Archive for the ‘Economics’ Category

Do you believe poverty is worsening?

November 28, 2015

UnknownThe global population living in extreme poverty has risen in the last 20 years – indeed has almost doubled – say two-thirds of Americans in a recent survey. Nearly all the rest guessed poverty has merely stayed the same.

“Rising poverty” is a pessimist idee fixe, so ubiquitous that most folks unthinkingly consider it an obvious truism, to be sanctimoniously deplored. I have actually seen people’s eyes sparkle when talking of “rising poverty;” puffing up one’s moral vanity feels good.

Unknown-1Well, sorry to be a killjoy, but global poverty has in fact plummeted in recent decades. If world poverty were a stock, you’d have lost your shirt on it. The 95% of Americans who believe otherwise are misinformed.

This little known secret was revealed by Nicholas Kristof in a recent New York Times op-ed, citing World Bank figures: since 1993, the proportion of world population living in extreme poverty (defined as earning less than $1.00-$1.25 daily) fell by more than half, from 35% to 14%. Adding insult to injury, Kristof also noted the child death rate, before age five, dropped by more than half since 1990.* And whereas in the ‘80s only half of girls in developing countries completed elementary school, now 80% do. Literacy is rising and disease rates are falling. And so on. (Bill and Melinda Gates similarly argued in the Wall Street Journal in 2014 that pessimists are wrong and global conditions are improving markedly.)

imagesYet still there’s rising inequality, we’ve still got that for moralizing lamentation, no? Well – Kristof’s data refute that “the rich get richer and the poor get poorer.” The rich are getting richer, yes, but so are the poor, though not as fast, which does increase wealth gaps. However, globally, inequality between poor countries and rich ones is indisputably lessening, simply because the former have higher economic growth. (Even with today’s big slowdown, the Asian Development Bank projects 5.8% 2015 growth for the region, minus Japan. For advanced countries, 3% is considered sizzling.)

images-1The left, wedded to a mantra of rising poverty and inequality, is all about wealth and income redistribution to fix it. But part of why developing economies are growing faster than advanced ones, reducing the gap between them, is because wealth is in fact being redistributed from the latter to the former. This is what Trump yaps about with his China bashing. And, ironically, the left hates it too – all the whining about “shipping jobs overseas.” That redistributes wealth from richer to poorer people. Shouldn’t the left love it?

Unknown-2But of course poorer countries aren’t simply sucking our wealth away. To the contrary, a more integrated global economy with fewer artificial barriers enables goods and services to be produced where it is cheapest and most efficient, and this makes the whole world richer – including us. Cheaper production in China or India or Vietnam reduces prices for U.S. consumers (to the tune of trillions of dollars in fact), enabling more spending on other things, which stimulates job creation, making up for jobs lost. Everybody wins.

Further illuminating what is happening and why, author Ronald Bailey provided a commentary (on Reason.comon Kristof’s piece. What has enabled many developing countries to improve by taking advantage of global trade opportunities is better economic policies – in a nutshell, more economic freedom for their people to do so – phasing out dysfunctional old socialist nostrums (this is the “neoliberalism” lefties condemn). Bailey cites a 2015 Fraser Institute report giving countries economic freedom ratings, based on various measures. The 102 countries continuously rated averaged 5.31 in 1980, rising to 5.77 in 1990, 6.74 in 2000, and 6.86 in 2013.

Bailey notes that such economic freedom, and its handmaid, rule of law, tend to flourish in politically and economically stable countries. And it should be no surprise that all those conditions combine to unleash human ingenuity and enterprise, creating wealth and reducing poverty. Bailey also cited data showing that such nations tend to have markedly reduced fertility rates (thus controlling population growth), better environmental stewardship, and higher life expectancies than in more repressive and misgoverned lands.

Bailey concludes by saying that it is in “democratic capitalist countries that the air and water are becoming cleaner, forests are expanding, food is abundant, education is universal, and women’s rights respected.”

images-2Free market capitalism admittedly produces uneven results – as will any economic system – but is far better than any alternative for giving the greatest number of people the best opportunities and quality of life. The gigantic poverty reduction and welfare improvement of recent decades was not the product of socialism, but of getting away from such economic folly. And a market economy is also ethically superior because it works by increasing freedom rather than restricting it. That’s what I call social justice.

(All of this was already covered in my own very excellent 2009 book, The Case for Rational Optimism. I thank Scott Perlman for pointing me to the cited articles.)

*Meantime, Bernie Sanders saying America has the world’s highest child poverty rate is ridiculous. We measure it in relation to average U.S. incomes – which top worldwide scales. Of course child poverty is much worse in many countries that still are much poorer.

What Is “Socialism?”

October 20, 2015

imagesBernie Sanders calls himself a “democratic socialist.” The word “socialist” has gotten much use in the past century. “Nazi” was actually short for “National Socialist.” Not that Sanders uses the word in the same sense as Hitler.

There’s a lot of effort to sugar-coat it, to persuade voters it’s nothing to fear. Sanders says it means nothing more than economic fairness. UnknownHumpty Dumpty said, “When I use a word, it means just what I choose it to mean.” One caller on a radio forum chirped, “Do you like the fire department, the police, military, run by government? Why, that’s socialism!”

Well, no. That’s simply government. Not everything government does is “socialism,” so that if you like government doing anything then you must be a socialist.

Time for some Political Science 101.

Why was government invented in the first place? Philosopher Thomas Hobbes explained: in a “state of nature” your neighbor could bash your head in and grab your food, or wife. Unknown-2Imagine people getting together to discuss this predicament. The answer is for each to give up his* freedom to bash a neighbor in return for others giving up theirs. Now you can devote less time and effort on self-defense, and tending your wounds, and more on getting food or nookie. But this system of law (the “social contract”) needs an enforcer. That’s government.

But notice this is a faustian bargain. You give up your right to use violence, to government – which can now use it against you. That’s a terrible power, and you want to be very careful it’s limited. And while we have found many other worthy functions for government (like fire protection, mentioned by that caller), government doesn’t work by voluntary cooperation, but through its ultimate power to put non-cooperators in jail. Unknown-3With all the talk these days about “corporate power,” remember that no corporation can put you in jail.

What “socialism” really means is government performing not only its social contract function, via a legal system, and communal functions like fire protection, but also economic functions; in the lingo, “owning the means of production, distribution and exchange.” What, in a market economy, is done by people individually or, more commonly, grouped together in businesses. A purely socialist economy doesn’t even allow that.

Now, of course, just as we don’t have a purely market economy, and America actually is already partly socialist, so too one can imagine a socialist economy that isn’t pure but is still partly capitalist. But that doesn’t negate the basic dichotomy between the socialist and market economic concepts. Though you can have a mix, socialism means government taking the place of private business activity.**

images-1Sanders’s “democratic socialism” is really something of an oxymoron, because it is, once more, the essence of socialism to supplant private activity. And the more pervasive government becomes, in running society, the harder it is to be democratic. While a market economy entails numerous non-government institutions (importantly, businesses and corporations) as independent power centers, a counterweight to government power, a socialist economy undermines that power dispersal and concentrates power in government hands.

And so it has indeed been the experience that countries with basically socialist economies have not been what we would recognize as democratic. The two ideas are fundamentally incompatible. This is one key reason why the world so decisively turned away from socialism in the late twentieth century.

The other reason was that it just didn’t work. While the idea of socialism is purportedly to give ordinary people better economic outcomes, in practice it did the opposite. Government has proven itself incapable of creating wealth, as does a market economy of enterprises competing with each other to give consumers better products and services at better prices. You can redistribute till the cows come home, but without a market economy creating wealth in the first place, people will be poorer. Whine all you like about the unfairness, the “harshness” of capitalism fueled by greed, but the ordinary person is still better off than under socialism.

Unknown* One is supposed to use gender-neutral language nowadays. But of course women don’t bash anybody.

** Socialists talk of “common ownership.” However, in reality that means nobody except government owning anything.

Hollow Hillary’s Trade Terrors

October 11, 2015

Republican presidential candidates are falling over themselves pandering to a right-wing activist base that dominates party primaries – exemplified by Scott Walker advocating a northern border wall. Though he quit, so maybe that out-crazied the party’s crazy wing.

unknown-12The Democratic party has likewise been captured by a left-wing activist base, which explains Hillary Clinton’s disgraceful attack on President Obama’s TPP (Pacific nation trade deal), even though she advocated the concept while Secretary of State. It’s one of the few really good things Obama has achieved. That a big trade deal could be concluded at all in today’s complicated world is almost a miracle. Failure to approve it would be yet another blow to America’s tattered international credibility, while China’s role is growing. Recall how our friends all ignored Obama’s plea to shun China’s new regional development bank.

imagesAnd it’s a good deal for America – the benefits to our consumers through lower prices on imports will vastly outweigh any jobs lost – and that furthermore will stimulate more spending on other things, creating new jobs, making up for the ones lost. It’s good for the world too, making people in other countries more prosperous. A more prosperous world, with wealthier trading partners, is also obviously good for America.

But none of this registers with the anti-trade – frankly, anti-market – anti-economic-growth – Democratic left wing which Hillary feels she must coddle. At one time it was actually the Republicans who were the protectionists, while Democrats were for free trade, recognizing that protectionism was a scam to protect businesses from economic competition, and free trade benefited the broader public. UnknownDemocrats’ newfound hostility to trade trashes the good of the many for the interests of a few. How did they get their heads so far up their rears on this issue?

Hillary, trying to justifying her betrayal on the TPP, claimed its provisions are too cushy for pharmaceutical companies. Funny that when the deal was announced, pharmaceutical stocks plunged because those companies were seen to be screwed.

Telling It Like It Is: My Presidential Campaign Speech

September 12, 2015

Unknown-1My fellow Americans:

I didn’t want to run for president, but alas now I must. Mr. Trump supposedly “tells it like it is.” Unfortunately he – and other candidates – tell it like it isn’t. But I believe Americans can face reality.

This is a great country, but it wasn’t anointed by God to be that always. It requires work and even sacrifice. It’s not “morning in America” now – it’s getting late in the day.

Problem One: we face financial ruin. Social Security, Medicare and Medicaid were great programs, as long as three or four times as many people were working (and paying taxes) as collecting benefits. Unknown-2But that ratio is inexorably falling as lifespans rise. If nothing is done, these programs will swallow up the entire federal budget, leaving no money for anything else.

As a nation, we’ve actually been spending way more than our income for years, borrowing the difference (much from China). We could do this thanks to historically low interest rates. But at some point the debt’s size will outgrow what the financial markets can tolerate, causing our interest costs to balloon. Then we’re fucked.

Ignoring all this is the Obama administration’s seminal, historic failure.

Like Winston Churchill, I offer nothing but blood, sweat, toil, and tears. However, we remain a very rich people, who can afford to take care of the less fortunate. What we cannot afford is welfare for the better off. Social Security and Medicare will be phased out for higher income people. Taxes will rise too.

imagesSome of that money will go to infrastructure, on which we’re way behind, threatening our status as a world-class country. That spending will create a lot of jobs. I call the program “America Works.”

Another reality is that we cannot insulate ourselves from global economic competition. But free trade benefits more Americans than it hurts. No more stupid whining about “shipping jobs overseas.” If a product or service can be produced better and/or cheaper in India or China, that’s where it will be produced. American businesses that cannot match them will fail and won’t be able to employ anybody.

And did you know our rate of creation of small businesses (responsible for most job growth) is way down? images-1We’ve made it increasingly hard for businesses to operate, what with all the taxation and regulatory hassles. For starters, Sarbanes-Oxley and Dodd-Frank must be repealed.

A lot of folks, concerned about inequality, think businesses make people poorer, with “profit” a dirty word. That thinking must end. It’s successful, thriving businesses, making money by producing things people want, that make everybody richer. Otherwise nobody has a job.

images-2But job skills that used to assure a good life increasingly don’t cut it in today’s world. The real inequality problem is not the 1% versus the 99%, it’s the well educated versus the less educated. I know, people have been yakking about education forever, and there’s no magic bullet. But a quarter of Americans dropping out of high school cannot be tolerated. A great expansion of school choice would inject a much needed competitive ethos. And we need a rethink on college costs, because subsidizing tuition only enables colleges to raise it.

On all these issues, I will work with both parties, seeking compromise and consensus. We must end the culture of partisan demonizing, and recognize that Americans of all political stripes all sincerely want what’s best for everyone, disagreeing only on how to achieve it. Nobody’s evil (or very few).

Unknown-3Foreign Affairs: no more “leading from behind.” That doesn’t mean rushing into wars. But President Obama got the balance wrong between caution and assertiveness, shredding American credibility and making a world much more disorderly and dangerous. America must take the lead and act resolutely to nip conflicts in the bud. There must be no reprise of Ukraine. And if we decide ISIS must indeed be fought, then Heaven help ISIS.

The UN, as a vehicle for international order, has long been broken, due to bad guy vetoes. I will push to create a new “League of Democratic Societies,” with strict membership criteria (like the EU’s), to assume the role the UN cannot.

One last thing.

On May 14, 1938, my mother stood on the deck of a ship as it passed the Statue of Liberty. She was a refugee from a murderous tyranny. America has always been the go-to place for people seeking better lives; and that’s been one of the key things that has made America great. images-3Because such people, willing to give up everything comfortable and familiar, with the ambition to start life anew, even risking their lives to get here – those are the best people. We need more of them.

Elect me and we’ll keep America great.

Piketty, Inequality, Envy, and Fairness

August 16, 2015

Unknown-1The rich-hating left went orgasmic over Thomas Piketty’s book Capital in the Twenty-First Century. I previously discussed the controversy. Now I’ve read the book.

Not the thunderbolt of lefty wet dreams, it’s mainly dry economic history and analysis. Much I found interesting and informative. But it’s one of the most poorly organized books I’ve ever read, meandering repetitively to and fro.

Piketty’s big “revealed truth” is r>g – that is, return on capital (r) exceeds economic growth (g), which leads to capital accumulation, and thus rising inequality. His data does show r>g through most of history. Well, not data exactly, but mostly assumptions and estimates. UnknownBut never mind. A bigger problem is that for the last century, 1913-2012, g>r! Piketty says this was due to the 1914-45 “shocks” (wiping out many fortunes) but that past norms are returning. So the future will more resemble the 19th century than the 20th? However, taxes were negligible before the 20th century. Thus in order to project future after-tax r>g, Piketty makes the heroic assumption that taxes on capital and its return will fall to zero! Even while he advocates greater taxation.*

imagesThat r exceeded g through most of history is hardly news because g (economic growth) was practically zero, while capital would nevertheless earn some return, typically farm produce or by lending money at interest. Now we have significant growth that, for the past century at least, has exceeded return on capital. But why let facts spoil a pretty theory?

Inequality may also rise from pay gaps. Piketty focuses on corporate “supermanagers,” whose pay he doubts is justified by merit or productivity. Unknown-2I agree – it’s due to incestuous boards of directors. But even if “supermanager” pay were drastically cut, would that money then flow toward the bottom of the income distribution? Surely not. It would go to shareholders; the rich would still get richer.

Much inequality talk casts the rich as squeezing the share of productivity begrudged to employees. That’s not how the economy works. By and large jobs pay what the market dictates, in order for businesses to attract and keep the needed workforce. They can’t just arbitrarily pay less; but nor can they pay more; if they want to stay competitive and employ anyone at all. Worker pay is not what’s left after the rich have “taken” their “share” (or more than their share).

Piketty’s constant use of the words “take” and “share” implies a zero sum game where one person’s larger share makes others smaller. Similarly, the language of “distribution” implies a pot of pre-existing wealth to be divided up, as though some god ladles out portions. But that’s not how an economy works either. In the main wealth is not “taken” but gained from other people handing it over willingly – in exchange for something (a product or service) they value even more. No zero sum game, that makes everyone richer. The pot grows.

Unknown-3In today’s world, not just “supermanagers” but top performers in any field earn much more than the nearly-as-good. Take LeBron James. It might seem absurd to earn so much for something so meaningless as getting a ball through a hoop. But millions enjoy watching it, and willingly pay, in various ways. So LeBron gets rich. Is that social injustice?

We can debate who deserves what income, and I’d agree with Piketty that much high pay is undeserved. But should it be forcibly confiscated (as Piketty urges) in conformance to those debatable opinions? By what right may I (or anyone) dictate what’s fair for others to earn? I eschew such arrogant presumption.

Meantime Piketty acknowledges that bare mathematical inequality tells us little. In the past a small minority lived well (to the extent technology allowed), while most lived wretchedly. Today the whole picture has shifted dramatically to a higher level of overall societal wealth: the rich are even richer (hence mathematically more unequal), but the rest are much richer too. Indeed, their living standard is actually comparable to that of the past’s wealthiest (if not better, considering health and longevity).** That today’s inequality might mathematically equal 1800’s says nothing.

Yet Piketty writes as though modern inequality exactly parallels that of centuries past. Relative living standards are no part of his analysis. images-2Piketty’s focus is entirely upon the wealthy, analyzing their situation in depth; the non-wealthy are present only as shadows, with no discussion of their situation and its changes. A Martian reading this book would have no idea how much ordinary lives have improved.***

The book indeed omits any analysis of economic inequality’s goodness or badness. The answer might seem self-evident. But clearly, perfect equality of wealth and income would not be just but unjust because different people earn/deserve differing outcomes; not to mention the matter of incentives for people to be productive (hardly theoretical in the experience of communist societies). The real question is what kind of inequality is acceptable. Some writers have attempted to grapple with this, but not Piketty. All he does is to project rising mathematical inequality – which he himself cautions tells us little.

Yet he’s terrified that the 1% will monopolize all wealth, with the 99% having nothing. The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?

Unknown-4Their wealth is not a problem, nor is high inequality, so long as most people can live decent lives; and helping those who can’t does not require knocking down the rich. They don’t get their wealth at the expense of the rest. Steve Jobs impoverished no one but got rich through products that benefited millions. Had he not, all that wealth would not have been “distributed” to others. It would never have existed. Indeed, we would all have been poorer.

This book, obsessed with the rich and oblivious to the lives of others, would be better titled Envy. unknown1 Resentment at others’ success (especially when seemingly undeserved) is a powerful human emotion, often underlying egalitarian politics. Life is unfair, and we must work for fairness – but by building people up, not tearing others down. Envy and fairness don’t mix well.

* Rising inequality is often blamed on tax cuts, the top mid-century U.S. income tax rate having exceeded 90%. But never discussed is what rich people actually paid. Piketty himself notes they can legally avoid having taxable income, allowing returns to accumulate untaxed instead. So in practice nobody ever paid anything like 90%. Yet Piketty forgets this in claiming that lower taxes have raised inequality. (Rich people still pay far the lion’s share of income taxes.)

** This actually applies even to the poorest in advanced societies; especially taking into account government benefits. Today’s U.S. “poverty” line equates to a middle class living standard of just a few decades ago. Poverty ain’t what it used to be. And even in developing countries, the almost universal abject deprivation of the past is inexorably going away, afflicting now only a small minority of world population.

Photo by Walker Evans

Photo by Walker Evans

*** Nor would many Earthlings, romanticizing the “good old days.” But read, for example, Evans and Agee on the extreme poverty of rural 1930s Alabama. The work was grinding; the food disgusting; clothes made from used burlap sacks; copulation the only recreation. And those were white folks.

The $15 Minimum Wage – Money From Heaven

July 29, 2015

UnknownDo you favor a $15 minimum wage? Nobody asks where the money comes from. Heaven, I guess.

We’re told that if you give low wage workers more cash they’ll spend it, great for the economy. As though it’s free money.



Or else the money is imagined to come out of business profits. When pigs fly. It will actually come from higher prices. And since low wage industries (like fast food) often serve poorer people, the extra money earned by low wage workers will ultimately come from . . . low wage workers.

Economics 101 says that when prices rise, demand falls. Raise the price of low skilled labor, and businesses will buy less of it. They’ll seek ways to automate instead (more self-service checkout machines if cashiers become too expensive, for example), which is already happening. imagesHigher minimum wages can only accelerate that – bad news for low skilled workers – who, once unemployed, often stay unemployed.

People imagine businesses can just pay more because they have profits to spare. In reality, profit margins tend to be pretty thin – like around 3% of sales for supermarkets. There’s no room for fat because in a globalized economy every business competes with every other. McDonald’s doesn’t compete just against Burger King and Wendy’s, but every other food option including home cooking – and indeed against every other conceivable product people could decide to buy in lieu of big macs. So prices must be kept as low as possible. Force prices up, due to higher minimum wages, and a business may become non-competitive. Bye bye jobs.

Yet defying this economic logic, advocates of higher minimum wages claim studies show they don’t actually kill jobs. Maybe so – in the short term at least – and if the rise is small, staying under 50% of median wages. But $15 would double the minimum wage, to 77% of the median. The long term impact on low-skill jobs is frightening.

Unknown-3We’re also told government is in effect subsidizing businesses like McDonald’s, that don’t pay a living wage, with food stamps and so forth filling the gap. That’s twisted logic. After all, plenty of people who get food stamps earn nothing. So you could equally say McDonald’s payrolls actually reduce what government must provide. Anyway, we give food stamps, and other welfare, because we as a society deem it the right thing to do. We shouldn’t expect (or force) private companies to do that for us.

In fact, higher minimum wages are an ineffective way to combat poverty. The Congressional Budget Office estimates that only 20% of the income benefits would go to those below the poverty line. (Most minimum wage workers are not primary family breadwinners.) So programs like food stamps, and the Earned Income Tax Credit, are much better targeted for helping the poor – without pricing low skill workers out of the market.

But New York State is currently in a paroxysm of political pandering on this issue. Governor Cuomo set up a board to assess fast food minimum wages. Legions of workers duly came and testified that $15 would be peachy. The outcome was pre-ordained. Our local Times-Union has denounced it – because the $15 wage will be phased in, not immediate!

Never mind the absurdity of singling out one category of jobs (and, unfairly, only in chain restaurants). Or how “fast food” can actually be defined. Unknown-4Or that New York, due to high taxes, already high unionized wage costs and other costs of all kinds, and the most burdensome bureaucratic regulation, is just about the least economically competitive state in the union, making large swathes of upstate into job deserts.

Politicians in this free-money fantasyland will never have to answer for the economic consequences. Voters won’t connect the $15 minimum wage with unemployment higher than it would otherwise have been. Just as public officials don’t answer for all the other ways they’ve run the state’s economy into a ditch. Indeed, the resulting tough economic conditions just encourage more populist politics, preening “compassion” and doubling down with yet more of the economic follies that got us here.*

I too have compassion for fast food workers, and wish they could earn more. It’s a hard life, and I’m lucky to be spared it. (Though I did work one very crummy job in my teens.) But the answer is not to wave a magic wand and expect Heaven to cough up the cash. Instead it’s to stop making it harder and costlier for businesses to operate. images-1And to make sure more people get the education they need for decent jobs – at least finish high school (too many don’t). A key reason fast food jobs pay so little is because there’s a vast oversupply of poorly educated people to fill them.

* Like rent control — more effective than bombing for destroying affordable housing.

What Is a Business For? Is Profit a Dirty Word?

July 15, 2015

UnknownAt a recent social event, most guests sanctimoniously agreed it was somehow disgusting that anyone should make a profit providing health care. One woman said she had no problem with a store profiting from selling sweaters; but no one should profit from people’s hardship or suffering. I frankly thought that bizarre. Isn’t the relief of suffering a greater boon, more worthy of compensation, and incentivizing, than merely supplying sweaters? I sure as heck didn’t begrudge the profit of the dentist who cured my tooth ache; that’s what motivates people to go to dental school, invest in offices and equipment, hire staff, etc., to provide such service. Nor do I resent the profits of the pharmaceutical company producing the medicine that makes my wife’s life livable.

Unknown-1Calvin Coolidge said, “The business of America is business.” But what is a business for? There are two schools of thought. One says a business’s only purpose is to make money for shareholders (the owners) and anything detracting from that is indeed a dereliction of its primary duty. The other side says a business should serve the interests of all “stakeholders” affected by its doings – including employees, customers, and the broader public. They note that in olden times a business seeking a corporate charter from the state (allowing limited liability for shareholders) was required in exchange to have a public benefit purpose. But that model was dropped in the 19th century in Britain and America, allowing corporations to be chartered just to do business.

Thus critics of capitalism talk as though the first side won the argument and businesses do exist solely for profit – in disregard of any other consideration – and hence are ipso facto a menace. For example, Naomi Klein, whose recent book I reviewed, seemingly thinks profit is the sole reason energy companies extract fossil fuels – the fact that society uses, needs, fossil fuels doesn’t enter into it. As if, remove the profits, and no extraction would occur.

imagesThis tells us there’s something incomplete in the view of businesses as solely profit maximizing creatures. It leaves out the way they do that – by supplying something beneficial to customers*, creating value greater than what is paid (of course some predatory businesses do the opposite, but that’s cheating). The point is epitomized by Steve Jobs. He made tons of money, but that wasn’t his ultimate objective – rather, the profits were what enabled him to perfect products useful to purchasers. That was his true motivation.

People who bought his products valued them more than the money spent. That difference, or surplus value, created by Jobs, increased societal wealth. Had he never existed, all those people would have been worse off. His wealth would not have been somehow distributed among them; it would never have existed either. This is what the 99%-vs.-1% mentality misses.

Today it’s more true than ever that business is really all about customer value, with the internet leveling the competitive playing field, giving consumers far more choices and access to information. A business whose products aren’t great, that doesn’t satisfy customers, will not survive.

Anyhow, it’s too simplistic to say (legitimate) businesses are only concerned with profit. The real world isn’t like that. It’s certainly untrue to say they care only about shareholder returns. Shareholder ownership is merely notional; in reality a corporation owns itself, buying shares merely entitles one to certain rights, while management isn’t meaningfully beholden or accountable to shareholders, instead running the company for its own purposes. And while a firm’s profitability does benefit managers, mainly they care about profits because profits advance their other agendas (a la Steve Jobs).

Unknown-2Also, speaking of the real world, corporate denizens are human beings, and while money is surely a big motivator, nobody is exclusively mercenary. Another big motivator is how one appears to other people – and in the mirror. Most of us want to be seen as doing good, and even to actually do it. Back in the ‘70s I was a regulatory lawyer battling Con Edison over its rates. The company was in financial trouble; and I actually felt management was betraying shareholder interests to bend over backward for consumers.

images-2Corporate greed? It’s not so simple.

At the end of the day, the most successful and profitable businesses are those that are best at creating customer value – which of course means societal value. Adam Smith wrote of the market’s “invisible hand” thusly benefiting society. I heard a radio commentator say Smith might have been right in his simpler time (1700s) but not in today’s world rife with inequality. Really? In Smith’s day, the great mass of humanity everywhere lived in squalid poverty – whereas in the last century, worldwide average real dollar incomes quintupled. That colossal fact is not negated by the inequality of the few with great wealth. They haven’t stopped billions of people from seeing a quantum leap in living standards in modern times. And that vast enrichment is nothing other than the cumulation of customer value created by businesses seeking to profit thereby – i.e., free market capitalism. A stunning vindication of Adam Smith and his invisible hand.images-1

* To quote management guru Peter Drucker, “There is only one valid definition of a business purpose: to create a customer.”

Pope Francis: Is Consumerism Bad?

July 11, 2015

imagesPope Francis has denounced consumerism as a “poison” that threatens true happiness, and is an assault upon the poor. What does he say does bring true happiness? Faith in a nonexistent deity. The bit about the poor is equally fallacious.

I’m going to repeat here what turned out to be one of my most-visited blog posts ever, from December 2008, titled “Is Consumerism Bad?” —

Ellen Goodman, in her 12/15 column, is one of those rejoicing that materialist consumerism, at which they’ve always sneered, is falling victim to the recession, as people cut back spending. They applaud this as a simply wonderful retrenchment, a return to sanity and virtue.

But why are we in a recession? Because people are cutting back spending. None of the other factors would actually cause a recession if they weren’t causing spending cutbacks. When people buy less, businesses need to produce less, so they need fewer employees. So people lose their jobs; then they too will spend less; so then even more people lose their jobs. And Ellen Goodman thinks this is a good thing?

“Materialist consumerism” is people buying stuff that other people think they shouldn’t. But a free society has to mean people pursuing happiness by doing things–like spending their own money as they choose–that others disapprove. Some social critics just hate this. They’d prefer it if right-thinking moralists like them got to tell everyone else how to live.

Such people, like Goodman, do believe that an economy based on consumerism is somehow an offense against virtue. But what else, actually, could any economy be based on? The “economy” means you produce goods and services that I buy, and I produce stuff that you buy; which makes us both better off. That production of things people want is the source of all wealth and income, our entire standard of living. It doesn’t come from heaven, or “society,” or government. You may sneer at consumerism, but you don’t want consumers to stop buying what you yourself are employed to produce; you’d be out of a job. And if all consumerism stopped, we’d all be out of jobs.

Greece At The Rubicon

July 7, 2015

UnknownWhen the Euro was set up, they knew it was a fraught proposition, binding themselves to each other financially. The Germans in particular, fearful about giving up the strong Deutschemark, insisted on strict penalties for any country whose deficit breached 3% of GDP. Of course it was Germany itself, and France, that soon violated this, but the matter was fudged. Not a good precedent.

Meantime, there were also stringent fiscal criteria for admission to the Euro. So how did Greece get in?Unknown-1 It cooked its books, and lied.

Greece’s economy has long been weighed down by clientelistic politics producing an over-bloated state sector, with lots of well-paid unneeded government jobs, fat pensions and benefits, while tax avoidance became endemic, and red tape (giving all those government workers something to do) strangled business. Thus Greece could not pay its bills, borrowing heavily to close the gap. This is what was covered up. But about five years ago the retsina hit the fan when the hole became too deep, requiring a bail-out.

Reasonably enough, the Europeans (mainly Germany) insisted that Greece clean up its act as a condition for the bail-out – the “austerity” we hear so much about. In hindsight, they may have overdone it. You’d want to wean the country away from profligacy, but not crush its economy, because economic growth is the only hope for ever paying Greece’s debts. Greece did accept some reforms, but did suffer a pretty severe economic contraction, with 25% unemployment, which didn’t help matters.

Unknown-2Part of the problem is that lefty Greeks just don’t get it that, to support the lavish government salaries and other spending, you need an economy that actually produces something that earns money. Of course, that’s dirty capitalism. Feh. So Greece’s reforms did little to improve economic productiveness.

And the reforms in question, the so-called “austerity,” merely moved Greece from extreme profligacy to moderate profligacy. This shows just how deep the hole is, and suggests the Europeans probably also erred in failing to bite the bullet of just writing off a major part of Greece’s debt.

Unknown-3Through all this, Greeks have cast the Germans as villains, seeing no reason why they shouldn’t go back to the old ways of living high on the hog on borrowed money they can’t pay back. The Germans see no reason why, having themselves undergone, a decade ago, the same sort of painful reforms now asked of the Greeks, they should have to work to age 65 and pay taxes so the Greeks can retire at 57 with fat pensions and avoid taxes. A classic grasshopper-and-ant story.

Then in January the Greeks elected the Syriza party, a bunch of irresponsible leftists with a platform of rejecting “austerity” and restoring the days of wine and roses. images-1They danced in the streets exulting in this triumph of wishful thinking. The new government, led by Alexis Tspiras, proceeded to make a hash of further bail-out negotiations and to shred any vestige of trust by Europeans. And then, just as it seemed possible that a deal might nevertheless be struck, Tsipras kicked over the table by calling a snap referendum on whether to accept the bail-out terms.

He urged Greeks to vote No, saying they could have their cake and eat it too – twice over – that they could reject Europe’s terms yet stay in the Euro – and, indeed, could reject the deal and see off austerity, returning to their old cushy clientelistic habits. With what money? Who knows.

This insane fantasy Tsipras cast as a matter of national pride – standing up against European (mainly German) blackmail!

Unknown-5Two things happened in the week before the vote. First, Greece defaulted on a scheduled debt payment; a first for a “developed” country. And Greece’s banks all but closed (for lack of money), allowing only small ATM withdrawals, throwing much of the economy and many people’s lives for a loop.

You might think this foretaste of what could lay in store would give the Greeks pause in the referendum vote. You’d be wrong. This vote was a matter of pride, remember. The Greeks are a proud people – proud enough to borrow billions and tell the lenders “Fuck You.” Unknown-4And so they did – a resounding 61% voted No. And again the grasshoppers danced in the streets to celebrate their courage.

What happens now? Tsipras justified the referendum “No” as strengthening his hand to get a better deal from the ants who, of course, lacking backbones, might just cave. But the Europeans had said they’d construe a “No” as a vote to exit the Euro. Greeks have indeed made a courageous bet, and if it comes wrong, those who thought “austerity” was rough ain’t seen nothin’ yet.

It’s not really clear how a country can be kicked out of the Euro. But perhaps it would be as simple as the European Central Bank supplying no fresh Euros; after a time Greece would effectively be forced into a different currency.

The Economist believes Europe should think twice before such a drastic step into uncharted territory. It could pull a thread that unravels the whole fabric. And you wouldn’t want a failed state in the continent, with all the potential tsuris that could entail. Furthermore, Greece could be thrown into the arms of Putin, with whom Tsipras has been playing footsie. But The Economist also thinks that if Greece stays in the Euro, the kinds of crises we’ve seen will keep repeating basically forever.images

My view, FWIW, is that Europe should cut off this gangrenous limb once and for all. A Greece-free Euro zone should ultimately be stronger and more stable. And there’s the issue of moral hazard; Greekish behavior should be seen to have consequences, lest others (like Spain) be tempted to follow it.

But Europe should also ready humanitarian aid packages for Greece. We’ll see if the Greeks spit in their faces then.

Fighting the Secret Plot to Make the World Richer*

May 24, 2015

President Obama is battling for “fast track” authority, to negotiate the Trans-Pacific Partnership (TPP, a trade deal among 11 big countries) without having it subject to Congressional amending. It’s the only way such a deal could conceivably happen.



Most Democrats, led by Elizabeth Warren, oppose this. They say the trade negotiations are being conducted in secret, shaped behind the scenes by corporate interests. (We all know Obama shills for fatcats, right?) As columnist Ruth Marcus points out, this Warren argument is simply bogus. It’s not as though legislators will have to vote on the deal without our knowing what’s in it. In fact, the proposed legislation requires the terms to be made public 60 days before signing – an unprecedented proviso.

Unknown-2But, as Marcus notes, the secrecy argument is a mere excuse, and Warren et al would still oppose this deal if the negotiations were broadcast live on C-SPAN. They paint it as selling out American workers by helping foreigners to compete unfairly against them. This reprises the 1990s NAFTA debate, when Ross Perot warned of a “giant sucking sound” of U.S. jobs going to Mexico. Warren says he was right. But in truth that sound was at most a whisper, with direct U.S. job losses minimal.

Well, free trade does threaten some jobs by exposing them to tougher foreign competition. But this perspective is like viewing the universe through a straw, blind to the bigger picture. Part of that picture is that freer trade lowers prices for consumers. This is huge; the U.S. Chamber of Commerce estimates that imports add $10,000 annually to the average American family’s purchasing power. That enables them to spend more, stimulating the economy and generating more jobs – probably way more jobs than the few lost to foreign competition.

Unknown-1By harping on those latter lost jobs while ignoring the benefits to consumers and the economy as a whole, Warrenite Democrats are literally favoring the interests of the few (very few) over the interests of the many. Some populists.

Unknown-4Interestingly, for most of its history, throughout the 19th and early 20th centuries, the Democratic party understood perfectly well that freer trade was good for the many while protectionism cosseted the few at their expense. Not a good deal for “everyday Americans.” This was in fact a headline issue for Democrats. But then (perhaps too heavily invested with union interests) Democrats lost their way on the trade issue.

Meantime, even the focus just on America’s economy is too narrow and misses the larger reality. If NAFTA’s impact on U.S. jobs is debatable, its impact on Mexican ones was unarguably huge, making Mexico much more prosperous than it would otherwise have been. And surely a richer neighbor is something in America’s national interest.

imagesIndeed, whatever its effect on any particular job, or industry, or country, freer trade makes the world as a whole richer.** Any serious economist will tell you so. It does this by enabling capital investment to be put to the most economically efficient uses, unhindered by artificial barriers and constraints, which results in production of more goods with fewer inputs of resources and labor. That’s an enlargement of the global economic pie, so more people can get bigger slices. Since WWII, this – an increasingly globalized world, with more and freer trade – has been the prime driver which has raised billions of people out of poverty.

Surely that is something in America’s national interest. A richer world is a less troubled world; and can buy more that U.S. workers produce.

Warrenites cloak themselves as tribunes for those “everyday Americans,” believing that if Democrats sound this trumpet loudly enough they’ll win. Thus they are trying to move the party, and Hillary Clinton, to the left of President Obama – who in fact was just barely not too far left to win – barely. The British Labour party made the same mistake in their recent election, believing the country would embrace pet left-wing themes. It did not; Labour was crushed.

imagesOur next election, with a Democratic candidate tacking left and having big trustworthiness issues besides, will be the Republicans’ to lose. If only they can control their own self-defeating instincts and offer a halfway sensible nominee.

* I cribbed this title from a recent article in The Economist.

** Potentially $220 billion richer annually, from the TPP alone, it’s estimated.


Get every new post delivered to your Inbox.

Join 3,442 other followers