The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.
In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.
No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.
Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930’s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.
Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.
Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.
I think this captures my feelings about the situation:
“[C]rony capitalism” has as much to do with real capitalism as praying mantises have to do with real prayer.” – Donald J. Boudreaux, Cafe Hayek
Boudreaux is responding to an article by Gerald O’Driscoll a few days ago in which O’Driscoll took on the notion that “crony capitalism” is simply an natural evolution of capitalism. Boudreaux had a slight nit to pick with the author but his characterization of crony capitalism was dead on.
O’Driscoll covers many of the myths that those who want to characterize crony capitalism as a problem only to be found under a capitalist system. In fact it has little to do with capitalism at all. It’s simply cronyism and, once you understand what is being described, it can exist under any system that has a government.
You see, that’s the one ingredient that is necessary for it to exist.
Under a free enterprise system – capitalism – the government’s job is to play referee, that is, enforce legal contracts and prevent/punish fraud. And, there’s a certain amount of regulation necessary to exercise those functions.
But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or a free market. When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism. Obviously, a capitalist system, then, isn’t the only place it can happen.
And how does this cronyism develop?
Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”
Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
Government also tends to favor those who favor it. And this is one of the many things which came to light in this recent financial bailout:
Crony capitalism ensures the special access of protected firms and industries to capital.
Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
Consider the revolving door at Goldman Sacs. Consider the preponderance of union workers at GM and Chrysler. Go ahead and try to argue there’s no money connection between those who control the government’s purse strings and regulations and those who have benefited.
Donald Beoudreaux gives a great summary that dispels the myth that “crony capitalism” is a version of capitalism or, in fact, has anything whatsoever to do with it:
To the modern American ear, “anarchy” no longer means simply “no ruler”; instead it now means “no law” – true, free-for-all chaos. In vivid contrast, capitalism – real capitalism – is infused with law, most of which is self-enforcing. The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.
The chief problem with crony capitalism is precisely that it injects significant amounts of lawlessness into the economy, transforming capitalism into something entirely different and dysfunctional. Under crony capitalism, government excuses the politically influential from capitalism’s laws. Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals who lie, rape, pillage, and plunder. And that’s true lawlessness and chaos.
So don’t let the enemies of capitalism get away with calling it crony capitalism. It’s cronyism, pure and simple, and it can and does exist with any form of government. And increased regulation isn’t going to change that dynamic or curtail the developed system of cronyism that we now suffer under.
Some of you would no doubt love to be accosted by a bunch of girl scouts plying their wares (you know who you are), but you won’t be subject to such a harrowing experience in Seattle:
Tim Burgess’s move to outlaw “aggressive panhandling” may be an unconstitutional, attention-seeking bully tactic, but at least the Councilmember appears willing to apply the law equally to anyone asking for money on the streets. Even if they just want to sell you a box of thin mints.
The issue, such as it is, arose from a (possibly facetious) email exchange between a Seattle Councilmember and an alleged citizen complaining about what can only described as a channeling of a Mike Myers mock-horror scene:
I was strongly opposed to your panhandling proposal until my experience on the streets of downtown West Seattle yesterday. Now I totally understand where you’re coming from.
Here’s what happened: on the way to the West Seattle Farmer’s Market, I encountered a band of Girl Scouts aggressively promoting cookie sales within spitting distance of a KeyBank ATM where I was withdrawing money. The situation was so extreme that I could actually hear their aggressive, repeated, high-pitched solicitations at the very moment I was entering my PIN. Then as my cash was dispensed and I nervously removed my receipt — trying to stay calm despite this invasion of my constitutional right to not be confronted by my relative class status — I saw two adult women. They were the ringleaders, I assume. They didn’t seem to be doing anything but watching over the whole scene and talking discreetly to each other about god knows what. All in all, a nerve-racking experience.
So there they were, asking for money, repeatedly, despite my lack of interest in what was on offer, all happening well within 15 feet of an ATM. Would this be banned by the your ordinance? I certainly hope so, because there’s a long history of applying laws like this inequitably, almost as an excuse to push poor people out of desirable areas instead of addressing the actual problem.
Thanks for any information you can offer.
My best guess is that this email comes from a rather disgruntled, yet somewhat clever, panhandler. The Councilmember’s response is both appropriate and obviously skeptical, but it does raise an interesting question: if the state is going to exercise it’s police powers judiciously, doesn’t that ensure that we miss out on opportunities that are neither a threat nor an offer of something we don’t really want? After all, what sort of hair-shirted aesthete do you have to be to not want girl scout cookies?
When it comes to local rules and regulations, I’m not one to quibble too much unless such restrictions impinge on fundamental rights. Setting up shop in a public way certainly deserves some treatment of police power since the sidewalks belong to the public. At the same time, if you are just standing around hawking your legal goods, I really don’t understand what it is we need to be protected from. Can it be annoying to walk through a gauntlet of capitalism? Sure. Maybe worse for some than others. But we don’t have any right to be free from annoyance, do we?
I mean, if that were the case, then why should I be bothered by ACORN morons marching up and down the street where I work? Nothing has ever been done about that. Once, I nearly came to blows with some idiot preaching about how we needed a new New Deal while I was trying to enjoy a leisurely stroll in downtown Alexandria, VA. Do I have the right to be free from that annoyance? Not bloody likely.
And the fact of the matter is that I shouldn’t be “free” from those annoyances, anymore than I should expect to be “free” from girl scouts selling cookies on a street corner, or a hippie selling dew rags in a city square. If one of them genuinely threatens my peace, then the appropriate authorities should be able to step in, but how often is that truly the case? That some panhandler was able to point out this hypocrisy in the enforcement of Seattle’s anti-public-space-economy laws (to coin a terrible phrase) only underscores how ridiculous the application of police power (local or otherwise) has become.
The bottom line is that, whether one is selling girl scout cookies or dew rags, why do I need the state’s protection? Keep the public ways clear for the public sure, but let’s not forget that commerce is what truly makes the world go ’round. Without it, that police protection doesn’t get paid for.
[HT: Tom Scott]
The proposed bank regulations, all driven by President Obama’s war on Wall Street, would limit big bank’s trading and size. Obama claims that the nation will never again be held hostage by institutions deemed “too big to fail”.
Well, here’s a clue – the only ones who claimed they were too big to fail and threw all that money at them are the same ones now trying to regulate them into noncompetitiveness. You’d almost think this was part of a plan if you didn’t believe they weren’t smart enough or quick enough to do such a thing. But, as they’ve claimed, they won’t let a crisis go to waste.
In fact, this is another battle in the long class war against the rich. Nothing symbolizes the “rich” like Wall Street. And nothing serves Democrats in trouble better than a populist cause (or at least one they deem to be populist). So while voters continue to send messages to the Democrats via VA, NJ and MA, health care reform implodes and the President’s job approval rating tanks, he’s warring on the institutions which are critical to the economic recovery of the nation.
How freakin’ tone deaf can one be?
Mayor Bloomberg has some immediate local issues that concern him – possible layoffs and the erosion of the tax base. But he also recognizes that handicapping US banks when no such handicaps exist for foreign banks, hurts their long term competitiveness and will therefore have negative long term consequences.
Obama’s proposals would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.
He called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.
The proposed rules also would bar institutions from proprietary trading operations that are for their own profit and unrelated to serving customers
According to sources, Geithner says the proposed regulations “do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown.”
He’s not alone in that criticism:
Lawrence White, a professor at New York University’s Stern School of Business and a former regulator, said Obama’s proposals were “a solution to the wrong problem.”
“They have this rhetoric that it was proprietary trading that was the problem,” White said. “That’s wrong.”
Of course the Obama war on Wall Street is certainly having an effect – bank shares have declined as has the dollar against other currencies.
If you don’t get the idea that this is mostly an ideologically driven “war” trying to cash in on populist anger at a time when nothing is going well for the administration, you’re not paying attention. It also points to an “war of choice” based in a very poor understanding of economics and the fact that we’re engaged in a global economy where competitiveness is critical. If these regulations pass and when the recovery falters because banks are hobbled and noncompetitive, I’m sure that somehow the White House will again play the “greed” card out in a effort to hide the effects of their own short-sighted and ideologically driven economic malpractice.
The myth is that without government regulation, the market would certainly do everything it could do to kill or cheat its customers. Of course most of us realize that doing those things is a sure way not to be in business long. But for a significant number of others, that myth is alive an well. A recent example, however, provides a perfect example of the absurdity of that notion. And, I suggest that it should be applied to health care as well.
The U.S. Department of Agriculture says the meat it buys for the National School Lunch Program “meets or exceeds standards in commercial products.”
In the past three years, the government has provided the nation’s schools with millions of pounds of beef and chicken that wouldn’t meet the quality or safety standards of many fast-food restaurants, from Jack in the Box and other burger places to chicken chains such as KFC, a USA TODAY investigation found.
McDonald’s, Burger King and Costco, for instance, are far more rigorous in checking for bacteria and dangerous pathogens. They test the ground beef they buy five to 10 times more often than the USDA tests beef made for schools during a typical production day.
And the limits Jack in the Box and other big retailers set for certain bacteria in their burgers are up to 10 times more stringent than what the USDA sets for school beef.
So the burger at Jack in the Box is safer than the mystery meat your child is served at school. Children are served tons of chicken in school each year that KFC won’t touch (KFC doesn’t do “spent hens” but your child does).
Jack in the Box and KFC have to please and answer to customer demands if they want to stay in business. If KFC makes you sick because of bacteria, you and others will most likely vote with your feet and go elsewhere. What is your choice if that happens in a government school?
Now, think health care.
End of story.
In a London preview of Wall Street’s bonus nightmare, more than 1,000 investment bankers have quit Royal Bank of Scotland to work at rivals due to curbs on their paychecks, according to people familiar with the situation.
Wall Street banks fear top talent would flee en masse for greener pastures if Uncle Sam’s pay czar, Ken Feinberg, and Congress try to put more ceilings on bonuses and pay at financial firms.
In the UK, the rules are modeled after US actions to curb pay at firms bailed out by the government.
The protest exodus at RBS — first reported on the Web edition of the Times of London — involved less than 5 percent of its banking professionals.
Some headhunters see more bankers jumping ship in the coming year as the controversy deepens over pay freezes and curbs.
Pay people less than they think they can earn elsewhere, then “elsewhere” is where you will find them.
Some will say that these ship-jumpers can’t be worth too much if their companies had to be bailed out, but that gets it exactly backwards. For the most part, it’s those who are responsible for the floundering that will be left working for the rotting (and now government owned) corpse, while those most capable find positions in more stable firms.
There’s nothing particularly bad about this sort of slough off, except that with the bailouts thrown into the mix, it’s the public that’s left holding the bag. Absent the government takeovers, the same sort of thing would have happened, only in a quicker, more orderly way (see, e.g. the fallout from the collapse of Arthur Anderson, or the bankruptcy of BearingPoint).
Moreover, the demonization of Wall Street types accomplishes nothing constructive, and may very well convince otherwise enterprising young B-school grads (or potential grads) to employ their intellectual talents in other fields that may not fully capture their potential or interest. All that does is deprive the rest of us of smart, young and industrious business people who might make our world better, and instead treats us to a glut of some other professionals that we likely don’t need (i.e. lawyers). And we really don’t want that now, do we?[ad#Banner]
If you’re among the 15 or so in this country that believe this White House job summit will actually end up creating policies that produce jobs, I think Evan Newmark’s WSJ piece might dissuade you from that belief:
Now, I’ve never been to a White House summit, so I can’t say exactly what will happen on Thursday. But as a past Davos World Economic Forum participant, I’m pretty familiar with these kinds of VIP schmooze and snoozefests.
And here’s how it will likely play out. A senior White House official — perhaps the president — will give a welcome pep talk to the 130 gathered “summiteers.” He’ll ply them with thanks and stirring patriotic words.
But then he’ll urge them to not waste the day in conference fuzzy talk. Instead, the summiteers should turn words into actions and actions into jobs. After all, it is a “jobs” summit.
And then the summiteers will shuffle off to one of six working groups — where of course they’ll end up wasting the day in conference fuzzy talk.
It’s inevitable. Prepared remarks, banal anecdotes and empty debates are the stuff of these mushy forums. I can count on one hand the number of memorable moments from the dozens of my Davos sessions on technology super-revolutions, entrepreneurial innovation and world peace.
That’s because the VIPs at these things aren’t there to say or do anything unexpected.
Do you think that FedEx CEO Fred Smith and United Steelworkers President Leo Girard will somehow reach agreement that the best way to create jobs is to kill the union-card check?
Do you think that Randi Weingarten, President of the American Federation of Teachers, will suddenly serve up innovative ideas for trade unions to assist small businesses?
It seems unlikely.
And so the jobs summit will fail for the same reason Obamanomics is failing: The White House mistakenly believes economic growth and new jobs are created by society’s stakeholders — business, labor and government — cooperatively working together.
Like most of these events, this is a political stage show. It is a visual representation meant to convey the idea that a) the government is interested in your problems and, most importantly, b) it is here to help.
But the key to the failure of this summit, even if they were serious about creating jobs, is found in Newmark’s last sentence. The key to economic growth and new jobs aren’t the product of summits among “society’s stakeholders”. They never have been.
In fact, it’s pretty simple as he notes:
But that’s not the way capitalism works. It doesn’t take a village to create a new job. It takes a businessman trying to make another buck.
So why aren’t the businessmen out there trying to “make another buck”? While business is all about risk, the risks they take are rational. Businessmen aren’t at all inclined to take risks that can ruin them, especially in unsettled markets. Right now economy is very unsettled and government has huge tax laden legislative bills pending which will directly effect these businesses in a very negative way. And of course, there’s new and increased financial regulation pending which may effect their ability to get funds to expand their businesses and hire new workers. Thus they’ve concluded it would be entirely irrational to expand their business or hire in such an atmosphere.
Instead, they’ll hold off on hiring or expanding until the economy and markets are much more settled and they’ve had the opportunity to gauge the cost to them of all of this new legislation and regulation.
That said, the simple answer on how ease economic uncertainty and thereby create more jobs is kill health care, kill cap-and-trade and back off the increased regulation. Additionally, a corporate tax cut might help as well. All of that would certainly settle market down and give businesses an incentive to both expand and hire. But this job summit? Newmark nails it. Fuzzy talk aimed at the wrong solution. The best thing the government can do is back off and let the market get back to work. Unfortunately, that won’t be the solution the “summit” proposes nor will it be the policy the White House will adopt.
Happy Thanksgiving, everyone.
Usually I try to keep this day as a non-partisan, non-political day in which I wish everyone of every ideological persuasion the blessings of the day (and I still do!). But as it happens, the day provided me with one of the best examples of the differences between libertarians and liberals I’ve seen in a while. Two separate postings concerning Thanksgiving. One from a liberal blogger, Ezra Klein, and one from a blogger who is a visitor at the American Enterprise Institute (Mark Perry).
Klein reprints a food section column (one assumes he does so approvingly) all about controlling behavior:
I asked Ariely how he would set up his Thanksgiving feast to limit overeating without having to exercise self-control. His answer was to construct the “architecture” of the meal beforehand. Create conditions that guide people toward good choices, or even use their irrationality to your benefit.
“Move to chopsticks!” he exclaimed, making bites smaller and harder to take. If the chopsticks are a bit extreme, smaller plates and utensils might work the same way. Study after study shows that people eat more when they have more in front of them. It’s one of our predictable irrationalities: We judge portions by how much is left rather than how full we feel. Smaller portions lead us to eat less, even if we can refill the plate.
There it is in a nutshell – the liberal propensity toward trying to control the behavior of others. The writer decides it is his or her job to make it more difficult for you to “overeat”. Instead of just deciding to put on a great feast in keeping with the day and butt out of the affairs of others, the writer approvingly decides it is incumbent upon the server to construct an “architecture” to control the eating of others. Really – “move to chopsticks”! Or put the mashed potatoes in the kitchen!
Speaking of which, Ariely suggests placing the food “far away.” In this case, serve from the kitchen rather than the table. If people have to get up to add another scoop of mashed potatoes, they’re less likely to take their fifth serving than if they simply have to reach in front of them.
Some people can just suck the joy out of an occasion, I swear. But this seems perfectly in keeping with my observations of the more liberal among us.
On the other hand, Mark Perry decided on focusing on a completely different thing for the day – a celebration of a miracle that occurs daily all over the world that is rarely acknowledged. Thanksgiving provides the perfect day to note it:
Like in previous years, you probably didn’t call your local supermarket ahead of time and order your Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up “unannounced” at the grocery store to select your bird.
The reason your Thanksgiving turkey was waiting for you without an advance order? Because of “spontaneous order,” “self-interest,” and the “invisible hand” of the free market – “the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many.” And even if your turkey appeared in your local grocery stores only because of the “selfishness” or “corporate greed” of thousands of turkey farmers, truckers, and supermarket owners who are complete strangers to you and your family, it’s still part of the miracle of the marketplace where “individually selfish decisions lead to collectively efficient outcomes.”
Thanksgiving is epitomized by the process Perry describes. Our holiday is indeed as much a miracle of the market as anything. It enables everyone who wants too to have what they need or desire for that day – and every day. It is truly something to celebrate.
Free markets. Free people.
For anyone who might be interested, Rob Port of Say Anything Blog has graciously invited me to co-host his radio show tonight. It will be airing from 7-9 PM Central time, and can be heard on Ustream and can be seen right here (allegedly):
Tonight’s topics will include the Pelosi health care bill, the elections this week, the Fort Hood tragedy, and my post on Corporatism v. Capitalism. If you desire, you can call into the show toll free at 888-598-8464. Hope to hear from some of you all.[ad#Banner]
This guy is sooooo close to getting it exactly right, and at HuffPo of all places.
When I heard the word “corporatist” a couple of years ago, I laughed. I thought what a funny, made up, liberal word. I fancy myself a die-hard capitalist, so it seemed vaguely anti-business, so I was put off by it.
Well, as it turns out, it’s a great word. It perfectly describes a great majority of our politicians and the infrastructure set up to support the current corporations in the country. It is not just inaccurate to call these people and these corporations capitalists; it is in fact the exact opposite of what they are.
Capitalists believe in choice, free markets and competition. Corporatists believe in the opposite. They don’t want any competition at all. They want to eliminate the competition using their power, their entrenched position and usually the politicians they’ve purchased. They want to capture the system and use it only for their benefit.
The sensible approach would be to recognize the problem and figure out a way to avoid it the best we can. Money always finds a way in, but we can at least be cognizant of the issue and try to combat it as much as possible. We must do this as citizens who care about our democracy, but we must also do it as capitalists.
If he just realized that the answer isn’t “that we watch politicians with a very wary eye”, but instead to make sure that the politicians have as little and diffused power as possible. Without concentrated power, politicians have nothing to sell, including the power to protect big corporations. If there’s nothing to sell, the corporations have nothing to buy for their protectionist schemes and are left to sink or swim in the market just like the rest of us. The end result? More freedom and more free markets.[ad#Banner]