Category Archives: Business

“Bold Experimentation”

Jonah Goldberg explains why we should fear that Barack Obama will emulate Franklin Roosevelt:

there can be a chasm between being right and merely appearing to be right. Why anyone stakes greater value on the appearance than reality is a mystery to me.

But as Obama clearly recognizes, that was a big part of the FDR magic. FDR came into office promising “bold, persistent experimentation” — and delivered. Raymond Moley, an early member of FDR’s “brain trust,” saw the New Deal for what it was. “To look upon these programs as the result of a unified plan was to believe that the accumulation of stuffed snakes, baseball pictures, school flags, old tennis shoes, carpenter’s tools, geometry books and chemistry sets in a boy’s bedroom could have been put there by an interior decorator,” Moley wrote later.

Yet Americans thought it was all part of a plan, even though experimentation and planning are in fact near opposites. Why? Because FDR always projected such confidence, even as he made things worse. But this isn’t another column about how FDR prolonged the Depression. Been there, done that. I’d rather be forward-looking.

In fact, I want to be experimental, too. So here’s my idea: Just stop.

Stop talking about bailouts and stimuli. Stop pondering ever more drastic action. Give it a rest. Let it be.

One of the main reasons there’s all of this “money on the sidelines” out there among private investors is that Wall Street doesn’t know what the government will do next. Will it bail out the auto industry? The insurance companies? Which taxes will go up? How far will interest rates go down? How long will the federal government own stakes in the banks? Will more stimulus checks go out? If so, how big will the deficit get?

Don’t just do something–stand there!

One of his readers says that this also explains the current market volatility:

Free market economics involves the application of immutable laws, and it’s those laws that allow us to forecast the effect of current events on various companies and the stocks and bonds they’ve issued. But investors will only play the game if they believe the rules aren’t going to change in the middle. When government begins ‘experimenting’, it makes it harder for investors to generate a long term forecast. This drives long term investors away from the market, or converts them into short term traders. The result is a massive increase in volatility as investors shorten their investment outlook because they can’t predict what’s going to happen far enough into the future.

Volatility is an indication of instability. It’s not a sign of a healthy economy but of an economy which has lost its way. High volatility isn’t what you expect from the worlds largest market, but from the emerging economy of a third world country. As you can see from the attached chart, when Roosevelt began his ‘bold persistent experimentation’ it drove away long term investors and that caused volatility to dramatically increase. It will almost certainly have the same effect when Obama does it.

Since he’s so determined not to learn from the mistakes of the past, I would expect him to repeat them. I’m betting that his poking and prodding will add to unemployment, reduce economic growth, and wreak havoc with the federal deficit. There is little doubt that he’s the wrong man at the wrong time. I’m just hoping that he is as devoid of principles as the Clintons, and that he finds a way to break his campaign promises or we’re in for a long painful recession, and maybe worse.

We can only hope, since we lost an opportunity to do any more than that a couple weeks ago.

A Corrective

…to the charlatans like Jim Hansen. Here are two useful books. First, Cool It, by Bjorn Lomborg who, while he doesn’t deny the science behind global warming, he doesn’t need to, because he has actually prioritized useful government policy actions based on cost and benefit (something that the warm-mongers refuse to do, e.g., Kyoto). Second, from Chris Horner, Red Hot Lies, which is well described by its subtitle: “How Global Warming Alarmists Use Threats, Fraud, and Deception to Keep You Misinformed.

Yup. As many reviewers note, “climate change” isn’t really about science–it’s just the latest ideology to come along for the collectivists to use in their latest attempt to bend us to their will.

No Bail Out

Here’s a fellow Flintite (Flintian) explaining why her former employer shouldn’t be bailed out:

The strength of the union and the weakness of management made it impossible to conduct business properly at any level. For instance, I had an employee who punched in his time card and then disappeared. The rules were such that I had to spend hours documenting that this man was not in his three foot by three foot work area. I needed witnesses, timed reports, calls over the intercom and a plant wide search all documented in detail. After this absurdity I decided to go my own route; I called the corner bar and paged him and he came to the phone. I gave him a 30 day unpaid disciplinary lay off because he was a “repeat offender”. When he returned he thanked me for the PAID vacation. I scoffed, until he explained: (1) He had tried to get the lay off because it was fishing season; (2) The UAW negotiated with GM Labor Relations Department to give him the time WITH PAY.

I supervised a loading dock and 21 UAW workers who worked approximately five hours per day for eight hours pay. They could easily load one third more rail cars and still maintain their union negotiated break times, but when I tried to make them increase production ever so slightly they sabotaged my ability to make even the current production levels by hiding stock, calling in sick, feigning equipment problems, and even once, as a show of force, used a fork lift truck and pallets and racks to create a car part prison where they trapped me while I was conducting inventory. The reaction of upper management to my request to boost production was that I should “not be naïve”.

Another employee in the plant urinated on the feet of his supervisor as a protest to discipline. He was, of course, fired…that is until the union negotiated and got his job back.

Eventually I was promoted to a management position where I supervised salaried employees at HQ. As I left the plant I gave management a blunt message. I told them that I expected the union to act like the union, but I was disappointed that management didn’t act like management.

I saw a lot of this in the 1970s when I worked summer jobs in the shop, and my relatives who are still there tell me it goes on to this day. Of course, it’s hard to put all the blame on management, when the Wagner Act made it impossible for them to do much about it, because it allowed the UAW to credibly threaten their company with bankruptcy if they didn’t knuckle under. This crisis was caused by government, and bailing out the UAW will not solve it.

Also, Jim Manzi explains why we (the taxpayers) can’t just buy the three auto companies for their current market value (only seven billion) and save ourselves the many more billions that a bailout would cost. It’s kind of amazing that the stock has any value at all (GM’s in fact doesn’t). Equity in these companies currently has negative value because running them requires putting more cash into them, with no certainty, or even likelihood of return, at least with their current union contracts and cost structure. They are the proverbial white elephants.

This, by the way, is the reason that the notion of selling the Shuttle or the ISS to anyone else is a non-starter. No one could afford them, even if you gave them away.

The Wrong Lessons From History

Exploding the myths of Clintonomics:

The bull market took off precisely when then-Fed Chairman Alan Greenspan took his foot off the brakes and hit the gas in 1995. It was also then that Republicans took control of Congress — further blunting the effects of the Clinton tax torpedo that had taken effect the previous year.

Clinton also benefitted from innovations long in the making, including the Pentium chip released in March 1993 and Microsoft’s Windows program released in August 1995. These together made the Internet boom possible.

As for the budget surpluses, they came as a complete surprise to Clinton economic forecasters, whose static models only predicted their tax hikes on the rich would narrow the budget gap, not get it into the black.

Their “deficit-reduction plan” didn’t create the surpluses at all. They were a direct result of a tidal wave of capital-gains revenues generated by the GOP-led stock boom.

Relieved that Washington would no longer threaten to take over 14% of the economy by socializing medicine or raise taxes even higher, the market took off like a shot at that point. And capital gains tax receipts exploded, flooding federal coffers.

Clinton’s own long-term budgets predicted no surpluses of any kind during his administration and beyond.

Bill Clinton never had a plan to end deficits. The Republicans and economic circumstances did it for him. But I’m sure that this myth that Bill Clinton balanced the budget will prevail in the minds of the media and Democrats, just as the false myth that Roosevelt, and not the war, got us out of the Depression continues to prevail many decades later. They have to rewrite history to justify their continued plunder. And of course, the near-term danger is that President-Elect Obama and the Congressional majority will use this mistaken history as a justification for tax hikes in a recession, which could be economically ruinous.

Capitalism, Corporatism, Free Markets

Some useful thoughts from Rod Long, over at Cato Unbound.

As he points out, there is a broad-based mythology that defending capitalism is equivalent to defending “big business” when, by its nature, big business abhors capitalism (at least as understood by true free marketeers). Of course, I agree with Jonah Goldberg that we latter should abjure the term “capitalism,” both because it is such a misunderstood word with a wide variance of definitions, and because it is fundamentally a Marxist concept.

A “free-market economy” (something that hasn’t existed to a large degree in this country for many decades) is what should be defended and supported, and we should continue to push to get the country to move back in that direction to find our way out of our current travails (which really started back in the Depression Era). Just as one example, there’s an interesting discussion over at Megan McArdle’s place, here and here, on GM’s straits (about which I’ve also had thoughts over the years, as someone who grew up with it). I think that, as one of the commenters over there notes, the roots of the destruction of the American auto industry lie in the Wagner Act:

GM and the UAW are a perfect illustration of bad government in action.

At some point, a collective decision was made that the unions should be given such expanded powers that they could destroy the company if they wanted (see the above post describing how a strike at a key plant could idle the whole company). What happens here? Well, naturally the union tries to extract as much as they can from the company with the tools available. The union doesn’t profit from increasing profits and building a healthy company, it profits from building an overstaffed company that exists to benefit its employees. The union would have been better served if it divvied up the right to collect a union payout from GM among the workers of the time and let them sell the claims. Then the union could simply negotiate the maximum dividend possible for the holders of these claims. This way you have a rationally run company with the benefits going to the larger voting block (the workers) than the shareholders who are all presumably evil capitalists.

What would have been much more honest and worked better would have been outright nationalization of GM when the rules were set up that the UAW could destroy the company. Instead you’ve got unclear property rights and consequent ill management.

It took a long time to kill the industry, but that doesn’t mean that it wasn’t the cause. Arsenic or mercury can kill over a long period of time as well, though death might actually occur from some other ailment that the toxin-ridden body is ill equipped to fight.

The toxin in this case may be a lot of things (perhaps even including “capitalism” by some warped fascistic definition) but it is an abomination to a free market, and it has destroyed the American auto industry.

[Update a few minutes later]

IBD says let GM go bankrupt:

Far from vanishing, many of GM’s assets would be quickly purchased by competent foreign automakers eager to expand their capacity in what is the world’s largest auto market. Happily, the list of well-run car companies, from Toyota to Nissan to Porsche, is long.

How this helps Michigan, the auto sector and smaller firms reliant on the latter’s health is pretty clear. With capable auto executives finally overseeing GM’s poorly deployed assets, the value and utility of each would rise, thus perpetuating the existence of jobs in the sector, all the while ensuring that other businesses that exist due to GM will enjoy more stable commercial relationships with competent management.

So while the cries of certain Armageddon would be ear splitting in the event of a GM failure, the U.S. auto sector would actually emerge much healthier thanks to a change in ownership that would be the certain result of GM going under.

The problem of course, is that this will be another Enron, in that many people will be thrown out of work, and lose pensions (I should note, for the record, that as a Michigan native, I have close family members who may be in this situation). The political pressure to maintain the status quo will be intense, and unfortunately, given the fact that despite all of the talk about “change,” the status-quo-ante types (at least when it comes to static economic circumstances) have just entrenched their power in Washington, that’s probably the way it will go. If GM is going to get federal money, it should go toward buyouts of long-term employees, and then let the market work to redeploy its assets toward more useful purposes than maintaining an expensive company-town welfare state, that makes cars on the side.

[Update mid morning]

Matt Welch says to the barricades to defend free markets. Except that he uses the confusing word “capitalism.”

I should add, that I consider George Bush’s biggest failure not the events leading up to this crisis, but his response to it, in which (as Matt points out) he capitulated to those advocating government solutions to government-caused problems. Of course, it’s on a par with “compassionate conservatism” and “comprehensive immigration reform” and “no child left behind” and “prescription drugs” and myriad other issues, large and small, on which he showed himself to be anything but a conservative (let alone a libertarian). Had he been a Democrat, the Dems would have been cheering all of his actions as the greatest thing since LBJ and the Great Society.

Speaking of compassionate conservatism (and the tone deafness of George Bush and Mike Gerson and others to how rightly offensive the phrase was to actual conservatives), imagine how well the Democrats would take to a nominee who ran on a platform of “logical liberalism.”

[Early afternoon update]

Iain Murray has more thoughts on free markets and their relationship to liberty:

…as Jonah says, markets are more than this information delivery system. Where the Chicago School has gone wrong is in focusing purely on economic efficiency. As my boss Fred Smith said way back in 1983, “The Chicago School’s case for antitrust policy . . . rests solely on economic efficiency, as if rights had nothing to do with the matter — as if business had no right in principle to dispose of its property as it sees fit, but only a conditional freedom so long as it helps maximize some social utility function. That is to say, no business is entitled to its property if that property can be redeployed so as to expand output. With ‘conservative,’ ‘pro-business’ economists taking this view, who needs social democrats.” In other words, if we value property rights, the free market is an essential consequence. And that is why market socialism never works, because it devalues property rights. Liberty demands property rights which demand free markets. We only interfere with that chain in defiance of history.

It is not a coincidence that communist nations are the most unfree on earth.

[Early evening update, particularly for Instapundit readers, who might want to look around the site]

I’ve talked in the past about the fact that my father was a GM exec, but I’ve never noted what he did there.

Here’s a little background, which may be apocryphal, because I only knew it from my mother, but they met after the war in New York (he was from Brooklyn). She was a former WAC who had served in Egypt, and had decided to see a little more of the world before heading back to her home in Flint, Michigan.

He was standing on a soapbox in the Village, haranguing the crowd on the benefits of Marxism. As an economics major, raised on Keynes, she fell in love.

They married, and finished their graduate degrees, at various places (NYU, UCLA, other, his in Psych–Industrial Psych, hers in Econ). In the fifties he tried door-to-door in Lansing after moving to Michigan with his upper Midwest bride, but when he got an offer at A.C. Spark Plug in her home town (as a result of her brother, my uncle, being an engineer there) he took it, and settled into a middle-class lifestyle, during the best years of the company, in which he raised his family.

He moved up though the white-collar world at AC, in “personnel” (these days, it would be HR, which is one of the reasons that he could get me summer jobs there during college), until he got an offer to go to work for corporate in Detroit, a job for which he commuted sixty miles a day each way from Flint, and we never had to move. I know that this is no big deal of a commute in southern Cal, but for me, it was amazing. He died at an age slightly older than me (right now, for those reading in the future) that I can count on one hand, and not half of it, from a heart attack (his second–he had had his first about a decade earlier, in his forties). That was almost three decades ago.

His job?

Head of labor relations, and negotiator (perhaps chief negotiator, though (as Doctor Evil said) I can’t vouch for that), with the UAW.

[Bumped to the top, because there’s a lot of new stuff]

Hoover, Or Reagan?

Which president will Barack Obama want to emulate? He has said that he admires Reagan, but only for his transformational qualities, not for his political beliefs. But if he persists in his apparent desire to implement some combination of Hoover and FDR policies (raising taxes on the productive, protectionism, enforcing high wages), he’ll end up making a bad situation much worse, and end up being a one-termer for sure.