Free Markets, Free People
Michael Wade sent me and email a few days ago asking me what purpose I thought banks served any more. That email led to a phone conversation, and that conversation led to this post. Because that simple question opened up a whole area of investigation about not just banking, but a whole universe of institutions that may be near the end of their purpose.
The modern era has been an age of institutions. Banks, unions, governments, corporations—a whole panoply of organizations whose sole purpose was to provide a central clearinghouse for goods and services, and the regulatory rules and legal framework under which they operated. But we are now seeing glimpses of a future in which institutions simply have no purpose, or, at the very least, will serve a different purpose than they do now. The era of institutions is passing, and is being replaced by the era of…something else. I think—I hope—it will be the era of the individual.
Let’s take the example of banks, first. Currently, banks take deposits from their customers, then loan those deposits out—less a reserve requirement—for mortgages, revolving credit, business loans, etc. They also offer their customers the convenience of access to their money on a moment’s notice, almost anywhere in the civilized world.
Now, imagine a world where your money is stored on a personal biometric device. So, you no longer need an institution to store your money. You can carry it with you—perhaps implanted in you—everywhere you go. Your entire stock of cash and savings are now truly yours, and in your personal possession at all times. So what happens to banks? Without depositors, there are no longer any deposits to loan out in credit cards or home purchases. What happens to banks, then? More importantly, what happens to credit then? Perhaps banks will have to change from depository institutions to investor-funded lenders. Or be replaced by them, as there are already web sites where potential creditors and debtors can engage in micro-lending.
We are on the cusp of really transformative technological change, and if you want to see what the implications are for institutions, you need look no further than the music industry, where the RIAA is in a fierce rear-guard battle to maintain their viability. The entire music industry is being destroyed, as an institution, by the new digital technologies that were created just a decade ago. It may be a shock for some of you younger readers, but there was, at one time in the recent past, a world in which there were record stores in every shopping center and mall.
It used to be that the recording industry controlled every aspect of commercial music. They would underwrite the recording costs, would create the playable media and packaging, then pay for the distribution to music stores. If you wanted a piece of that pie, and hit it big in the music world, you had to scrape up enough money to make a demo tape, send it into Sony, BMG, RSO, etc., and hope that some executive was impressed enough to sign you to a contract to make your first album.
The world doesn’t work that way any more. For less than $1000, you can turn your dingy studio apartment into a multi-track recording studio. You can get a web site, upload your MP3 files onto it, and sell them online. You don’t need a record company, a distribution channel, or marketing money. This is killing the record industry. The RIAA is actually trying to extort royalty money from bar owners who have live bands play, on the theory that they should get a piece of the bar’s profits from the music performance. Good luck with that.
Digital publishing is starting to do the same thing to the publishing industry, as Amazon is making it possible for anyone to publish their book. Yes, a lot of less than stellar talents are publishing for the Kindle now, but some mainstream writers are now moving over to the Kindle platform. Publishing, as an institution, is in trouble.
Technology is now empowering individuals in ways that were undreamed of 20 years ago, and the pace of that change, and the vistas it’s opening up for individual empowerment is increasing every day.
Obviously, institutions, including governments, are going to become increasingly leery of this trend. After all, it is not in the best interests of institutions to allow individuals to be empowered. So there will be some sort of backlash at some point. Hopefully, that backlash will be as ineffective as the RIAA’s backlash against digital music has been. But some institutions have their own police and armies, and they have the potential to resist more strongly.
Of course, since we are now in the middle of what appears to be a huge test of government’s ability to manage the economy and currency—and government is not doing a very good job of demonstrating competence—maybe even that potential problem can be minimized.
We can only hope.
The US Post Office is in deep trouble. Obviously some of the problems can be laid at the feet of the internet which has all but killed routine personal mail in favor of the faster and cheap email. Competition in the area of express delivery and package delivery have taken a ton of business away as well. Private companies like FedEx and UPS can delivery those items more cheaply and reliably than the USPS ever could.
But the biggest problem the USPS faces is its lavish entitlements driven by union demands. And once again, we the tax payers are being warned that unless we toss another 5.5 billion dollars the USPS’s way, its going to go broke. Here’s why:
At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.
So you have a government agency with declining revenue number …
Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago.
It’s difficult to imagine that trend reversing, and pessimistic projections suggest that volume could plunge to 118 billion pieces by 2020. The law also prevents the post office from raising postage fees faster than inflation.
And overgenerous and rising pension obligations. Sound familiar? The $5.5 billion payment due at the end of September is a payment required to help restructure that pension program. But, as expected, there’s resistance from the union as to the means taken to do so – like cutting the work force:
Cutting the work force is more difficult. The agency’s labor contracts have long guaranteed no layoffs to the vast majority of its workers, and management agreed to a new no layoff-clause in a major union contract last May.
But now, faced with what postal officials call “the equivalent of Chapter 11 bankruptcy,” the agency is asking Congress to enact legislation that would overturn the job protections and let it lay off 120,000 workers in addition to trimming 100,000 jobs through attrition.
Got that folks … the brainacs at the USPS, fully aware of the dire financial straits in which the agency found itself, agreed to a “no lay-off clause” in their new union contract last May. Incredible.
And now that it makes perfect sense to consider layoffs, as well as other measures (no Saturday delivery, closing little used post offices, etc.), that option is one that would literally take an act of Congress:
The post office’s powerful unions are angry and alarmed about the planned layoffs. “We’re going to fight this and we’re going to fight it hard,” said Cliff Guffey, president of the American Postal Workers Union, which represents 207,000 mail sorters and post office clerks. “It’s illegal for them to abrogate our contract.”
So reach deep fellow taxpayer. Time to bail out yet another failing agency which apparently never saw this revolution in communication coming, was never able to compete in the market without monopoly powers granted by government and has overspent and overpromised even as it watched it’s market share continually shrink.
Maybe it is time to, horror of horrors, consider privatizing this service? Actually, that’s something that should have been done years ago. But watch … we’ll still have this government run anachronism around our fiscal necks when your grandchildren are adults.