The Equanimist

Invest in US

Posted in Economics, Economy, Political Economy, Politics, Public Policy, Socioeconomy by equanimist on August 16, 2010

I

Where do stewards who hoard currency (incentivization to put people to productive work) think that average people are going to get money?

Where do average people get money? Can they print it?

How does flow and use of money (economic engine) work? Can socioeconomy (presently) function without some kind of currency actively cycling through it?

The single most pressing issue facing the US remains a lack of US jobs—as opposed to unemployment, which concept is clouded by unemployment insurance: jobless aren’t exactly unemployed for so long as they receive money from the government to pay bills but in a sort of limbo between employment and unemployment.

While fundamental causes of hoarded currency may include utter lack of perception/understanding of socioeconomic principles (including civic responsibility and patriotism as same apply to the wider world) combined with inability among people vying for acceptance (and conditioned to think one way or another) to “put two and two together and get four” on their own when they are being told it is ten, the proximal cause of unemployment is hoarded (misused) currency. This can and must be quickly addressed.

II

Currency (so-called “paper money” measured in dollars and cents) is not commodity but tool. That US people were able to produce with credit (pseudo-currency) more than they could afford with circulating (real) currency is testament to the fact that there is not enough real currency circulating through the economy.

The US did not furnish too many jobs. US people did not live beyond their means, but credit to supplement available incentivization provides evidence of irrational distribution of paper money, which is disproportionately concentrated in the hands of a few who do not use it.

Lack of current in currency can be the result of a confluence of factors including too-high pay packages at the top combined with too-low investment by top earners and businesses, too-low taxes on top earners and wealthy businesses, too-low wages at the bottom, and too-high prices for goods and services (in this case, the direct result of pull from the top as evidenced by increasingly unequal wages).

That the modern steward class would sooner allow US infrastructure to decay than make currency available is testament to a radical change in attitude of US stewardship that took place over several decades.

III

Why does it bother currency-hoarders that US masses buy the very iPods and PS3s and HD TVs that keep them entertained (and otherwise oblivious to a changing power structure)? Surely it must bother them because they are not doling out the money with which to make future purchases, or, they are but they are not including enough to meet other expenses.

Why does it bother them that average US people are well educated in order to be more productive, better-quality servants? Surely it must bother them because they and their representatives have cut and continue to cut education spending. Isn’t high pay supposed to attract the best and the brightest? Aren’t small class sizes supposed to lead to better-educated students? Hasn’t the US system suffered by most metrics?

Why does it bother these hoarders that average people can afford their own homes? Surely, average people must live some place.

Past US stewards (i.e., our progenitors) might have been thrilled by the extraordinary accomplishments that we made as a society. Yet, their children revolted against the socioeconomy that made these possible. The “greatest generation”, spoiled (perhaps) by two terrible wars, bred a generation (the current steward class) that is preponderantly fearful, callous and avaricious beyond reason. These compulsive people are committed to a “zero-sum-game”, “tough-love” vision of life incompatible with civil society because it undermines systems that civilize.

Modern US stewards take indiscriminately from people whom they see as adversaries (i.e., everybody else) in order to hoard, while they would undermine with an army of lawyers and lobbyists the institutions that make possible US socioeconomy and gamble that US middle class will accept the change passively.

Worse, modern US stewards fail to understand the risk—that we are what we are—not what we would wish to be. If US stewards act like Mexican, Indian or Chinese (or pre-war US) stewards then, all else being equal, they’ll recreate Mexico, India or China (or pre-war America). Consider, for example, Mexico is so fantastic that its citizens streamed across the US-Mexican border at great personal risk to be illegal immigrants and all that that entails.

There is nothing in the last few hundred years of western history that suggests that average western people will suffer degradation indefinitely while their stewards enjoy ever-increasing wealth. The result of wealth consolidation and deficient current then, instead of safety, is likely to be ruin (preceded only by volatility and risk).

IV

Consolidated wealth must be wound down to a sustainable level and invested at home.

It is no longer enough to stimulate US demand. US people must spend more on US goods and services or jobs won’t come back. To that end, average US people need more real money to spend and strong incentives to spend it domestically. Further, it will not be enough to furnish more credit for the purpose: this crisis is predicated upon credit in place of currency.

The Credit Gamble [which seems something like, “If we (a minority of stewards) make credit available and show what it can do then the broader steward class (the same that has been consolidating money) will be forced to pay when the rent comes due because average people will be unable to do so”], this gamble did not pay off.

Modern US “stewards” do not tend to see themselves as such but see themselves as adversaries of average people and popular government: aristocrats. These aristocrats see only how fat their wallets get, and, thinking that they are successful just as long at they make more money to hoard, they continue to siphon the lifeblood (fiat currency) off our socioeconomic system.

Doubling down would be foolish.

V

To suggest or, worse, believe that people who have and businesses that have consolidated wealth will spend (in an “uncertain environment”) more than they make (that is, that they will suddenly spend down their savings to reinvigorate the US economy) because their taxes are lowered is absurd and would not be worthy of consideration except that it is suggested by those who view success in terms of hoarded currency and their surrogates.

If the US did not attract business sufficient to employ US people and jobs were vanishing for that reason then tax cuts could be used to attract business and restore jobs. But business attraction is not now relevant to US job creation.

There are plenty of businesses headquartered and/or doing business in the US. Despite tax cuts, it will remain cheaper to produce goods and services in China and India and Mexico. Believing the bottom line the single most important function of business, US businesses will continue to outsource absent some incentive to produce goods and services in the US. The “savings” that outsourcing yields will continue to go to a small few who have steadily awarded themselves higher pay and severance packages at the expense of “working” people absent some force acting against them. And, jobs will not come back as the result of tax cuts.

Instead, taxes should be raised substantially on top earners. Further, tax law should be modified to tax extraordinary wealth that is not invested in projects that put people to work. Using this money to create US jobs will begin to make up the slack in currency circulation without devaluing the dollar.

Obviously, it is difficult for elected US officials, increasingly pageant winners and right-hand men—not stewards per se, to distribute money to the middle class, which will spend it wisely (just so long as they spend it domestically). But, the US government must also pressure wealthy businesses to expand domestically and pay more in wages (in a deflationary environment) and simultaneously take money from same wealthy businesses (i.e., stewards who own/manage same) to distribute to US middle class.

[One might argue that businesspeople borrowed from future growth to buoy their own incomes: by beggaring their countryman and leaving same laden with debt, while packing away the higher yield of outsourcing—not putting it to use abroad to create foreign middle classes or distributing it at home to sustain their own way of life but always “leaving it to others” to do these things, these businesspeople ensured that the US would lose jobs, spend down its capital, accumulate debt and ultimately collapse like a house of cards when the cheap money stopped flowing.]

VI

High taxes, however, are not sufficient solution.

The wake of a staggering Chinese trade surplus and Buy Chinese incentives (borrowed, perhaps, from decades-long success of “Buy American” programs) provide another opportunity to institute an Invest in US program. Unfortunately, it will be a harder sell than it was a few years ago when inferior products seemed a plague, but it should look the same:

1.) All containers entering US ports should be thoroughly inspected. Inspection costs should be paid by the importers themselves—not US middle class.

It must be within a country’s purview to verify that contents of shipping containers are as listed and meet well-defined standards; and, if one genuinely wants to stop crimes including everything from trafficking in guns and human slaves to terrorism, it is a wise policy.

Moreover, it would remove an artificially low barrier to outsourcing and perforce make same more expensive absent tariffs. Special relationships with countries whose standards, wages and security mirror our own should be recreated.

2.) Illegal immigration should be stanched. While not as big a population as that of China or India (or China and India combined) the illegal population represents a substantial group that will work for extremely low wages and, as such, negatively impact wage growth.

While the US is and should remain a melting pot, a society is not likely to absorb a group twenty-times its size and maintain the status quo.

Let us be quite clear, while there are US policies that have done disservice, the sum total US policies have done great service to US people and foreign people all over the world.

Adding, in too rapid fashion, too many people of any nationality, religion or ethnicity that do not support core US principles threatens the US socioeconomy because it is likely to tip the balance away from core positions.

3.) Insourcing should be dramatically curtailed. Our institutions have not expanded to include more than 6 billion people vying for positions. In order to rebuild US capital, US positions must be substantially limited to US citizens.

The US cannot employ, educate, feed and etc. the whole world. The US can employ, educate and feed some foreign people and lead by example.

4.) Taxes should be raised on corporations and wealthy; and, in the meantime, money should be printed to replace credit and invested in projects with long term benefit, esp. infrastructure, education, defense and clean-energy technologies.

It should go without saying: Infrastructure makes every daily pursuit possible. Safe neighborhoods, reliable power lines, running water, driveable roads, sound bridges and so on and so forth are indispensable to civil society and high productivity. Of course, to the extent that these suffer civil society and productivity must also suffer.

But, civil society and productivity also suffer when children are poorly socialized and educated. Successive generations must be taught the core principles, techniques and skills—the wisdom upon which success is predicated or be all but guaranteed a darker tomorrow.

History makes clear that the world is navigating treacherous waters. And, the US is in a weakened state. Cuts in defense spending could not be timed more inappropriately than now. While new bombers and manned aircraft might be put on hold, the US would be foolish to divert money from myriad technologies as diverse as unmanned aerial vehicles and energy production that will ensure US hegemony.

The US cannot stand up for freedom and democracy and lie prostrate at the feet of foreign despots. Clean, cheap energy technologies sufficient to US demand will ensure our independence, while creating hundreds of thousands of jobs and products to export. Stewards should hasten such technological advances while putting people back to work.

VII

The positions outlined here are in keeping with a long US history of independence, freedom and equality under a strong central government.

Make no mistake, while it is indeed possible that the US has changed so that we will welcome socialism or peaceably abide poverty and starvation it seems unlikely.

Fundamental change no more exotic or painful than restoration of flow of currency can change the tide. If we hope to avoid the real dangers on our present course, we will make the change.

There is no magic place where money doesn’t flow but people prosper.

Part III.C. Regarding US Unemployment

1. ‘The proof is in the pudding’

Relatively-high, steady unemployment is not compatible with civil society when a relatively acquisitive, motivated people confront social programs that only reinforce hardship and success.

Now, it appears that there are more US Americans who would work than there are US jobs to do. This is not the case. The US people need challenging, satisfying work now more than ever because they are “on edge” and strapped for cash. Moreover, innovation will be product of a lot of hard work.

Notwithstanding that recent “boom” times were characterized by relatively high US unemployment (see Fig. 1 below for data on the US Unemployment Rate since 1948) there must be work for the unemployed to do.

2.

Human-capacity utilization is being slashed instead. It would appear that the steward class does not see high employment as a responsibility of US stewardship. US pundits wonder aloud, who’s at fault for high unemployment?

Many so-called conservatives cry, “People refuse to work! Fat, lazy, beer-drinking, out-of workers – socialists living on the fat of the land are the problem. It’s un-American.”

The left is flabbergasted. “Now, now… It’s the corporate fat cats,” they tell the middle class, as if they had taken vows of poverty. “It’s CEOs and corporate lobbyists, who laze about smoke-filled rooms, while you build America.”

3. ‘Finger-pointing’ (AKA, Proximal cause)

Of course, an individual must be incentivized and make a choice to work. Individuals do not incentivize themselves. Who is responsible to incentivize workers? Are they doing that or not?

Data on US income inequality clearly show diverging pay scales of small-and-shrinking proportion at the bottom and large-and-growing proportion at the top. That is, it looks like the topmost tier is and has been consolidating wealth and removing some portion of monetary incentives for decades.

Further, relatively “high-paying” (middle-class) jobs are disappearing to foreign nations where they can be done more cheaply. In place of such jobs, so-called “McJobs” have appeared. Many find such work neither satisfying nor worthwhile.

But, now, all jobs are coming under the axe as stewards and managers ‘restructure’ to ‘maximize efficiencies and profits’.

These data strongly suggest that US workers are and have been losing battles for middle-class wages and satisfying jobs. Individuals within the steward class that makes policy and those under them, who manage finance and companies, and those under them, who manage divisions, and so forth must be accountable because stewards create jobs, set pay scales, hire and fire.

However, in that stewards want to live a little bit better than they have at any instant (e.g., now) are they not just like their compatriots? They’re just a little better at getting what they want.

4. ‘The meat of the matter’ (AKA, Distal cause)

What an individual feels and believes and can accomplish for itself has steadily gained importance in the western world, esp. the US. Now, it appears that the individual matters more than societal concerns, of which we admit fewer and fewer over time. The result is a new west where, much like the old west, it’s every man for himself. A middle-class democracy cannot exist indefinitely in such a state.

Some examples stand out from the pack. Bernard Madoff and Allen Stanford clearly take first and second place, respectively. Others fade into the woodwork. If, for example, we assume that Ben Bernanke had compelling evidence to suggest that the Merrill deal must go through and pressed Ken Lewis to make the deal, does it matter if Mr. Bernanke did what he believed was best for the country in pressing Mr. Lewis to complete the deal? It must! Can Mr. Bernanke have violated US law if he did what a preponderance of evidence suggested was best for the country despite the fact that a relatively small group of risk takers suffered a financial setback, or, he might have violated the terms of an imperfect law? Which is more important, an individual or the country? The country or the law?

The good of a country does not change over time. Our understanding of it does, and so, our laws change to better approximate the national interest because a country’s laws exist first and foremost to effect the national interest! As such, absent foreseeable, avoidable and/or greater wrong, it hardly seems an act can violate law if it is reasonable, appears the best of alternatives and is intended to effect national prosperity.

Yet, secular, self-centered individuals now want and believe that they can do whatever they like within the law without repercussion (because “it’s a free country”, virtually everything not specifically addressed by current law). The law is become sacrosanct. The law is become an offensive weapon.

This may be par for the course among third-world ruling classes, but, it cannot work within the context of a middle-class democracy precisely because it obviates the possibility of a middle class: When one societal group is so inclined, capable of outmaneuvering another group and consistently allowed to take advantage of same, the long term result must be oppression or eradication of the weaker group, here, the US middle class.

Approaching an extreme in the US, when a plurality of individuals threatens civil society, self-centered and selfish individuals give only cursory thought to others – rarely more than is absolutely necessary – and, generally, persuade themselves of the rightness and goodness of their own interests: freewill, as a philosophy, does not allow the possibility of responsibility for actions that do not violate the law but only actions that violate the law. Believing thus absolves law-abiding individuals of guilt and, in so doing, sets in motion a positive and pleasurable feedback loop. Moreover (in free countries like the US) coupled, extreme visions of freewill and individuality effectually subvert the justice system: laws addressing specific actions cannot possibly foresee infinitely-diverse bad actions, and, because we do not admit an enforceable “spirit of the law”, bad actors are free to act unless there’s a law that prevents them from doing so.

When bad actors act in the self-interests described, while they fight to keep the law off their bad actions and achieve success as a result, they attract and make converts of others.

The result is a socioeconomy so corrupt that is does not see itself as corrupt. Corruption is become business as usual. And, rising unemployment over time (as illustrated below) is just a symptom.

Fig. 1, Unemployment Rate 1948 Jan – 2009 Aug, based on unemployment rate data by month over a period 1948 Jan thru 2009 Aug obtained from the Bureau of Labor Statistics. Red line is linear regression calculated by Microsoft Excel. Upper (green) and lower (yellow) brackets highlight amplitude of swings.

The unemployment rate has clearly trended up over this time period (from approx. 5% to approx. 6.3% – a rise of approx. 25% in the portion of the population that is unemployed at any instant). More disturbing, however, is the change in unemployment-cycle amplitude in the postwar period, illustrated by the brackets. The highs and lows seem to be diverging. But, finally, the troughs are getting higher. During “boom” times US unemployment is staying higher.

5. The positive feedback loop in action

I can make more money if I pay less. I want to make more money because I want and believe that I deserve more. Nobody is stopping me from employing fewer people. And, I can employ them at a lower rate.

Since I don’t believe that I have any responsibility to employ people, and, I have no responsibility to my fellow countrymen, I will find ways to increase productivity with fewer workers and pay them less.

…I have done so, and, I have kept more money. I live a slightly more lavish lifestyle and have consolidated more wealth. But, I know I can live a more lavish lifestyle and consolidate more wealth if I can further increase worker productivity while keeping money in my pocket. Moreover, I can pay even less if I outsource relatively “high-paying”, middle-class jobs to “business-friendly” nations.

I will invest in technologies that eliminate the worker and outsource middle-class jobs to lower-class countries where I will pay middle-class workers according to lower-class rates.

…Success!

Other people see what I am doing. They are impressed. And, they do it, too.

The unemployment rate ticks ever up. Some hypothesize that the natural unemployment rate might not be even 5% but something higher. And, so forth and so on.

Of course, the principles that underlie this logic extend beyond employment to all facets of human endeavor.

6. A curious justification: human rights

While the justification described may be sufficient to have set the loop in motion, still, present justification for actions that negatively impact the domestic socioeconomy jibe nicely with “progressive-”liberal ideology. Specifically, so-called “bleeding hearts” would put an end to injustice in the world. Irrespective merit-of-the argument, the argument supports substantial US investment in foreign countries: it takes a lot of money to elevate a poor population from poverty into the middle class.

Will to furnish that money never existed in the US steward class. (The same people have used profits of outsourcing and insourcing to pay themselves more.) Yet, the plan was clearly lucrative over the short term.

Jobs were moved overseas, and, money that would have lined US-middle-class pockets went with them. This would have been fine and could have been sufficient to raise many poor foreigners out of poverty if it had been temporary. But, wages of poor foreign workers did not rapidly approach US-middle-class wages, and, adequate foreign demand would not develop. (It seems plausible that many foreign populations are generally less acquisitive than the US population and will, as such, tolerate a low standard of living that US people will not. Further, foreign workers who might pressure foreign stewards routinely migrate to the US leaving a vanishingly motivated people behind. Thus, foreign stewards might easily fail to see the benefit of higher domestic standards of living.)

While outsourcing and insourcing effectively grew the US workforce out of all proportion to the number of available US jobs and the same globalization replaced US workers with cheaper foreign workers, US-middle-class income continued to decline. Moreover, the goods that the US middle class consumed and the services with which it was furnished originated overseas with greater frequency. This further diminished US capacity for demand.

When the US middle class could no longer afford the effort to spread US-middle-class democracy in a hostile world, US stewards doubled down. In order to pay for the plan in the face of diverging pay scales, rising US unemployment and relatively weak foreign demand, the bankrupt US middle class was furnished credit that US consumers were eager to use. But, now the plan must work because there was never any hope that US-middle-class people could repay the staggering debt they would accrue if foreign wages did not rise to US-middle-class levels, and, outsourced jobs never “returned” home. Further, the US steward class was ill-prepared to cover its losses and never intended to do so.

We now know it was a bad bet. The US middle-class could not prop up poor foreigners whose steward classes would not adapt to the demands of progressive-liberal US ambitions. The US middle class was gambled into servitude.

But, the US people didn’t “come to America” to be poor, indentured servants. Just the opposite. “No taxation without representation!” they cry. “Live free or die!” The US has always attracted relatively acquisitive and extremely motivated people who are looking for a “better” life, revolutionaries. Moreover, many tens or hundreds of millions of US Americans have already lived some version of the “American dream”. Taken together, these facts strongly suggest that the US middle class, without anyplace to go, will revolt.

It must be time to retrench.

7. Solution to the example, unemployment (AKA, “It’s past time to get tough”)

The US steward class must cover its losses and, then, institute the changes that must be made in order to regain standing in the world and maintain a vibrant civil society:

(1) (a) Raise minimum wage for all those emancipated and/or adult US individuals to some “relatively-high”, middle-class level (based not on a USD amount but some fraction of the upper wage); and (b) guarantee unemployment benefits (at some significantly lower, “poverty” rate) to every citizen whose household income is below the minimum-wage figure per capita.

(2) Guarantee health coverage to every US American.

(3) (a) Stop trade with countries that refuse to adopt similar policies; (b) severely limit immigration from same; and (c) prevent domestic entities and other entities based in trading-partner countries from outsourcing services to and developing products in non-trading-partner countries.

8. How it works

The unemployed cannot pay their own unemployment benefits, let alone medical bills. And, under this plan, there is significant benefit to work. Still, the plan is ineffectual if US business entities can get visas for cheap labor and employ cheap labor abroad. So, the law must be reformed to stanch the flood of cheap foreign labor.

Thus, under this plan, US employers are effectively compelled to employ every emancipated or adult US citizen and end the deadly trend to mass poverty that results when the steward class does not rightly estimate its relationship to a civil, acquisitive and motivated middle class. At the same time, the unemployed have strong incentive to work to stay out of poverty.

Which is better for the employer: an employee who does nothing and gets paid, or an employee who adds to net income?

Domestic employers will bend over backward attempting to make money off of those whom they have to pay (i.e., US Americans) and the number of US jobs will expand out of proportion to the number of US workers. Otherwise, US companies might (1) move to the third world, where they need not pay or (2) regress (i.e., forfeit high quality of life). In the event that more than a very few choose (1) they’ll have either to change the third world, or, as in (2) they won’t live well because demand for their goods will be much lower and, as a result, their incomes will drop substantially while they will face a hostile population in relatively wild lands. That is, there isn’t enough room at the top tier of the third world to absorb a mass exodus of top-tier first-worlders, and, it seems unlikely that the steward class would choose to recreate the third world at home.

For the same reason that companies will not relocate en masse, the US people will find it better to enjoy the comforts that a little work brings. It appeals to virtually everybody to work for “something better” because it’s human nature (as will be explored in some later part).

In any case, the US will retain advantages that it has always had: diverse, creative, motivated US people working within the framework of the US constitution and (now centuries-old) institutions. While restored domestic-demand capacity will grow the socioeconomy, the kind of work that US people have done historically will breed continued innovation and further progress.

That this plan is good for every US American and the citizens of all US trading partners is self-apparent. But, further, it is good for citizens of our non-trading partners because it provides the strongest incentive to make progress on issues that plague these countries (e.g., income inequality and human rights). They will have no choice but to commit to change or squander US investment. Now that these countries have experienced growth and higher living standards associated with US-middle-class investment, it should be hard to go back to the old ways.

A sliver of a slice of US American and foreign stewards will understand that it means an end to tyranny and, because they cannot see how that benefits them (either because they actually cannot understand or because it flies in the face of the supreme belief that their interests are more important than their nations’) the plan will not suffice to persuade them that the next phase in the evolution of civil society will afford a higher quality of life for all.

They will fight it tooth and nail – not because it’s a bad plan (bad for the US and US-trading partners) but because it is a good plan that is good for the US, US-trading partners and the world; and, to their way of thinking (which equates personal benefit with personal wealth) that’s bad for them.

REPOST: Part I. "It’s Just Business"

While I continue to conceive this ongoing untitled series (among other things) I think this — a week during which banks (e.g., Goldman Sachs and JPMorgan Chase) reported extraordinary profits while ordinary citizens, who footed the bill, are jobless and homeless — this is a perfect time to repost Part I. “It’s Just Business”.


How does a businessperson* (often a salesperson in this capacity) “make” money? In the simplest sense, s/he buys or finances or otherwise brings goods and services (that somebody/-ies designed/engineered/whathaveyou and produced or otherwise will either provide or facilitate – sometimes his or her own goods or services) to market where s/he peddles them to the consumer. To the extent that s/he profits off this ingenuity and productivity or other work s/he makes more or less money.

Of course, design/engineering/whathaveyou/production &c. cost money, and, materials have inherent cost. For the sake of argument, assume that the total cost of the product is its worth irrespective remuneration owed a businessperson (or businesspeople) in his or her (or their) managing/marketing/sales capacity. In a freemarket, to the extent that a businessperson can keep total production or service costs down, convince a consumer to pay a higher price above a product’s worth and to buy more of same s/he makes more money. That is, businesspeople (often paid bonuses/commissions/whathaveyou) are incentivized to devise techniques to sell products and services at increasingly high profit margins above their worth and to do so en masse whenever possible.

By nature, this system cannot make anybody rich if everybody does it so the rules are such that it is very difficult (generally impossible for most people) to pull off. (If, for example, few can understand codified techniques and fewer still can afford the training and fewer still will be able to do both and fewer still will be able to apply the training skillfully, we’ve already narrowed down the population of potential businesspeople a great deal; and, in this way, everybody cannot do it). Nor can it work if people are given to know that the worth of the products that some businessperson is peddling is less than the price that they are being asked to pay.

‘Transparency’ is, thus, the enemy of the businessperson, who is incentivized to misrepresent actual product worth and obfuscate his or her own share in the profits (and that of his or her employer where applicable). If s/he can swindle one percent (or two or even five percent) on a million cheap units at one (or two or even a dozen) times a year then swindling becomes so extremely advantageous that s/he lives like a god.

Language becomes a weapon! Jargon, jargon as far as the eye can see. “First-in, last-out” (sometimes, FILO) accounting, for example, what’s that? Imagine that you have a hundred identical widgets. The first one that you bought only cost you five dollars and the last one that you bought cost you one hundred dollars. Further, for the sake of simplicity, suppose that the cost of each successive widget is always (over some finite period) more than the last. You sell a widget. FILO allows you to claim that though you’ve got a hundred identical widgets in your stock that range in cost from five dollars to one hundred dollars, you kept the cheap widget and sold the most expensive one for a relatively small profit or even a loss. What a concept!

What’s a company’s profit margin? How many widgets at what profit margin does a company sell in a given period? How much does it make? What does it own? What does it owe? What’s it worth? What are you really getting when you buy a share of stock in some company? Financial widgets, shares of stock, for example, take the cake as far as widgets go.

A quick look at the “Financials” section of a stock listing from a free website like Google reveals a list of “Total Revenue”, “Gross Profit”, “Operating Income”, and “Net Income”; the “Balance Sheet” section lists “Total Current Assets”, “Total Assets”, “Total Current Liabilities”, “Total Liabilities”, and “Total Equity”; the “Cash Flow” section lists “Net Income/Starting Line”, “Cash from Operating Activities”, “Cash from Investing Activities”, “Cash from Financing Activities”, and “Net Change in Cash”. Have you got any idea what that means? Probably. But do you really know – to a certainty? Do you, for example, know how they account? Know how they report? Even the P/E varies from site to site.

Delving into a business report reveals a seemingly limitless array of terms each denoting a specific concept and probably connoting another (that even educated businesspeople and financial experts cannot be expected to fully understand) strung together in a sort of word soup. Delving into the fine print on a so-called “financial product” is somewhat less revealing. Are the terms useful? When people who know what they mean talk to each other and interact, sure; to everybody else, they’re worse than useless – not merely incomprehensible but misleading when incorrect meanings are inferred from context clues – misunderstandings that few people have energy, time, intellectual capacity and resources to clear up.

Jargon makes it impossible for most people to understand what a widget is actually worth. And, it is generally impossible to uncover what a businessperson is actually “making”. This is by design – even when the intent of the information provider may be to provide good intel. A small few will have a pretty good idea. But why wouldn’t they play it close to the vest? They’re out to make money – especially if they’ve put the time and energy into understanding it all. And, everybody can’t make money because, all else being equal, if everybody made money then there’d be smaller shares for the few, and, they could not live like gods.

Businesspeople know that they thrive at the expense of the many – that somebody actually starves so that they might live in greater luxury. And, that’s why they give meaningless, obtuse and arcane answers to even simple questions: they wield deceit to their advantage at others’ expense. Even otherwise respectable men and women who drive innovation and get it to the marketplace, get rich organizing a salesforce (or otherwise act as such) in order to swindle more money out of consumers’ pockets than “their” goods and services are worth and to persuade “willing” investors to capitalize them.

But, when a businessperson can control the laborforce, too, profit climbs even higher. So, the same logic undergirds many hiring processes and pay packages. The savvy businessman or -woman attempts to hire people at some price below their worth, and so forth, in order to maximize his or her own profits. They despise the unions for this reason.

Academic institutions (businesses themselves, just ask the head coach of a good college football team) furnish a particularly elegant and relatively uniform example with which the author is intimately familiar. Colleges and universities generally offer new hires just a little less than somebody who has already worked at same for some short time, like a year. H.R. people either tell the candidate that they will make some salary toward the bottom of a range because they’re new (inexperienced in some way or an unproven commodity) or they leave it to the candidate to infer. Then, when the time arrives for a raise, it turns out that the institutions give only cost-of-living increases. In other words, new hires don’t make less because they’re ‘junior’ but because they haven’t yet received cost-of-living increases. That is, by their logic and practice, a new hire should get what the oldest hire at the same tier is being paid because the old hire is not getting a cent for performance or experience – just cost-of-living.

Savvy businesspeople get it at both ends: charging exorbitant fees (see the escalating cost of tuition for example) and ‘keeping costs down’. This is the freemarket. “It’s just business.”

Is it too much to expect that businesspeople should understand why a civilized society must curtail their prowess? We don’t let physically superior people run rough shod over their weaker cousins. We don’t let large men, for example, beat smaller women or take from them what they want. We make them conform to the requirements of a civil society. (But we let shrewd crafty people give weaker people the business.) We must curtail even the aptitude of all people who would run rough shod over our civil society and we know this.

For some time businesspeople have either shrugged or otherwise kept our laws off their bodies by convincing people that capitalism is equal to democracy, that patriotism is equal to rabid individualism. But, we know that capitalism and democracy are not part in parcel. And, patriotism is antithetical to rabid individualism. Patriotism is knowing and doing (and, to some extent, feeling) what’s best for your country, your state, your community, your home – because “charity begins at home;” n’est-ce pas?

So, what is the businessperson worth? What’s s/he earned? Now may be one of those rare opportunities when you get to ask and be heard to answer. Let me suggest that we start by asking what we’re worth – what are you worth? – because what you pay him or her will bear directly on the value of what you earn.

Would you pay a businessperson a million dollar salary/”pay package”/whathaveyou – how’s about ten million dollars – or a hundred million dollars – when you make twenty-five or fifty or a hundred thousand? If s/he had to come to you for it, would you authorize it? The answer is probably, “No.”

Even when we assume “freewill” – when we say, “Biology, Chemistry and Physics are crap” – when we say stupid things like “anybody can achieve the American dream” (while we know full-well that many just don’t have the intellectual wherewithal to succeed) – even when we allow all “men” are “created” equal to mean that everybody is just as capable as everybody else, how much remuneration does a salesperson, a marketer, a swindler deserve? What should we incentivize? Do we want the ‘best and the brightest’ people to go into business?

It’s not just business. It never was.


______________________________________________________


*Definitions

Business (n.): (1) “widgets for money;” an exchange of widgets (final products) and other services accompanied by terms and conditions that adequately (if incomprehensibly) describe same (such as they are) for money (an abstract representation of work – buffer between work and remuneration) (as in, We do business on four continents); (2) organization of the production or provision of same widgets and services (as in, She manages a small business, and, He generates a lot of business for the company); (3) organization of the production or provision of same widgets or services for the purpose of (1, above) (as in, That’s no way to run a business); (4) the hierarchy within which widgets and services are made or otherwise provided and sold (as in, That’s the business); (5) a beating (as in, I gave him the business.)


Businessperson (n.): (1) somebody who does, generates or conducts (runs) exchanges of widgets and other services accompanied by terms and conditions that adequately describe same for money; (2) a facilitator of same (e.g., a regulator or policy maker); (3) a gangster (as in, I’m a businessman).

Part II. Worth

“You say it is the good cause that hallows even war. I say unto you: It is the good war that hallows any cause.” – Nietzsche

Here, I would like (desperately) to write something else; that a man or woman is worth some moral equivalent in dollars; or, at least, that human dignity is valuable and productivity still more so. Peace costs. Loyalty costs. High living standards cost.

But this is not the place to argue that everybody is created equal – for better or worse – equally incapable of self-control; that freewill is an unsupportable postulate accepted by ignorants and promoted by spin doctors; that “you” are not the “you” you think yourself to be.

I will write these things – elsewhere – in some other ‘Part’.

The trouble is that these arguments against unmitigated avarice and megalomania break down when opponents deny reason (when no rational moral argument can stand up, and, we are debased). (Religious doctrine accomplished what reason seems inadequate to do. The fear of God served a purpose after all!)

When push comes to shove, a person is worth what s/he can and will take and defend. And, nothing can be taken that is not sacrificed (except in death).

Capitalism has so debased us. It is a “survival of the fittest” – a constant contest, which does not generally mean a triumph of the “best” but, specifically, some fruitful advantage (whether it be defined as child-bearing or wealth-consolidation – or betterment, but let us save that discussion for some other place).

In a freemarket, I am worth what I can and will take [from you] by force (intellectual or, now more rarely, physical) and am then willing and able to protect. [It’s extraordinarily counterproductive! How much work, for example, is just contest? And how much productivity is sapped by same? And how do our lives suffer as a result?]

We (people) are not (intrinsically) adversaries at a zero-sum game, but Capitalism makes us so. Ergo, it behooves me to be confident; to deny you; and to take some prize. I should think myself better and belittle you; I should value my assets and disparage yours; demand everything and leave nothing; have everything because having is triumph, and, triumph is controlling influence, and, controlling influence rules – not the best – but triumph.

To wit, capital is squandered.

When credit (not synonymous with but equivalent to effective triumph) is controlling influence – credit is everything! So, we contest for credit. “Good” and “bad” notwithstanding, when opposing forces meet, a slim “edge” wins, and, the “loser” is overcome – effectively negated in a binary capitalist system. But, how else can it be when triumph is everything (and everything else, perforce, is nothing)?

Worse, however, opposing forces are susceptible to “other” forces. Some of these other forces will favor one or another of two dueling bodies; some will come at odd angles. – An arch is “strong” not because it fights itself but because it supports itself and so distributes forces so as to maintain the integrity of its shape.

Society that fights at itself is inherently vulnerable. Locked in mortal combat, one with another, US citizens make themselves prey – needlessly, because US resources are suited to the task of cooperation.

This, however, is the reality. We have come down to agree that you are only worth what you can wrest from somebody else. Why? Because we are not a country – not a community – but three hundred million individuals loosely associated into real physical and ideological fractions. The enemy is your own spouse – or maybe not your spouse but the opposite “sex”; your neighbor – or maybe not your neighbor but somebody down the street – in the next state – half way across the continent – on the other side of the world. We’re “male” and “female” and “transgendered” – “straight”, “homosexual” and “bisexual” – “pants-wearers” and “pansies” and “housewives” (oh, my!) – “socialists”, “liberals”, “moderates”, “conservatives”, “fascists”, whathaveyou – “Christians”, “Muslims”, “Jewish”, and etcetera – “African Americans”, “Mexican Americans”, “Italian Americans”, “Europeans” and so forth – “Pennsylvanians” and “New Jerseyans”, for example – “Philadelphians”, “Princetonians”, “Trentonians” – “Smiths”, “Jonses”, and “Rodriguezes” – “fathers” and “mothers” – “sons” and “daughters” – “black sheep” and “good children”.

What are you worth but what you can wrest from another? Nothing.

The “American Dream” has gone up in a puff of Capitalism – not socialism, or republicanism or democracy, but capitalism.

REWRITE: This is a private drive. No trespassing. (Update 3)

Posted in Economy, Political Economy, Public Policy, Socioeconomy by equanimist on April 7, 2009

Originally published here, at the Equanimist, 17 Sept 2008. Rewritten and reposted in response to continued deterioration of the US labor market (another 600+k jobs lost in March) and other recent news, including (but in no way limited to) this debacle covered by the Christian Science Monitor related to ‘contaminated’ Chinese drywall.

Developed economies will be made solvent or reposition on the broad socioeconomic continuum. History makes the latter almost unthinkable.

Continued bailouts will only put “recovery” off. Systemic injury must be sustained. Loss ought, therefore, be distributed among financially responsible parties to stop “bleeding” the real economy.

Here, I would like to refer you back to a paper buried in a link within my first post below (December 2007) and to elaborate on certain of its conclusions.

Illiquidity (resulting in catastrophic losses) in the financial markets is only symptomatic. Typically, people don’t pay their debts when they don’t have money with which to do so. More than bad banking practices, four decades of increasing income inequality and overdependence upon the US lie behind the extraordinary decline in the value of such products as mortgage backed securities and collateralized debt obligations. US citizens have gone broke making rich despotic foreigners and domestic stewards (who fail utterly to recognize themselves as such) capitalizing on low foreign socioeconomic status.

If developed democracies are to “recover” then bad actors (viz., Chinese, Indian, Mexican, middle-eastern and Russian stewards, who have over-relied upon developed democracies to care for their large populations) must take responsibility for their own people or now learn to play by the rules (i.e., take bold and immediate steps to raise their domestic living standards).

In the meantime, developed democracies’ middle classes must be furnished real money with which to make real “domestic” purchases – more money in countries like the US, where the middle class has been trampled under foot by a flood of cheap labor far in excess of that inherent in legal immigration, and less in countries, esp. certain European countries, where the adverse effects of income inequality are largely corrected by social programs.

Is it time for closer ties between special, aligned democracies such as Australia, Canada, Europe, Japan and the US?

Through new cooperation and closer ties forged between same – beyond cooperative financial regulation to include “special” trading status through cooperative regulation of products and industries and similarly high commitment to national security – we might band together and so defend ourselves from the scourge of high income inequality and low living standards that once seemed a thing of the past. We will not lift “them” up (bad actors) who will not act for themselves.

Outsourcing to and insourcing from bad actors (e.g., China, India, Mexico, the middle-east and Russia) must be dissuaded. Though there may be myriad ways to do so, ensuring the reliability of shipments and adherence to strict migration policies seem the most reasonable methods. Broadly, check every “foreign” container and the actual contents thereof to ascertain with certainty whether or not those contents conform with strict regulations, which (as evidenced by ongoing troubles) is not done “abroad”; shore up porous borders; and describe means by which to repatriate as many illegal aliens as practicable.

This plan neither bars “foreign” investment in developed democracies nor unfairly taxes anybody in order to socialize profits (something extremely distasteful in the mouths of the US “right”) but provides an adequate framework within the spirit of our shared traditions to protect developed democracy from detractors. Simultaneously, this should create strong incentives to produce goods “domestically” (e.g. within the developed democratic world) – ergo, increase the number of “domestic” jobs out of all proportion to the worker pool – a step that should then increase wages and restore socioeconomic status from the bottom up. Moreover, this might provide strong incentive to “foreign” stewards to act in ways that will bring them closer to us so that they might participate in our economy and enjoy our high standards of living.

It would be nice if we could save everyone – but the global will does not seem to exist. Responsible “foreign” parties refuse to take an interest in their own well-being. No minority “domestic” group of nations will effect higher living standards by force. This race to the bottom helps no one. Let us lead by example.

Riding the rally

Posted in Economics, Economy, Political Economy, Public Policy by equanimist on March 24, 2009

While others seem very suddenly and insanely positive (see, for example, Jim Cramer’s change of heart), I remain unconvinced.


Economic fundamentals are largely unchanged. Transparency is still a pipe dream. The “solution” to mark-to-market accounting may be a good broom (with which to sweep the mess under a rug). Credit can get as cheap as dirt, but, borrowers remain broke and unworthy.

Some of the brightest minds in the world see a very hard road ahead. According to the BBC, the IMF predicts that the world economy will contract in 2009 (for the first time in 60 years). According to the Associated Press, Sen. Arlen Specter recently remarked, “[The nation is on the] brink of a depression“. Chairman of the Federal Reserve, Ben Bernanke told the Council on Foreign Relations on 10 Mar 2009, “The world is suffering through the worst financial crisis since the 1930s…“. And, on 22 Mar 2009, Paul Krugman wrote of the Geithner Plan in a piece entitled, “Financial Policy Despair“:

If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle the Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

Worse, “China’s Premier Wen [Is] ‘Worried’ on Safety of Treasuries,” according to Bloomberg. And, Avinash Persaud, Chairman of Intelligence Capital and a member of the UN Commission of Experts on Financial Reform, recently revealed that among the commission’s recommendations is a “new global reserve currency” to replace the USD.

Moreover, companies, like AIG and Washington Mutual, and people, like Vikram Pandit and Ken Lewis, just don’t seem to get it. While the public fumes over bonuses paid to AIG’s financial products division, the New York Times reports that AIG is suing the US government (its largest shareholder after several bailouts), and, Reuters reports that Washington Mutual is suing the FDIC for US$13bln. In response to the ‘bonus tax’ (a hasty and possibly unconstitutional response by the House of Representatives to public outrage over the AIG bonuses) Ken Lewis, CEO of Bank of America, recently wrote a memo in which he attacked the proposed ‘bonus tax’ as ‘unfair’; it is! And, he should keep his damn mouth shut about it. But, finally, Vikram Pandit is hiding behind his contract, taking a US$10.8mln bonus for 2008 (a year in which Citigroup lost many billions of dollars; as you may have heard, he is also remodelling his office).

The market is rallying in the face of a lot of mediocre and downright bad news. And, the data isn’t much better, (despite that some have taken to talking about bad data as if it were good; see, for example, two very different takes on the Feb housing data
here and here).

Nothing goes straight down. The “crash” in 1929 paled in comparisson to subequent market deterioration (see charts here, for example). And, the same traders effected some of the greatest rallies.

As of now, there is little reason to believe the pundits who prognosticate (with impunity) a “‘major’ bull market”. There is little reason to believe them because we have not yet begun to address the single most important cause of the financial crisis.

Much is now being written about “global imbalances” (see, for example, the Council on Foreign Relation’s Special Report, “Global Imbalances Must Be Reduced to Prevent Another Economic Crisis, Warns New CFR Report,“). This tells an interesting and important part of the story from a height of about thirty-thousand feet. Back on earth, the fact remains, radical redistribution of wealth away from economic growth and social stability — i.e., the engine of growth (the middle class, esp. the US middle class) and the infrastructure that otherwise supports it — has not reversed, and, I haven’t read of any plan to reverse it. In fact, just the opposite.

Part I. "It’s Just Business" (Update 1)

How does a businessperson* (often a salesperson in this capacity) “make” money? In the simplest sense, s/he buys or finances or otherwise brings goods and services (that somebody/-ies designed/engineered/whathaveyou and produced or otherwise will either provide or facilitate – sometimes his or her own goods or services) to market where s/he peddles them to the consumer. To the extent that s/he profits off this ingenuity and productivity or other work s/he makes more or less money.

Of course, design/engineering/whathaveyou/production &c. cost money, and, materials have inherent cost. For the sake of argument, assume that the total cost of the product is its worth irrespective remuneration owed a businessperson (or businesspeople) in his or her (or their) managing/marketing/sales capacity. In a freemarket, to the extent that a businessperson can keep total production or service costs down, convince a consumer to pay a higher price above a product’s worth, and buy more of same s/he makes more money. That is, businesspeople (often paid bonuses/commissions/whathaveyou) are incentivized to devise techniques to sell products and services at increasingly high profit margins above their worth and to do so en masse whenever possible.

By nature, this system cannot make anybody rich if everybody does it so the rules are such that it is very difficult (generally impossible for most people) to pull off. (If, for example, few can understand codified techniques and fewer still can afford the training and fewer still will be able to do both and fewer still will be able to apply the training skillfully, we’ve already narrowed down the population of potential businesspeople a great deal; and, in this way, everybody cannot do it). Nor can it work if people are given to know that the worth of the products that some businessperson is peddling is less than the price that they are being asked to pay.

‘Transparency’ is, thus, the enemy of the businessperson, who is incentivized to misrepresent actual product worth and obfuscate his or her own share in the profits (and that of his or her employer where applicable). If s/he can swindle one percent (or two or even five percent) on a million cheap units at one (or two or even a dozen) times a year then swindling becomes so extremely advantageous that s/he lives like a god.

Language becomes a weapon! Jargon, jargon as far as the eye can see. “First-in, last-out” (sometimes, FILO) accounting, for example, what’s that? Imagine that you have a hundred identical widgets. The first one that you bought only cost you five dollars and the last one that you bought cost you one hundred dollars. Further, for the sake of simplicity, suppose that the cost of each successive widget is always (over some finite period) more than the last. You sell a widget. FILO allows you to claim that though you’ve got a hundred identical widgets in your stock that range in cost from five dollars to one hundred dollars, you kept the cheap widget and sold the most expensive one for a relatively small profit or even a loss. What a concept!

What’s a company’s profit margin? How many widgets at what profit margin does a company sell in a given period? How much does it make? What does it own? What does it owe? What’s it worth? What are you really getting when you buy a share of stock in some company? Financial widgets, shares of stock, for example, take the cake as far as widgets go.

A quick look at the “Financials” section of a stock listing from a free website like Google reveals a list of “Total Revenue”, “Gross Profit”, “Operating Income”, and “Net Income”; the “Balance Sheet” section lists “Total Current Assets”, “Total Assets”, “Total Current Liabilities”, “Total Liabilities”, and “Total Equity”; the “Cash Flow” section lists “Net Income/Starting Line”, “Cash from Operating Activities”, “Cash from Investing Activities”, “Cash from Financing Activities”, and “Net Change in Cash”. Have you got any idea what that means? Probably. But do you really know – to a certainty? Do you, for example, know how they account? Know how they report? Even the P/E varies from site to site.

Delving into a business report reveals a seemingly limitless array of terms each denoting a specific concept and probably connoting another (that even educated businesspeople and financial experts cannot be expected to fully understand) strung together in a sort of word soup. Delving into the fine print on a so-called “financial product” is somewhat less revealing. Are the terms useful? When people who know what they mean talk to each other and interact, sure; to everybody else, they’re worse than useless – not merely incomprehensible but misleading when incorrect meanings are inferred from context clues – misunderstandings that few people have energy, time, intellectual capacity and resources to clear up.

Jargon makes it impossible for most people to understand what a widget is actually worth. And, it is generally impossible to uncover what a businessperson is actually “making”. This is by design – even when the intent of the information provider may be to provide good intel. A small few will have a pretty good idea. But why wouldn’t they play it close to the vest? They’re out to make money – especially if they’ve put the time and energy into understanding it all. And, everybody can’t make money because, all else being equal, if everybody made money then there’d be smaller shares for the few, and, they could not live like gods.

Businesspeople know that they thrive at the expense of the many – that somebody actually starves so that they might live in greater luxury. And, that’s why they give meaningless, obtuse and arcane answers to even simple questions: they wield deceit to their advantage at others’ expense. Even otherwise respectable men and women who drive innovation and get it to the marketplace, get rich organizing a salesforce (or otherwise act as such) in order to swindle more money out of consumers’ pockets than “their” goods and services are worth and to persuade “willing” investors to capitalize them.

But, when a businessperson can control the laborforce, too, profit climbs even higher. So, the same logic undergirds many hiring processes and pay packages. The savvy businessman or -woman attempts to hire people at some price below their worth, and so forth, in order to maximize his or her own profits. They despise the unions for this reason.

Academic institutions (businesses themselves, just ask the head coach of a good college football team) furnish a particularly elegant and relatively uniform example with which the author is intimately familiar. Colleges and universities generally offer new hires just a little less than somebody who has already worked at same for some short time, like a year. H.R. people either tell the candidate that they will make some salary toward the bottom of a range because they’re new (inexperienced in some way or an unproven commodity) or they leave it to the candidate to infer. Then, when the time arrives for a raise, it turns out that the institutions give only cost-of-living increases. In other words, new hires don’t make less because they’re ‘junior’ but because they haven’t yet received cost-of-living increases. That is, by their logic and practice, a new hire should get what the oldest hire at the same tier is being paid because the old hire is not getting a cent for performance or experience – just cost-of-living.

Savvy businesspeople get it at both ends: charging exorbitant fees (see the escalating cost of tuition for example) and ‘keeping costs down’. This is the freemarket. “It’s just business.”

Is it too much to expect that businesspeople should understand why a civilized society must curtail their prowess? We don’t let physically superior people run rough shod over their weaker cousins. We don’t let large men, for example, beat smaller women or take from them what they want. We make them conform to the requirements of a civil society. (But we let shrewd crafty people give weaker people the business.) We must curtail even the aptitude of all people who would run rough shod over our civil society and we know this.

For some time businesspeople have either shrugged or otherwise kept our laws off their bodies by convincing people that capitalism is equal to democracy, that patriotism is equal to rabid individualism. But, we know that capitalism and democracy are not part in parcel. And, patriotism is antithetical to rabid individualism. Patriotism is knowing and doing (and, to some extent, feeling) what’s best for your country, your state, your community, your home – because “charity begins at home;” n’est-ce pas?

So, what is the businessperson worth? What’s s/he earned? Now may be one of those rare opportunities when you get to ask and be heard to answer. Let me suggest that we start by asking what we’re worth – what are you worth? – because what you pay him or her will bear directly on the value of what you earn.

Would you pay a businessperson a million dollar salary/”pay package”/whathaveyou – how’s about ten million dollars – or a hundred million dollars – when your make twenty-five or fifty or a hundred thousand? If s/he had to come to you for it, would you authorize it? The answer is probably, “No.”

Even when we assume “freewill” – when we say, “Biology, Chemistry and Physics are crap” – when we say stupid things like “anybody can achieve the American dream” (while we know full-well that many just don’t have the intellectual wherewithal to succeed) – even when we allow that all “men” are “created” equal to mean that everybody is just as capable as everybody else, how much remuneration does a salesperson, a marketer, a swindler deserve? What should we incentivize? Do we want the ‘best and the brightest’ people to go into business?

It’s not just business. It never was.


______________________________________________________


*Definitions

Business (n.): (1) “widgets for money;” an exchange of widgets (final products) and other services accompanied by terms and conditions that adequately (if incomprehensibly) describe same (such as they are) for money (an abstract representation of work – buffer between work and remuneration) (as in, We do business on four continents); (2) organization of the production or provision of same widgets and services (as in, She manages a small business, and, He generates a lot of business for the company); (3) organization of the production or provision of same widgets or services for the purpose of (1, above) (as in, That’s no way to run a business); (4) the hierarchy within which widgets and services are made or otherwise provided and sold (as in, That’s the business); (5) a beating (as in, I gave him the business.)


Businessperson (n.): (1) somebody who does, generates or conducts (runs) exchanges of widgets and other services accompanied by terms and conditions that adequately describe same for money; (2) a facilitator of same (e.g., a regulator or policy maker); (3) a gangster (as in, I’m a businessman).

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Dropping Money from Helicopters and Other Hard Choices (Update 1)

Posted in Economics, Economy, Political Economy, Political Philosophy, Public Policy, Socioeconomy by equanimist on December 18, 2008

 

i.

Hardly conservative, over-consolidation of wealth at the expense of the US middle class is a reckless game. High productivity and rapidly cycling currency fuel high living standards and rapid growth. Therefore, no long-term solution to the financial crisis is likely to exist apart from (1) upward wage pressure on the bottom 95% of US Americans (2) re-regulation to include incentivization of productivity and innovation and (3) re-inculcation of some sense of civic duty. Near term recapitalization of the US middle class should be the single most effective measure to stave off the ugly prospect of a deflationary spiral.

Much of what is being written, like this short ‘glossary’ entry at the Guardian, explains that “quantitative easing” is akin to dropping money out of helicopters. But, that does not rightly describe recent actions by the Fed. What the Fed has done is to make borrowing very cheap.

Potential borrowers aren’t any more credit worthy now than they were last week (or last year). Moreover, in the event that there are well capitalized bankers who can be persuaded to make risky loans, additional credit now will only kick the can down the road. We all know the one about the guy who borrowed money from Peter to pay Paul.

The current crisis is in some ways not unlike a balloon that, having developed a tiny pin prick, gets a big hole in it. It deflates and cannot be re-inflated until it’s patched. The balloon need not deflate entirely if something can interrupt the process. Might we not either (a) stop up the hole until it can be permanently patched or (b) balance loss with gain?

Unlike an ordinary balloon, a hot air balloon is at once inflated and constantly hemorrhaging air. In fact, there is a current of air flowing through the balloon. This is kind of what the current economy is like. Right now there is a shortage of air flow (liquidity) and a big hole (a lack of confidence). So to avoid a nasty tumble, supply air (real money) until the hole can be patched.

ii.

For some time now nothing has been worth more than some smaller fraction of the price at which it sold because of shrinking real relative middle-class profit shares. Only over-confidence made possible too-easy credit, which, in turn, made the relatively high US lifestyle possible in the face of excessive wealth consolidation.

As is well documented, real profit shares distributed to the bottom 95% of the US population peaked decades ago and income inequality has since risen sharply. A graph of top decile income shares makes this pretty clear (from Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” The Quarterly Journal of Economics, Vol. CXVIII, Feb 2003, issue 1).


At the outset of the Great Depression of the 20th C. income inequality was very high. In years that led up to US involvement in the Second World War, income inequality plummeted, and, it remained relatively low and constant for decades. Disparity in income ramped up throughout the 1970s and exploded in the 1980s (and again in the 2000s; see the International Labor Organization press release cited below) not because productivity and profits began a long decline but because the uppermost decile (later the uppermost 5% and, still later, some smaller fraction thereof) accorded itself increasingly large pieces of the pie (for specific data to augment the above see, for example, Productivity change in the nonfarm business sector, 1947-2006 at the US Dept. of Labor, and Historical Income Tables, Table H-2 and No. HS-26. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Families: 1947 to 2001 at the US Census Bureau). This graph, unfortunately, stops at 1998. The International Labor Organization estimated that “in the United States in 2007, the chief executive officers (CEOs) of the 15 largest companies earned 520 times more than the average worker.

Now fully 80% of US Americans make a real relative pittance unprecedented in the post-war era. That they don’t think they’re poor doesn’t mean they’re not – only that authority figures from the lowliest parent to the Commander-in-Chief have successfully convinced US Americans to compare down and trade down the socioeconomic ladder (to a more or less indentured servitude as debt ballooned).  See, for detailed analysis, the Trade Union Advisory Committee to the OECD summary of “Growing Unequal?” (to which I have linked here).

I reiterate what I have previously written: to attribute the current crisis to a lack of liquidity is to miss the point entirely. The balance of US stewards now promulgate economic visions and institute policies without even a foothold in reality. On the one hand, average US Americans are sold an outsized bill of goods while, on the other, the elite who profit on sales hoard and lobby for deregulation to further consolidate means. When convenient, the US consumer is ‘resilient’ and can be depended upon. S/he won’t ‘let the terrorists win’. S/he’ll ‘go out and spend’. And, ‘The free market will sort itself out.’ When convenient, consumerism is decried and the same beleaguered people are told that it is some fault of the US consumer that s/he cannot manage money and, moreover, that s/he does not need (or deserve) and should not get a bailout!

Credit cannot and will not now change the fact that many among the bottom 95% can no longer afford to pay debts they’ve been encouraged to amass, and, will (if furnished) only run the average US household further into debt (compound the problem per se).

But, the point is moot. Bankers should not be so foolish as to make loans that they know borrowers cannot repay. Potential borrowers, then, should not contract loans. Therefore, home prices should continue to plummet until they are priced so cheaply that these poor citizens can afford them. Likewise, goods and services should be sold ever more cheaply or sit on store shelves because the unreal equity (over-confidence) that fueled US consumerism is vanishing. Businesses, then, should be unable to meet their obligations and, unable to recoup even costs, they should fail putting more people out of work.

Mounting job losses, then, should force more homeowners into foreclosure or disadvantageous home sales… More importantly, US productivity and means of production along with the service sector should contract sharply as the supply of goods and services races to catch up with rapidly contracting markets. But, in the event that this is the new economy of extraordinary income inequality, the world furnishes way too many material goods and services – that is, precisely, in a new low-income world too many people are currently employed.

iii.

Congress must act now

The housing market cannot be expected to resolve itself any time soon. As clearly illustrated in the following graph (excerpted from, “‘Pay option’ mortgages could swell foreclosures,” MSNBC.com) foreclosures should be expected to accelerate through the first half of 2009 and only briefly stabilize in the second half before the bottom likely falls out on the housing market in 2010.


In the meantime, socioeconomic stability and quality of life, in addition to productivity and innovation, should continue to deteriorate. Poor, hungry, homeless, shiftless people are not conducive to democracy and should be expected to undermine national security and public safety. [Even wayward adolescents know what Libertarians and Republicans reject – that poor, hungry, homeless, shiftless people are easily “turned”. (Why do we feel allegiance? To whom and to what institutions do we feel it?)]

Still, these are only risks (however probable).

The fastest, surest way to avert these risks is to revalue goods and services by proxy relative to the bottom 95%. The more dollars there are chasing some constant goods-and-services the more expensive they will be. If hoarders cannot be persuaded to recapitalize the US middle class (i.e., furnish dollars to prop up their own way of life) then it falls to legislative bodies and appointees to make the hard choice. Give real money to those who will spend it and more to those who are more likely to spend it than to those who won’t. (Heaven forbid, right? Redistribution is only “right” when money moves up the socioeconomic ladder.)

Still, no long-term solution should be complete that does not effect upward wage pressure. That is, if the US middle class does not have continued support when government programs wind down, all else being equal, things will just revert. So, for example, though enough money might stabilize property values over the short- to medium-term, property values will again fall right away as government money is withdrawn. Bring income inequality back down to more optimal levels (approximately what it was throughout the 1950s, for example).

Short of legislation of pay scales, radical upward wage pressure will only be effected by either increasing the number of jobs out of all proportion to the worker pool or decreasing the number of workers to fill those positions that exist. To that end, I reiterate, it seems most reasonable to impose controls over outsourcing and insourcing as same controls are in the interest of national security.

Giving banks money does nothing to any of the aforementioned ends. Stop doing it. As ought be clear, this cannot and will not jumpstart the US economy and, it would be achieved just as well if the US middle class were recapitalized – dropping money from helicopters.

Response to Global Trends 2025, Part II: Clean Is Good (Formerly "Green Is Good")

Posted in Corrections, National Security, Political Economy, Public Policy, Socioeconomy by equanimist on December 18, 2008

Global climate change hasn’t gone on holiday because the US is staring down the barrel of a financial gun. There remains no doubt that the world is warming, and, there is vanishingly little room to speculate that human activity is not to blame (at least in some part). According to the Intergovernmental Panel on Climate Change (IPCC) Climate Change 2007: Synthesis Report:

Global atmospheric concentrations of CO2, CH4 and N2O have increased markedly as a result of human activities since 1750 and… in 2005 [concentrations of CO2 and CH4] exceeded by far the natural range over the last 650,000 years. Global increases in CO2 concentrations are due primarily to fossil fuel use, with land-use change providing another significant but smaller contribution… There is very high confidence [equal to or greater than 9 in 10 chance] that the global average net effect of human activities since 1750 has been one of warming…

The report continues, relatively small changes are already baked into the system. But don’t let small numeric values fool you. We can be quite confident that these same small changes (less than 1 or 2 degrees Celsius) will put tens or hundreds of millions under “increased water stress”, while negatively impacting food production, increasing risk and damage of flooding, and adversely affecting human health (pps. 50-52). Again, the consequences of changes that cannot be avoided do not bode well for the future. The effects of continued unmitigated global climate change could be catastrophic.

If for no better reason than we are playing a far riskier game than Russian roulette, clean is good.

“But,” you say, “It [R&D] is a huge economic burden. I don’t live in Africa. What do I care if Africans die of thirst? And, I can afford healthcare. Besides, this global warming might be good for US farmers, for a while anyway.” Right you are. But, here’s why you should care anyway.

(1) Addiction to oil is bloody expensive. According to T. Boone Pickens’s Pickens Plan the US currently imports nearly 70% of the oil it uses at a cost of about $700,000,000,000US per annum and will spend about $10,000,000,000,000US (ten trillion USD) on foreign oil over the next ten years. These numbers aren’t strictly accurate since the bottom fell out from under the oil market. At $49 a barrel, it’s about $263,000,000,000 per annum. But, barring total worldwide economic collapse, $49 per bbl. may not last. [Saudi Oil Minister Ali al-Naimi recently indicated that oil has a “fair” price of about $75 per bbl., so, OPEC may move to cut production. (Am I missing something? Isn’t $49 the fair price, the market price? $75 is the price after market manipulation!) And $75 per bbl. is down from June when $100 per bbl. seemed reasonable to the Kuwaiti finance minister.] So barring disaster, with no further interruption and at relatively “flat” reserve estimates over the mid-term, oil ought be expected to fluctuate between $49 and $150 per bbl.

In perspective, US GDP is presently valued at approximately $14.4 trillion. So, at $263 billion, the US annually spends about 1.8% of GDP on foreign oil; at $100 per bbl., that figure rises to about 3.7%; and, at $150 per bbl., that’s nearly 5.6% of GDP! Even if oil settles back down into the twenty dollar range, at $25 per bbl., the US will continue to pay nearly 1% of GDP (about $130,000,000,000 per annum) on foreign oil, a foreign tax on US productivity paid not by big US corporations alone but individual US citizens.

(2) And do not be deceived, the Saudis do not and will not show the US any special treatment. Sure, their king likes to hold hands with ours but, they’re not partners. Case in point, according to Gulf News, “Saudi Arabia’s King Abdullah Bin Abdul Aziz [recently] stressed that Saudi Arabia and other Gulf states did not and will not give any amount of money to the US for that purpose [i.e., the financial crisis].” Translation, The US is dependent upon disinterested foreign oil producers for continued national security.

Why do we stand for it? Why do we continue to lay prostrate at the feet of despots like Abdullah Bin Abdul Aziz? Well, as T. Boone points out, we only import 14,700,000 bbl. of oil every day. The other 6,300,000 bbl. come from US fossil-fuel magnates who collect another nearly 0.8% of GDP at a rate of only $49/bbl. and as much as 2.4% of GDP at $150/bbl.!

It should be clear, (3) energy production must go green and whoever holds the means of producing clean energy will be future king, and, it should be self-apparent that (4) real or imagined depletion of limited resources creates real potential for inter-regional and international conflicts. Wind farming, solar cell, fuel cell, hydroelectric and hydrothermal technologies will ensure continued US hegemony and will make “free-”market capitalists big bucks. But, the US procrastinates. Procrastination provides opportunity for technological powerhouses (e.g., Japan, Germany and Korea) and motivated states (e.g., United Arab Emirates and other Europeans) to gain the upper-hand and, further, runs the risk that money and means run dry in the interim.

According to the CIA’s World Factbook US foreign debt currently ranks number one in the world at $12,250,000,000,000 while US current account balance ranks dead last at $ -731,200,000,000. In a crisis of confidence (not unlike the current financial crisis) might there come a time when these extravagant Joneses get a knock at the door from debt collectors? Will the US find a new foreign securitizer? The answer seems a stern, “No.”

Will the US kowtow to some foreign superpower in the way that Europeans now kowtow to Russia? When Abdullah grabs George’s hand is it in friendship, or is he really telling the world, “George is my bitch.” How will these debts be paid?

Still, the US controls extraordinary means of production and a vibrant, albeit decimated, scientific community. There remains the possibility that the US can rally and rise to the occasion, as it has done throughout its history. But, it’s a closing window of opportunity. With jobs rapidly disappearing, manufacturers facing bankruptcy, no plan to tackle staggering imbalances, and rapidly gaining technological rivals, the US will either create jobs, secure manufacturers’ viability and aggressively develop future technologies or be eclipsed by foreign rivals.

For these reasons, it must be “unthinkable” that US policymakers do not reinvest in infrastructure now. A clean revolution offers fundamental solutions to all of these problems. And, if it costs even a trillion dollars in investment capital this small sacrifice will pay for itself in less than ten years at one tenth the estimated cost of foreign oil over the same period.

The Myth of the Pay Incentive (a follow-up note on innovation)

Posted in *HIGHLIGHTS, Philosophy, Political Economy, Public Policy by equanimist on November 16, 2008

Previously, I wrote a little note (“A Note on Innovation”) in which I argue that US-style “free-”market capitalism is collaboration inhospitable; that so-called “performance-based pay is profit-driven; and, as such, innovation-irrespective “performance-based” pay packages favor cheap, outmoded and proprietary goods and services (what some might call “crap”).

To fill the gaps left in this short note, I submit that “free-”market capitalism is just a feature on the US-economic landscape – a landscape strewn and dotted with (1) legislation (2) efficacy-driven market-share competition (3) strong perceived need and (4) pay promises that are only valuable on innovation, all of which do spur innovation.

Take, for example, the so-called “Big Three” (viz., GM, Ford and Chrysler).

Big Three executives command exorbitant pay packages relative to foreign peers. If innovation were a function of high pay (or vice versa) then Big Three executives should have radically advanced the industry in recent years. Have they? Have US automakers radically advanced the auto industry? The answer seems a resounding, “No.

Focus in on just one decades-old concern, fuel efficiency. Aside from a few so-called “econoboxes”, the Big Three have failed to produce even fuel-efficient vehicles, let alone the most fuel-efficient cars in any class. Legislation, such as CAFE standards that US car makers fight tooth and nail, has advanced fuel efficiency. So, despite Big Three executive pay packages (often multiples of foreign counterparts’ executive pay packages), the Big Three are not generally “innovative” and, the Big Three have consistently fought innovation. As a result, the Big Three have consistently lost market share to foreign rivals who have innovated.

Even in this soft economy, foreign car makers continue to grow market share. Why? When oil prices exploded, “patriotism” (decidedly anti-free market force) and advertising lost out to real efficacy-driven market-share competition and, foreign car companies were ready with many fuel-efficient cars. They were ready not because German and Japanese auto execs command extraordinarily high salaries that spur innovation but because foreign car makers have long competed for market share where gas is costly. That is, efficacy-driven market-share competition – competition, for example, to save consumers real dollars when real dollars really add up – is a powerful economic force.

Still, while efficacy-driven market-share competition may be sufficient to spur innovation, innovation is often product of something altogether other than market forces: strong perceived need (often subsidized by government and government entities). “Necessity,” as they say, “is the mother of invention.”

Since ancient times, battlefields have been rife with innovation. Likewise, at all times, implacable scientific minds and engineers have made manifold innovations (often in so-called “free time”). Some of history’s greatest innovators (often members of the leisure class – often subsidized) have toiled because they “needed” to know – they “had to” – had to satisfy themselves!

Strong perceived need is vital to innovation and much would not proceed if it were not for the very anti-free market force of subsidies that furnish resources and opportunity. Ergo, to this day so-called “free-”market governments fund agencies, academic institutions, departments and scientists within same in addition to private contractors. Why? Because “free-”market forces and “performance-based” pay are insufficient to spur myriad innovations that keep countries like the US one step ahead of the competition.

These government and academic scientists and engineers do not generally receive “performance-based” pay but graded pay (an extreme whereat there is no remunerative reward for innovation). The pay is so bad that many flee the very projects they most cherish to make money in the “private” sector (a sector not known for paying scientists and engineers sums to rival executive pay packages). That is, low pay packages may actually stifle US innovation by driving scientists and engineers away from basic science to more lucrative careers in business, sales and pharmaceuticals (where they have devised a way to make medicine pay: cure nothing, treat everything).

So, legislative (and litigious) processes spur innovation. Efficacy-driven market-share competition spurs innovation. Strong perceived need inspires innovation. Subsidies often make innovation possible. But, in no case does pay per se spur innovation (though, as indicated, too low pay may hamper innovation).

How can remuneration spur innovation? Well, that guy in the garage building a better mousetrap – if he isn’t some wonk like me who simply must satisfy himself – is probably sick to death of slaving away while executives make fortunes off the sweat of his brow. He becomes the so-called “entrepreneur”. That is, the promise of future pay that will only materialize as the result of innovation is a powerful incentive.

Thus, innovation is spurred by (1) reasonable mandates, (2) efficacy-driven market-share competition, (3) perceived need and curiosity and (4) the promise of pay for innovation. Innovation is not a function of regular or so-called “performance-based” pay (i.e., pay packages linked to short-term value of profit shares).

Until and unless (1) government mandates innovation; (2) competition fuels innovation; (3) innovation is cheaper than existing technologies or subsidized; (4) necessity demands innovation; and (5) pay packages are restructured to drive innovation per se, innovation will progress at a sub-maximal rate because “performance-based” pay is both irrespective of and insufficient to spur innovation.