Thursday, October 09, 2008

'Can this market be saved?' Part 2.

And now, to return to our discussion of Wall Street and the like (such discussions being all the more pertinent as the stock market seems to set a new benchmark for scariness on a daily basis).

I don't think any of today's grim events signify that capitalism is broken.
I really don't. The problem, as I see it, is more the mindset/motivation of the people at the helm of today's brand of capitalism; this has the effect of subverting the time-honored free-market model that was supposed to generate prosperity throughout the land. Though nowadays we sneer at the mere mention of trickle-down economics, we really shouldn't. I believe that the concept, as a concept, is sound...or it used to be. This is why, for much of my career, I hewed to a conservative take on life, writing not only for the Wall Street Journal, but also the American Enterprise, The Washington Times, National Review Online, etc. I believed then, and still basically believe today, that true greatness is born of striving: of individual initiative that's allowed (and systemically encouraged) to flower.

But the nature of the individual in whom that initiative flowers is key. It makes the difference between capitalism that can work for everyone, and capitalism that works for no one except a select few on the upper rungs of the ladder.

What time-honored free-market model am I talking about? In an ideal (and oversimplified) conception of it, a man* starts a business, and as he hones his business model and perfects his product offering(s)
**, the business grows to the point where he hires additional workers. So the growth of that business is good for all; society benefits. If, in the beginning, he paid himself a salary of $50,000 and had two employees to help him, he would now give himself a modest raise and hire two more employees. That is, in fact, the essence of the conservative social dynamic. When Coolidge famously said, "The business of America is business," that was not some sly code for "The business of America is corruption, selfishness and sin." He meant what he said: that a proper approach to doing business was (or should be)
the stereotypical rising tide that lifts all boats.

I don't think the above model applies today. Somewhere along the way, the wider social functions of entrepreneurship got lost; they weren't even really talked about anymore. Business and entrepreneurship became about making money. Period.

Clearly in recent times,
our apocryphal business owner, when his business took off, did not do what he should have done. Instead he doubled his own salary to $100,000 andfar from hiring additional workershe looked for ways to extract a burdensome level of productivity from his existing employees (while also denying them their fair share of the success). Then maybe he looked to buddy up with other entrepreneurs in aligned pursuits, and together they figured out how to wring as much of a windfall as possible out of the situation while the getting was good. Then maybe they hired a bunch of front men to buy up influence in Washington, thus ensuring that the deck remains stacked against the average Joe who's on the outside looking in. You know, I'm still not cynical enough to think that the war in Iraq began as a vehicle for the Bush/Cheney team to make some money for their pals at Halliburton; I guess I just can't give up that last shred of naivete. But would it surprise me to have such motivations documented someday? No, it would not. And if the profit motive can play a role even where life and death are concerned, one can only imagine how many liberties are taken when the only thing at stake is money!

For a perfect anecdotal example of this, look at the the AIG fiasco
no, not the original fiasco that required the bailout, but the new one that erupted just days ago when it was revealed that top AIG brass took a $440,000 luxury vacation on the taxpayers' dime...and were in the process of planning a second such junket, to the posh Ritz-Carlton at California's Half Moon Bay, when the first one came to light. (This, with over $110 billion in federal money now pledged to the struggling insurance giant on the heels of Wednesday's second "mini"-bailout.) If there's anything that better demonstrates the impunity and shamelessness we're up against as we try to combat the excesses of corporate America, I don't know what it could be. Such episodes are one reason why I'm not a believer in the death penalty: I think the standards for its application are way out of whack. High-level white-collar criminals certainly deserve capital punishment ahead of guys like Charles Manson or the Son of Sam, given the vastly magnified ramifications for society.

And you know what I'm realizing at this point? This is going to go waaay long if I try to forge ahead into SHAM's role in all this, so I guess we're going to have a Part 3. Some of it may seem self-evident to those who've been here a while, but please stay tuned anyway. I'll try to make it worth your while.

==========================

It bodes well for Barack Obama that even staunch conservative voices like Human Events have dropped their usual pretenses and illusions about the magnitude of the task now facing John McCain in his pursuit of the presidency. This of course is one key reason why McCain has released a new internet ad, previewed
where else?on FOX this morning, which hammers at the supposed connection between Obama and 1960s radical Bill Ayers.

* Please don't nitpick me on gender terms here. I tried to write the passage in a gender-neutral way, and it just became stilted and unmanageable. I am not implying, nor do I feel, that women have no place in the entrepreneurial world.
** Note to college students: Yes, America used to produced things, actual products that one could pick up and handle, or even sell to other people (or nations) if one were so inclined. Now we just sell services and engage in high-level forms of money-laundering.

18 comments:

Stever Robbins said...

Your use of "trickle down" is somewhat different from my understanding of what's meant by the term in most of politics (and after checking with several of my friends in economics departments, I'm assured there's no actual economic theory called "trickle down" or "supply side." Those are PR terms invented in the 80s).

The theory was that rich people would make a bunch of money, spend it or invest it, and thus put it back into circulation for the rest of us to enjoy. The "trickle down" would occur through investment and consumption spending.

This isn't how you use the term. As I read it, you're using "trickle down" to mean the wealth redistribution that happens through employment and fair pay for work.

There's never been a need for a special name for what you describe. Indeed, it's simply the definition of how a small business operates in a healthy capitalist economy.

So I would propose leaving the "trickle down" buzzword for the PR spinmeisters, and simply talk about "healthy capitalism." In healthy capitalism, everyone works a reasonable job, has a reasonable amount of time away from work, and takes home a reasonable salary.

I'm not at all sure we need any more qualifiers or special case rules like, "of course CEOs should be paid more than average workers" (much less a multiple of average workers).

Just today I was talking to an economic researcher who has recently completed the largest study in history on CEO and executive pay. Though he's a staunch Republican and the party line is that the Rich deserve what they get, the 7 person team found NO correlation between CEO pay and company performance.

So I say ... let's pay everyone the same and move on. (Which has its own problems, of course, but will be fun for people to flame at when they read this post.)

Elizabeth said...

This just in: As luck would have it, some enterprising journos got a hold of the minutes from the AIG retreat. See more here:
http://tinyurl.com/49owjd

Cal said...

I agree with the part of the post alluding to the top brass paying themselves extraordinary salaries while the little guy gets scraps. I don't know the exact figures, but the amount of money that the top brass gets in major corporations is several hundred times the lowest-paid employees. Corporations have boards of directors that are supposed to provide a check-and-balance to the management. Instead, they have just rubber-stamped things, and used their positions to get paid millions of dollars (in some cases) for a couple of meetings a year. They don't really understand the business, much less the balance sheet and income statements. And the CEO/lowest-paid employee pay ratio has gone up in this era of supposed increased corporate governance.

I place the majority of the blame on these exotic instruments that only people with PhDs in mathematics can understand. I read a book earlier this year titled 'A Demon of Our Own Design'. The book was published last year. The author's premise was that many of these instruments are supposed to reduce risk, but in times of market stress they actually magnify it. And I believe that I said in a prior post that Warren Buffett had called many of these derivatives "weapons of mass destruction".

The crash of '87 was blamed on equity derivatives, (i.e, portfolio insurance), while this meltdown is being blamed on credit derivatives.

I also think the fact you have a lame-duck President and two candidates with negligible experience in understanding the economy is a factor in the market problems. Obama has no experience in this area in my view, and McCain admitted early in the campaign that he doesn't know much about the economy. The same thing happened in the fourth quarter of 2000 with Bush v. Gore. You had no incumbent President and two candidates that the market had no faith in handling the economy.

I just wonder when this passes how the unfettered free-market champions are going to continue to promote their doctrine. The U.S. government will have ownership stakes in banking and insurance. And probably also in the auto and airline industries. I know many of the free-marketers will say the government should have let them fail, but I feel would be risking massive civil unrest. We may be still facing that prospect now, since in the coming months the unemployment rate is going to skyrocket. Even Larry Kudlow of CNBC (who is one of those unfettered free-market capitalists) said he believes there is a "once in a century" time when government needs to step in.

Where do we go from here? I have no idea. The passage of Sarbanes-Oxley was supposed to stop these types of debacles.

Akhetnu said...

Steve,

Oddly enough, my personal story of striving in a venture also incurs the opposite of the profit motive.

I'm in the end phases of a feature length film that I mostly financed myself on a shoestring, set for distribution online. The only potential profits will be from syndication and sales that may or may not happen. It took years to make through many setbacks, but the end product promises to be a fine, artistic piece.

The problem for me is that art tends to be a wildcard when it comes to money. It can be useful for a demo reel for future paid gigs or funding, or it can get distributed for actual revenue. However, given the subjectivity of art, and the current lowest-common-denominator commercialization of the market, nothing is certain.

Now, I had a day job during this time, so I was being a good little economic unit on the side. But for artists, the business model is often "do it for the love of the art and anything else is gravy." I'd like to think that I was being enterpreneurial (sp?) in all of this, but only by ironically rejecting the modern obsession with quality and worth being linked solely to profitability.

Steve Salerno said...

Akhet, your comment is more directly relevant to Part 3 of this series, but believe me, as someone who has stubbornly tried to survive for decades in a bitterly competitive realm where "quality" can't even be agreed upon--but to the extent it can be agreed upon, seldom leads to (and is often antithetical to) commercial success--I hear you. And my poor family hears you. Stay tuned, if you will....

RevRon's Rants said...

We have gravitated to a Seinfeld economy, where our once-productive engine has deteriorated into a "show about nothing." We produce little more than a promise of "something," and that something is wealth. Or the promise of wealth.

If wealth is the sole measure of our success, it should come as no surprise that CEOs and governing boards structure and run their companies with little regard for anything else. So long as salaries and dividends are high and continue to rise, there is little reflection upon other factors such as actual productivity, workers' well-being, and the like, except as inconvenient necessities to be grudgingly acknowledged. Throw a few crusts to keep them quiet, but not enough to hurt the "bottom line."

This mindset is actually encouraged by government, and not just by the "free market economy" evangelists. The phrase "the economy," in current usage, refers only to the total amount of money spent, including bailouts of failed sectors as well as actual goods produced. The well-being of the populace was never a consideration, beyond its willingness to spend. "Consumer confidence" came to represent little more than the willingness to go into debt.

Jumping ahead a bit, is it any wonder that, in this environment, we have hustledorks making fortunes selling their own brand of "nothing?" Or that they attempt to do away with feelings of unwarranted benefit by casting some spiritual aura over their non-products? They brag about and parade the symbols of their "success," proof positive that their enterprise is viable and good. And a public long nourished by calorie and nutrition-free promises rushes to their websites to send them more money. Perhaps as things tighten, we'll see a reemergence of common sense, when folks discover you can't wish yourself a meal or tap the car payment into existence. Who knows... we might even see a few CEOs grow callouses on their hands. I'm certainly not hoping for a replay of 1929, but can't help wondering if such a bitch-slap of reality might be the only thing that will remind us of the virtue of providing "something" in our search for happiness and success. Remember... even Seinfeld came to an end.

Anonymous said...

Steve:

Last month you wondered how the economy was really doing because the top 10% of income earners were taking way too much of the pie. How was the economy really doing if we excluded the top 10%?

Now we will see as the wealth of the top 10% vaporizes and gets redistributed by the government. The pain will certainly trickle down: waiters and bartenders at high-end restaurants feel it right now. As do landscapers, home remodelers, charities and hospitality industry workers.

When the next artificial reef project is made from unsold BMWs, we'll realize that it's important for the top 10% to do well.

Anonymous said...

With regard to your comments on capital punishment for high level white collar crime, China has a history of executing such miscreants.

http://tinyurl.com/4vgnsv

"There's a Chinese saying that you should kill the chicken to scare the monkeys", says university graduate Yu Li. "We need that threat to be there - it's part of our culture".

It is a very human trait to try to get something for nothing, but this has lately been enshrined as the most worthy of all endeavours.


While I would not advocate going as far as China with retribution, I do agree that we need a radical rethink of the foundations of our business culture if this market is going to survive. Currently it seems to be business as usual with the same tired remedies being thrown at the problem, with little effect.

I don't have a problem with the profit motive as such, we all need to make a living, but we also need to recognise that there is no such thing as unlimited growth and that economies have natural cycles.

The pendulum that swings too far swings back with equal force.

Elizabeth said...

I'm with you, Steve, on the dishonest barons of finance qualifying for capital punishment. But I also wonder how you can reconcile it with your belief that there is no free will? If it were so, wouldn't the greedy SOBs be merely victims of their fate? How can you hold them accountable if they had no choice (no free will) in their behavior? (Seriously asking.)

Steve Salerno said...

It doesn't reconcile, Elizabeth. Because if you truly follow a deterministic view, there should be no punishment for anything. On the other hand, that's an abstract view; one must also consider that the human need to inflict punishment--quite apart from the deterministic "logic" of it--is also predetermined. Further, if you really want to go far afield with this: If logic is predetermined, which means we have no choice but to arrive at the end points we arrive at, how do we know that logic has any validity? If we're predetermined to put faith in logic, that means we're not free to question it. So we'd never see its flaws. Right?

The bottom line is this: I do believe in predestiny. Absolute mechanical predestiny. I also believe that we have to live in the world. What I wish is that we would simply recognize the degree to which predestiny controls it (which is 100 percent), and be a little bit more forgiving of the things people do.

Notice, however, that I said I am not a believer in capital punishment. I simply said that if we're going to have capital punishment, the big white-collar criminals should go before the Mansons.

Elizabeth said...

I admit I cannot wrap my mind around your reasoning, Steve. Help me understand (and bear with me, please).

If I follow you correctly, you say:
1. Everything is predetermined.*
2. As humans, we have difficulty accepting this truth, so we settle on "lesser" beliefs such as free will, good and evil, justice, morality, etc.
3. If we were able to see the truth (of predetermination), we would have no need for morality and justice, among other things.

Is that right?

*This implies a tight causality going back to -- what? The original creator who imposed this particular and unchangeable order? Or a cosmic accident? (But there is no room for accidents in your POV.)

Steve Salerno said...

1. Yes.
2. Probably yes, though I really have no idea how such fallacies as free will came into being.
3. No. Because we still have to deal with broken people. So whether they're predetermined to be that way or not--we can't let them kill/maim/rape the rest of us, right? So we have to take steps that are out of conformity with pure-state deterministic truth--even though those steps are themselves predetermined. This is a product of the natural tension between abstract truth and human, well, humanism.

Steve Salerno said...

Eliz? I agree with what you're probably thinking right about now: It's not worth it. All I know for sure is that a chicken dinner is in the oven, and I will enjoy it in roughly an hour. (I eat early due to weight-lifting; it's not a senior-citizen thing...yet.)

Elizabeth said...

Actually, I'm not thinking that at all. (Though I/we too will have chicken tonight, LOL!)

I'm thinking, among other things (e.g., to buy or to make bean salad?), that in your POV, we should be able to predict the future, no?

Anonymous said...

"The problem for me is that art tends to be a wildcard when it comes to money. It can be useful for a demo reel for future paid gigs or funding, or it can get distributed for actual revenue. However, given the subjectivity of art, and the current lowest-common-denominator commercialization of the market, nothing is certain."

I am with Akhetnue on this point. I was a born artist and have had many "jobs" to pay bills, but I would tell stories even if I could not write. I would just tell them verbally. I would be another Homer or Milton. I have worked in investment banking and corporations, but never had the greed factor to succeed in those areas. I did find them fascinating on the human level and those jobs became fodder for my stories, but my heart was never there. I also never put a lot of stock in material objects, which serves me well in any economy. I think being a storyteller is in my DNA just like having blue eyes and dark hair. I could wear color contacts and bleach my hair blond, but underneath all of it, I would still be a blue eyed brunette. I think for anyone dealing with finances from the creative angle, fiances mean something else than the average job holder or financial guru.

Steve Salerno said...

Eliz: How would we be able to predict the future? We have no clue about what all the variables are. Even the ones inside us.

Elizabeth said...

Steve, I guess then you've never had a good psychic reading.:)

I would leave the "how" (for now) to parapsychologists and physicists to sort out, but, in your POV, our future is written already, down to the smallest detail, is that right?

Steve Salerno said...

Eliz: Yes. As I see it, we were inexorably having this exact conversation, down to every syllable, a million years ago.