Archive for the 'Capitalism' Category

Steve Forbes on the Crisis

December 23, 2009

In his December 10, 2009 Fact and Comment column, In-Credit-Able, in Forbes Magazine, Steve Forbes clearly communicated several points worth capturing.  Here’s on on the mortgage crisis:

Government-sponsored enterprises Fannie Mae ( FNM news people ) and Freddie Mac ( FRE news people), with their implicit government guarantees, were able to totally dominate the mortgage market. They could borrow cheaply and leverage up on a scale no private company could. When they went bingeing on subprime mortgages, they ended up twisting and then destroying the housing market. The private sector was quite capable of generating players that could have performed Fannie’s and Freddie’s roles. And because they wouldn’t have had Uncle Sam’s moral-hazard safety net, they would have been infinitely more cautious, even with the Fed creating floods of liquidity and the credit rating agencies forgetting their raison d’être. Yet Congress is determined to keep these beasts alive and under government sway. Washington is also taking over the student loan market.

This is not a well understood point.  Having the implicit guarantee of the government short-circuited the prudence that would take place in a free market.  All the bright bulbs that condemn free markets for causing the crisis, don’t seem very bright to me because they not only miss the true cause of the crisis, but they blame the very thing that could have prevented it.  Removing prudence from a free market through a government action will always end badly.

Here’s some clear thinking from Steve on health care:

The prospective government de facto takeover of health care will extend Washington’s reach into the credit markets. Health insurers will be reduced to federal vassals by being forced to offer policies at prices and terms dictated by Washington. As a reward they will have first call on the credit markets, with the same sort of implicit guarantees that once so benefited Fannie and Freddie.

It’s easy to forget, businesses like insurance companies are in business to make a profit for their shareholders.  If they don’t make a profit, there’s nothing forcing them to stay in business.

Michael Medved on the Dennis Miller Show

December 20, 2009

After Lane Meyer turned me back onto the Dennis Miller Show, I went to iTunes and grabbed a bunch of a recent interviews from the Dennis Miller show.

Miller gives a great interview.

One of the interviews happened to be with another radio show host, columnist and author, Michael Medved.  Medved was plugging his new book, the Five Big Lies About American Business.

Medved hit on a concept that Miller didn’t even seem to understand and I’m not sure he understood after Medved explained about two and half times.

Medved said that many people view business people as greedy and not giving back in the way charity to communities.  But, these business people do contribute to society.  They produce goods that other people value enough to voluntarily buy.

That’s very important.

At the root of capitalism is the idea of voluntary, mutual beneficial exchange.  Mutually beneficial means both sides come out ahead.  Win-win.

By providing one side of those transactions – goods and services that people value enough to buy – they are contributing to society.  They are adding value to society.

I’ve said before that in all of the trade that has taken place between myself and Bill Gates, Bill Gates really got the short end of the stick.  Now, I don’t feel sorry for him in anyway, but the point is to recognize that he has added a great deal of value to my life.  Much of my the livelihood I’ve earned over the past couple decades were based on Bill’s products.

Medved’s point is one that we each experience every day, but very few ever recognize it.  On your next purchase, ask yourself why you purchased it.  Was it voluntary?  Why were you willing to give up some of your hard earned money for it?  What value did it bring to your life?  How much would you have willing paid for it?  How much more of it would you buy if it were cheaper?

Miller heard Medved, but he took Medved’s point to mean that the businessperson contributes to society only by providing jobs.  That’s important too.  But, the value the businessperson provides in his or her products or services was Medved’s point and it’s invisible to most people.

It shouldn’t be.

George Schultz on PBS

December 17, 2009

Frustrated with Tiger Woods banality on the major networks last night, I switched on PBS and caught a segment on the Lehrer News Hour with George Schultz discussing his belief that the financial crisis was due to the government creating a moral hazard with it’s ‘too big to fail’ bail-out nonsense.  He asks, if they’re too big to fail, why not make them smaller?  Great question.

I highly recommend watching the video.  Click here and it should be the first video listed on the left of the screen.

I nearly fell out of my chair.  Finally, some reason in media.  Good job Lehrer.  Getting warmer.

Moral hazard is the unintuitive lingo economists use to describe the idea that if someone or something is there to bail you out, you do things differently than you would if you didn’t have that backup.

If somebody knows they’ll be bailed out, they take excessive risks because they do it [take risks] on the taxpayers dollar.  The whole system is badly damaged when bailouts occur because it takes accountability out of the system and the market system depends on accountability, so we have to design a system so that anybody in it can fail.

The interviewer, who I hope was playing dumb for his audience (I think he was), asks Shultz if this is something he’s seen in the past or “is this a new phenomenon?”   This isn’t new.

This is everyday human behavior  that’s been around since the dawn of mankind.  If someone tells you they’ll pay for your retirement, you don’t save as much.  If you parents got you out of trouble when you were a kid, you got into more trouble.

Schultz explained two examples from the past to illustrate moral hazard.

First was a strike the longshoreman in 1968.  President Johnson enjoined the strike to prevent national emergency.  When Nixon took office and Schultz became his Secretary of Labor, another strike fired up, why not?  The President is going to help them get what we want to avoid a national emergency.

Schultz said Johnson was wrong and Nixon should stay out of it.  It would teach them “they have to take responsibility for their own actions,” kind of like the parent who finally learns they aren’t helping matters by soothing the temporary pain for the child who made a bad decision.  Nixon listened and the strikes died down.

Another example was with the failure Penn Central railroad.  The railroad grossly managed their affairs.  The Federal Reserve Chairman, Arthur Burns, wanted to give Penn Central a bailout to prevent a massive failure of the financial system.  Sound familiar?

In the end, he didn’t bail them out because they had retained Burns’ former law firm and a bailout would look too suspicious.  Penn Central failed.  There was no ripple effect.  The economy kept chugging.

While Schultz said a lot of good things in the interview, that wasn’t the part that fascinated me.  What fascinated me was that there was no yelling.  He wasn’t chastised for challenging today’s conventional wisdom that markets failed.  He was allowed to state his case and rationale in a calm manner and the interviewer tried to understand his points, rather than stuff him in the face with populist lay-ups.

I could imagine Matt Lauer conducting the same interview.  When Schultz said that staying out of the strikes would teach them they they need to take responsibility for their actions, I could envision Lauer cutting him off and asking him in his condescending tone something like, “but don’t you think the longshoremen need the muscle of the government behind them, because the companies have all the bargaining power?”  Or, “shouldn’t we have bailed out Penn Central?  X thousands lost their jobs.”

Then Lauer wouldn’t have given Schutlz a chance to explain that the end result of the actions that weren’t taken were far away better than what would have happened after the temporary soothing of the government action, much like the parent who finally decides its time for their kids to learn a lesson.

Tick, tick, tick, tick

December 14, 2009

Ricky Gervais, creator of the television show The Office, and Andy Rooney both lamented about how much money they have on this evening’s 60 Minutes.  Ricky said that he doesn’t work harder than a lot of other folks, but earns many multiples of their income.  He said that a large part of his success was due to luck.

I agree.  Nassim Taleb, author of the Black Swan and Fooled by Randomness, educated me on how much luck plays in the success of successful people.  As Taleb says, we always hear about the successful people but never about the just as talented people who aren’t as successful because they just haven’t had their lucky break.  Sometimes it’s as simple as meeting the right person at a party.

But, I will give Ricky something, he does have talent.  He makes me laugh.  I enjoy his humor, acting and writing.  Not to say that others aren’t as deserving, but any dollars Ricky has of mine in his pocket were well earned.

Rooney seemed bothered by having more than his share, but comforted by the fact that he doesn’t have as much as others.  He referenced the Forbes 400 list of the richest 400 people as proof.

What bothered me: C’mon guys.  Rather than feel down about being wealthy, celebrate it.  Encourage others.  Tell us how awesome it is that we live in a world where you can follow your dreams, work hard and be rewarded.  Acknowledge, as Ricky did, that there is some luck to it, but one thing is for certain – they wouldn’t have been successful if they hadn’t tried.

And, if you don’t have a dream but can still live a decent, comfortable life as a nurse, engineer, electrician or some other chosen profession, that’s awesome too.  Compared to how people lived a century ago or how people live in other parts of the world (some within a day’s drive for most of us) – we are all rock stars.  That something that we should feel good about it.

We should be asking ourselves why that is.  What are the root causes that allow each of us live better than royalty in the past in exchange for an honest day’s work?  We should want more of that.

They showed an 80s video of Ricky taking a stab at the music business.  Apparently it didn’t work out.  He wasn’t bothered by it.  He seemed to recognize that all things don’t work out, but trying matters.

Bad Socialism Comparison

November 1, 2009

A writer of a letter to the editor in a local newspaper makes a common mistake in equating our public education system with socialism and with the proposed changes in health care:

While attending parent-teacher conferences for my sons recently, I marveled at the dedication of their professionally trained teachers. I considered all that my kids had learned, amazed at their progress. I thought about how convenient it was to have a bus that picks them up in front of our house to take them to school. I pondered the school lunch program and how it also provides free and reduced-price meals for low-income children.

Having mandated free, quality public education has been key to keeping the United States a major world power. Now I understand that some school districts have had challenges. But most deliver a quality product.

I then thought about the raging health care debate going on today. If public education were just now being proposed, would it also be shouted down in defeat as a “socialist” concept?

How is education a right but health care is not? It just doesn’t make sense to me.

I’ve seen this mistake made numerous times with other services such as fire, police and sewers.  It usually goes something like this letter, “the Police in my area do a good job, socialism isn’t so bad.”

There are several problems with these comparisons.  The main problem is that none of these things – public education, fire, police and sewers – are true socialist models.   It’s an apples-to-oranges comparison.P

People putting forth such arguments assume these services are socialist because they are funded through taxes and controlled by a government.  What such people miss is that socialism is the ownership and control through a centralized government, or one government in a country- the Federal government.

That’s not true for these services.  They are owned and controlled by many, many local government-like groups that are checked and balanced by other government groups.

Consider public education.  In my home metro area, we have dozens, if not hundreds, of school districts that provide public education using the property tax-Board of Education model.  Each of these school districts, while considered a governmental body, are separate from other city, county and state governmental bodies.

So what?  Why is this important?  It’s important because this system leaves a considerable amount of important competition and checks and balances in place that a true socialist system would remove.  If I don’t think the school district that I live in is good quality, I can move to a better one.

My parents made that decision when I was in third grade.  They moved primarily to get my me and my brother into what they considered a better district.  When I purchased my home, I chose a community with a good quality school district for my children.  Good school districts attract families, bad school districts repel them.

What would it be like if we didn’t have that choice?  What if all schools were run by the Federal government?  Then, if your local schools weren’t that great, you wouldn’t have much choice.

In addition, controlling school districts bodies separate from other governments brings in another level of check and balance.  Just consider one example.  What if the police and schools were run by the same agency?  Think about the things that might happen.  In fact, we’ve seen this very thing happen on college campuses with campus police forces.  Since the same group of people control the schools and police, some crimes go unreported and unpunished.  Having police and schools controlled by separate entities reduces this risk.

So, not only are there many local school districts which keeps competition in the equation, but there are also a number of other checks and balances that could go away if a true socialist (i.e. centrally run) model were adopted.

What’s Your Voting Privilege Worth?

October 7, 2009

John Stossel’s column, Transfer Machine, is recommended reading.  Rarely do we think of the misaligned incentives created by transferring wealth between citizens using political power.  Stossel sums it up nicely.  First with a quote from George Bernard Shaw:

The government who robs Peter to pay Paul can always depend on the support of Paul,” George Bernard Shaw once said.

The other way to say this is “It’s like two wolves and sheep voting on what’s for dinner.”

Then Stossel adds this startling paragraph:

The theory of government I was taught says that government provides benefits, primarily security, to the entire population. In return we pay taxes. But lately the government has been a distributor of special privileges, taking money from some and giving it to others. America is now about evenly split between those who pay income taxes and those who consume them.

Suddenly, the two-wolves scenario sounds plausible.  What incentive does someone who receives assistance from government have to vote for people who may take that away?  Better yet, what incentive does the sheep have to stay?

It’ll be interesting to see how this plays out.  The U.S. government has been growing over the last century at the hands of special interests.  Perhaps, when taxpayers become a special interest, by being in the minority, they’ll actually have more power.

Another interesting thought, should you lose your privilege to vote if you accept direct government assistance?  In the private sector, having an economic stake in something you can influence politically is called a conflict of interest.

Of course, this would never fly politically (as in correctness) or logistically.  Would government assistance include Social Security and Medicare, for example?  But, I still find it interesting to think about.  The mere suggestion makes one think about how much they value their voting privileges.

It’s the Thought That Counts

October 2, 2009

This is a CLASSIC from Milton and Rose Friedmans’ Free to Choose that should be remembered when thinking about policy at all levels, from government programs to holiday gift giving.

Today all of us are paying out of one pocket to put money–or something money could buy–in the other.

A simple classification of spending shows why that process leads to undesirable results.  When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

[Had to modify the look of the table for the blog]

On Whom Spent:

Whose Money ¦You ¦Someone Else

Yours                               I                          II

Someone Else’s           III                       IV

Category I in the table refers to your spending your own money on yourself.  You shop in a supermarket, for example.  You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else.  You shop for Christmas or birthday presents.  You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient.  You will, of course, want to get something the recipient will like–provided that it also makes the right impression and does not take too much time and effort. (If indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself–lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person.  You are paying for someone else’s lunch out of an expense account.  You have little incentive either to economize or to try to get your guest the lunch that he will value most highly.  However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III–for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV–for example, public housing; except that Category IV programs share one feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

This analysis of the incentives underpinning the four different ways we can spend money touches so much, but we rarely discuss it.  This is a root cause to many problems.  We act as if these different incentives across the four categories of spending do not exist or that we can somehow fix it because its driven by evil things like greed, not realizing that it’s not evil.  It just the way things are.  I simply can’t make as a good of a decision as you, consistently, about what you value.

Consider the profit-motive, which is bandied by the Right as why capitalism works and the Left as the source of all things evil in capitalism.  The word profit has become a loaded word, which degenerates discussion about the profit-motive into “talking past eachother.”  Each side really has in a mind a slightly different definition when discussing it, which is rarely recognized or reconciled by both sides.

Perhaps we should refere to the profit motive as the Category I-motive or ownership-motive, to remove the stigma and emotion attached to profitThe profit motive is really the ownership motive. 

When we have to directly live with the consequences of our decisions (Category I spending), we own that decision.  That’s what causes us to take such care to ensure we economize and get value for our money.  That’s also why we judge Category I activity the true outcome of the decision.

Contrast that to the Category IV spending.  We don’t have to directly live with the consequences of that spending, so we don’t own that decision.  That’s why Category IV spending is largely judged on the intentions of that spending, not the outcome (“It’s the thought that counts!).  Think about how much spending in political programs (all) is justified on what it is intended to accomplish, rather than what it really accomplishes.  How many times have you heard–or said–“we just can’t let (fill in the blank with your favorite cause here) happen,” as justification for a government program, intervention or mandate?

Obvious Questions

October 1, 2009

Kudos to CBSNews.com for asking Michael Moore an obvious question:

Critics would say he’s [Moore] been very successful under a capitalist system.  How would you justify making a movie where you paint capitalism as evil?

But, demerits to CBSNews.com for not asking the obvious follow-up : “Huh?”

Well, capitalism did nothing for me, starting with my first film.

You know, I had to pretty much beg, borrow and steal.  The system is not set up to help somebody from the working class make a movie like this and get the truth out there.

n fact, in Fahrenheit 9/11 if you remember, capitalism, the Disney Corporation, tried to kill that film–tried to make it so that people couldn’t see it.  My book Stupid White Men–Harper Collins tried to kill that book so that people couldn’t see it. It’s only because I put the light of day on it and told people what was going on did people get the chance to see these things.

Look, you know, I mean, I make documentary films.  So, clearly, I’m not loaded in the way you described. But I do well, obviously because my films do well.

So, capitalism didn’t help him, but he “obviously does well because his films do well”?  Isn’t that capitalism?

A Few Good Columns

September 30, 2009

The first from John Stossel.  In it, he links to and quotes from a blog post from Mario Rizzo.  One interesting quote regarding the stimulus package:

At the outset of the Obama Administration, as Greg Mankiw reminds us, their economists laid out a series of predictions about where the unemployment rate would be with the stimulus package and without it. Currently, the economy is doing worse than their predictions of unemployment without the stimulus and, of course, much worse than the predictions with stimulus.

The stimulus apologists are ignoring the original prediction based on a model. By that prediction the stimulus is doing harm.

History shows us that several financial crises in the U.S. healed on their own rather quickly prior compared to financial crises after the 1930s, when it became en vogue for government to try and right the ship.

Another good column from Walter Williams, Is Disagreement with Obama Racism?

Race is no longer the problem that it once was. That doesn’t mean there are not white and black bigots and that every vestige of racial discrimination has been eliminated. What little racial discrimination remains is nowhere near the insurmountable barrier it once was. For the most part, white bigots are no longer respected among whites and I look forward to the day when black bigots are no longer respected among blacks.

When one says that race is no longer the problem it once was, it is not the same as saying that there are not major problems that confront a large segment of the black population. Grossly fraudulent education is a major problem but it has nothing to do with racial discrimination as evidenced by the fact that the worse education received is in the very cities where blacks dominate the political structure. Crime is a major problem but it has nothing to do with racial discrimination, particularly in light of the fact that blacks commit most of the violent crime in America and well over 90 percent of their victims are black. The fact of a 70 percent illegitimacy rate and only 35 percent of black children raised in two-parent homes is a major problem but it has nothing to do with racial discrimination.

Americans should disavow and not fall prey to the racial rope-a-dope being played on us by the nation’s race hustlers.

Public Option

August 31, 2009

For those in favor of a public option (i.e. government provided) in health care, I wonder what makes them think the government will be able to manage better than they have proven in the past.

Some point to the military as example of a well-managed government organization.  Others have used the Post Office, though even President Obama has pointed out that it has its troubles.  I’m surprised nobody has mentioned public libraries.  Public libraries offer free loaners on books and other media and access to the Internet.  I really like my public library (though I would appreciate Sunday hours).  And, even with public libraries where you can borrow books for free, private booksellers, such as Amazon.com, still sell lots of books.

But, I see several problems with these examples that someone who thinks beyond stage one (from Thomas Sowell’s book, Applied Economics Thinking Beyond Stage One) should be able to understand.

First, I don’t know what I’m missing.

The presence of a postal service or library that “isn’t that bad” doesn’t tell me whether a privately run option to these could be better.

Same for the library.  While I’m happy with my library service, who knows what a privately run library could offer?  It’s hard to imagine because you never can predict what innovation or service enhancement will resonate with users (i.e. add value), but I might imagine that a private library might look something like Blockbuster, Netflix, RedBox or Amazon’s Kindle.

Second, there are some differences in the incentive structures in these organizations that might have something to do with their outcomes and we should carefully evaluate these differences when making comparisons to something like health care.

Consider the military.  The military does not provide an individualized service to customers or patients.  It defends the country and wins or loses conflicts.  Further, it has very clear, positive and negative feedback loops.  In other words, its very clear whether the military met its objectives successfully or not.  At the high level (what economists call macro) it either wins conflicts or loses.  On the micro level , it either executes well and saves lives or poorly and loses lives.  Responding to these immediate, direct and clear feedback loops are important to the success of the military.   But, even with that, many from military backgrounds  readily admit that there is much room for improvement in the way the military is managed.

Now consider the post office and public libraries.  Both do serve customers, so in this sense they are better comparisons to use for health care.  But, we still need to think about what’s different.

One difference in the post office is that the majority of its costs have are covered by its users in the postage rates, also known as first party payments.  This is an important, positive-reinforcing loop.  One that’s being heard loud and clear by post office management in their bottom line at present.

In health care, most plans I hear about are based on third party payments – that is taxpayer funds being routed to medical providers via some government bureaucracy rather than paid by patients.  Replacing the positive reinforcement of that first party feedback loop is dangerous.

So, that leaves public libraries.   Public libraries serve individuals (library patrons) and operate primarily on third party payments (usually property tax passed through local government to the operating group).

So, at first blush, public libraries may offer the best comparison to a proposed health care system.  Or maybe not.  There’s one important difference between libraries and a national health care system.  The library system is not nationalized.  It’s funded and operated at a local level and there are many library groups across the country.   This creates several important distinctions.

First, it allows the local libraries autonomy to best meet the needs of their communities within their budget. Second, it allows local citizens to evaluate whether the library is worth their tax dollars or not.  Third,  autonomous libraries provide a good bottoms-up laboratories for innovation, which is the best kind.   Fourth, libraries still compete with

And, when one of these laboratories hits on something worthwhile, others can adopt.  Consider if the library system were nationalized.  Rather than bottoms-up laboratories, we’d have top-down rule books. Who’s to say the one’s writing the rules know anything?  Innovation frequently happens by accident and rarely comes from the top.  This bottoms up nature of innovation is why larger companies find it difficult to innovate while young upstarts often take their cake.

To recap, the comparisons made to convince me that national health care is a good idea don’t work for me.  The military doesn’t serve end users and it is governed by clear feedback loops.  The post office is primarily supported by first party payments, which gives it clear feedback loops.   Libraries, while third party funded, are funded and managed at a local level and with ample competition, giving it several positive feedback loops.