriarchal view that women are meant to service men. How do we as human beings expect to better ourselves if we can’t move beyond our violent, self serving instincts?

Women can’t sell sex to women. Men can’t sell sex to women. Men can’t sell sex to men. Got it? Only patriarchal men – never feminists – can adhere to a heteronormative, degrading worldview. Got it?

Taking it further, this comment:

But on another level, this story really sickens me, as someone who voted for Spitzer, and begs a bit of a personal question: When can we ever trust the men in our lives? Whether they are elected, or our friends, our lovers, our brothers or brother’s friends…When do we trust them to not rape us, use us, objectify our bodies, patronize our minds or otherwise disrespect us? I struggle with this story, as an example of not just an act of “indiscretion” but as Samhita points out, the larger issue of patriarchy, heterosexism in politics, abuse of power and ultimately a complete disregard for women has human beings.

That’s grotesque.

Like I said, the appearance of patriarchy suggests a narrow approach to whatever topic is being discussed. This is why I’m not a feminist. I’m a libertarian, instead¹, because I believe in equality. I believe that all people are capable of making their own decisions free from, and with understanding of, competing interests for and against their actions. Where there is oppression against free will, root it out. Where there is a poor outcome from free will, let it be². It’s not complicated.

¹ I know feminists who believe in equality of opportunity (i.e. liberty) rather than “equality” of outcome, so I do not seek to disparage feminism or imply that all feminists believe in the latter. But the feminists who do not believe in any equality that produces results different from their preferred outcomes are too off-putting. I’ll stick with my broader philosophy of libertarianism, which is based on principles rather than my subjective tastes and preferences.

² Contrary to what some people believe about libertarians, this does not mean I advocating leaving people who make bad choices to rot in the gutter. It does not meant hat I believe women who choose between selling sex and starving should be left to sell sex. Charity/assistance is not anathema to libertarianism.

House Votes to Shift the Deck Chairs

I’m hard-pressed to imagine a scenario in which simplifying the tax structure is bad. Although this legislation would only achieve it on the front-end, replacing simplification with complication elsewhere, the front-end suggestion is good.

The House of Representatives brushed aside threats of a White House veto yesterday and voted 236 to 182 in favor of an $18 billion tax package that would rescind a tax break for the five biggest oil companies and use the revenue to boost incentives for wind and solar energy and energy efficiency.

There is no reason for Congress to pick winners and losers by giving tax breaks. (Again, redirecting those breaks to favored groups is not a principled stance by Congress.) As always, Congress is horribly short-sighted and unaware of unintended consequences.

The Bush administration, Republican lawmakers and big oil companies condemned the bill, which they said would raise fuel prices for consumers, discourage oil and gas exploration in the United States and unfairly discriminate against a single industry while other manufacturers continue to enjoy tax breaks.

Of course fuel prices will go up. If I could find a reason not to be cynical, I’d ignore the probability that members of Congress want this to happen so they have a continuation of one of their favorite targets to bully in populist, economically-ignorant rants. But I’m cynical, so I think they know this. How else to explain the nonsense my local Fox affiliate bombarded me with last night in claiming that a gallon of gasoline could rise to the “outrageous” price of $4. Adjectives require more than one data point.

That the price of a gallon of gas already includes – inefficiently – the $18 billion cost of the existing tax break. Removing inefficient tax breaks would push the price of gas (closer) to its true market price. That’s problematic?

On the second point, profit alone should encourage or discourage oil and gas exploration. Let the market figure out the details. The ongoing results will also work to push for alternative energy without requiring shifting tax breaks from one group to another. And, no, arguing that one industry will get tax breaks does not justify giving them to another.

Competition is better than government fiat.

Lance Ulanoff, writing in PC Magazine, explains why he was wrong on who would win the Blu-ray/HD-DVD battle.

I finally figured out why I was so dead wrong about the HD DVD versus Blu-ray format war. I should have analyzed the sides—Sony and Toshiba—not as two countries going to war, but as opponents in a close-quarters boxing match. Had I done so, I would have properly assessed each of the technology’s assets and deficits.

Mr. Ulanoff was wrong in prognosticating consumer technology for a magazine. No harm, no foul. We all make judgments, whether we commit them to print or not, that turn out wrong. We’re all human.

Remember that every time a central planner comes along and tells us confidently why we should choose X (with money taken from taxpayers) and outlaw Y.

Empty promises are a political guarantee.

Today’s column from Charles Krauthammer examines the messianic fervor surrounding the Obama campaign and how those promises of hope and change may ultimately be empty. It’s an interesting, if not terribly original, column. I think he hurts part of his supporting argument by ignoring the difference between American and Canadian politics, as well as the difference in time periods between Sen. Obama and Prime Minister Trudeau. Still, he’s effective in raising the correct basic questions.

His conclusion:

Democrats are worried that the Obama spell will break between the time of his nomination and the time of the election, and deny them the White House. My guess is that he can maintain the spell just past Inauguration Day. After which will come the awakening. It will be rude.

I agree, because our government is set up in order to create that reality. And I hope it happens when Sen. Obama is inaugurated. It can’t happen fast enough, given the conflict-avoidance we have now in Congress to the advancing hostilities of the Bush administration.

Of course, willful partisan blindness is not unique to Obamaniacs. For Mr. Krauthammer: In the face of all the evidence from the last seven years, how much would it help if the Bush dead-enders would come to the same rude awakening he expects of Obama’s supporters?

**********

I have a minor quibble over how Mr. Krauthammer’s establishes his foundation.

There’s no better path to success than getting people to buy a free commodity. Like the genius who figured out how to get people to pay for water: bottle it (Aquafina was revealed to be nothing more than reprocessed tap water) and charge more than they pay for gasoline.

Leaving aside the silly notion that water is free as most people consume it, the entrepreneur doesn’t see bottled water as selling a commodity. The entrepreneur sells convenience.

When I’m away from home, I need not bring my own water or even my own container. If I have a dollar, I’m freed from carrying either. It also meets my preference for cold water by allowing me to buy it from refrigerated storage, an additional convenience for me, given what I’d have to do to have that when and where I want it.

I have a different example of a free commodity. When I toured Wrigley Field many years ago, I took a pinch of infield dirt. I could clearly get a pinch of dirt almost anywhere. But I wasn’t getting the free commodity. I “purchased” something other than dirt. The mythical benefit that dirt gained by virtue of being placed in a specific plot of land on Chicago’s North Side mattered to me. Value is not always in what a product is, but what’s been added to it, as judged by the subjective preference of the consumer.

If I wanted class warfare, I would’ve supported John Edwards.

Via Greg Mankiw, here’s Senator Obama on NAFTA:

… We can’t keep playing the same Washington game with the same Washington players and expect a different result – because it’s a game that ordinary Americans are losing.

It’s a game where lobbyists write check after check and Exxon turns record profits, while you pay the price at the pump, and our planet is put at risk. That’s what happens when lobbyists set the agenda, and that’s why they won’t drown out your voices anymore when I am President of the United States of America.

It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that’s why we need a President who will listen to Main Street – not just Wall Street; a President who will stand with workers not just when it’s easy, but when it’s hard.

Kip offers an excellent rebuttal on Obama’s pandering to the Wal-Mart and Exxon non-angles, so I’ll point you there.

What struck me most in this nonsense is the last line. Apart from missing the truth that we need a President who understands that the President’s primary role in the economy is to get out of the way, Senator Obama is backwards on his spin. Telling people we’re going to erect barriers to free trade in an effort to protect domestic interests is easy. Telling people we’re going to stop listening to lobbyists while indirectly telling them we’re going to start listening to a different set of lobbyists is easy. Pitting one group of people against another group of people in order to win votes is easy.

The only hard task in American politics is telling people no. I haven’t seen a politician in my lifetime capable of doing that. Barack Obama is a politician.

The free market – which we do not have – works. There are winners and losers in the short-term as change disrupts the existing manner of operations. That is inevitable, and we can discuss a minimum safety next mechanism (public or private) necessary to squeeze through the turmoil. There will also be winners and losers in the long-term, but that hinges much less on individual skills and much more on motivation to adapt. Specific losing is not inevitable in the long-term.

Pandering to this type of class warfare, which is exactly what Sen. Obama engaged in, will lead to economic turmoil as government intervention designed on fixing perceived injustices only creates different injustice. It skews market incentives. It distorts individual tastes and preferences. It encourages inefficient economic behavior. That is not leadership. To any extent that he believes pretends otherwise, Senator Obama is not running on a platform of change.