I Bet on Sure Things…

I Bet on Sure Things…

By J.M. Hamilton (12-1-12)

“Now you’re not naive enough to think we’re living in a democracy, are you buddy?  It’s the free market.  And you’re a part of it.  You’ve got that killer instinct.  Stick around pal, I’ve got a lot to teach you.”

“I don’t throw darts at a board.  I bet on sure things.  Read Sun-Tzu, The Art of War.  Every battle is won before it is ever fought.”

- Gordon Gekko – From the movie Wall Street 

The 2012 election proved that plutocrats can’t buy everything, but fear not because Democrats – believe it or not – are both pro-business, and are often eager to take corporate largesse.  Besides corporations, as often as not, hedge their political bets by laying down campaign contributions to both political parties, albeit in many instances they lean right.  Seemingly, all that Koch brothers loot and all Mr. Adelson’s money could not put the GOP back together again, after its great fall in 2008.  And although some members of the GOP seemed to have turned the corner and have already begun to learn the lessons of the last election, there is always more than a few diehards fighting the last war.

Embittered, angry, and just like the T-Rex, they flirt with extinction.

Enough about government, because it’s all we talk about, it’s all we read and see on the tube and our smart phones.  It’s quite distracting, and even though government deserves our attention, the private sector often does not obtain the degree of macro scrutiny that it deserves.  Conveniently so; that is to say, this is by no misadventure, because the plutocracy doesn’t want us digging into or analyzing their affairs.   Besides private enterprise is sacred.  I know this to be true because I feel it in my bones.

Except… might it perform better?  For the good of women and men, labor, stockholders, fellow businesspersons, society at large and the good of the nation, might private enterprise do better?

Mr. Gekko likes sure bets, just like any successful businessperson, for instance Mr. Warren Buffett. Why assume risk or earning’s volatility, if you can guarantee earnings, profits and dividends?  And in some sectors of the economy, risk – in many instances – has all but been eliminated but at a terrible price.  Indeed, victory over volatility and risk has been achieved, and earnings and dividends are guaranteed.  I write of course, of markets – large swaths of the American economy – dominated by cartels and monopoly.  What is good for the plutocracy, unfortunately, is not always good for the hoi polloi.  

For these massive cartels – which promise sure bets – often embody diseconomies of scale, are Kafkaesque risk management nightmares, and – despite claims of being the living and breathing embodiment of private enterprise – are often dependent upon government for backstop and support.  Since consolidated markets require government approval, these monopolies are creatures of the state.  By way of example then, J.M.H. offers up Big Pharma, Big Oil, and the Wall Street banking cartel.  As these markets are dominated by cartels, their earnings are all but guaranteed; and as demand for life saving drugs, energy, and credit are all but inelastic, these entities can and often do achieve monopolistic profits and returns for their shareholders.  However, these “sure things,” profits, are often taken to the detriment of society at large, and our government.   For the monopolistic profits charged by these sectors of the economy, confiscates money and discretionary income that might flow to other sectors of the economy and businesses; and as real wages have stagnated in this country and throughout much of the western world, monopolistic profits cause the economy to stagnate and leads to gross inefficiencies and misallocations in the economy.

In Republican parlance, monopolies quite simply are job and business killers. And have you noticed (?), there’s always conveniently a shortage of product and supplies in these markets:  whether it be the recent shortage of gas in California, conveniently, because a couple of refineries went down; or a dearth of life saving antibiotics; or cut backs in credit and mortgage financing.  These alleged institutions of efficiency, always seem to fall short.  And my guess is that these “accidents” are quite possibly by design.  For shortages lead to increased dependence, and higher margins, profits and dividends.  There’s that “sure thing/sure bet” we keep talking about.  Monopolistic profits are a tax on society, for which the electorate has no say or representation.

Indeed, the government literally has to bribe these institutions to produce, whether it be the Feds purchase of mortgage backed securities, so that the banks will begin mortgage lending again; or government creating extra financial incentives for Big Pharma to produce the aforementioned antibiotics or vaccines; or absurd tax breaks for big oil, which reaps billions in profits annually.  Monopolies, duopolies and oligopolies have incredible power, both political and financial, with which to sway the government and the public around to their way of thinking.

And because capital – in the form of stock purchases (or bonds) – tends to flow into markets controlled by cartels and monopoly, due to Mr. Gekko’s desire for the lush dividends and sure bets, this crowds out investment in alternative markets.  All of which further reinforces the importance of these institutions, and makes the public more dependent upon these cartels for jobs, which further reinforces their clout and power.  Their power grows, expands, and is self-fulfilling in a Faustian fugue.  No wonder, the pinnacle of success, for many in the business community, is to eliminate your competitor.

Greed, self-preservation, and sure bets are all instinctual, but at the macro level is it all good for America, particularly when left unchecked?

So to sum up:  cartels and monopolies are incredibly inefficient, often predatory creatures, engage in rent seeking behavior, are the incarnation of private taxation without representation, and are often dependent upon handouts from the state… the very thing Republicans are said to abhor.  And yet, we never hear a word about these corporate predations.  Worst still, what these institutions are exceptionally good at is subverting democracy via mercenary battalions of attorneys, to further their interests by:  writing rules, regulations and laws in their favor, which often preclude competition or create barriers to entry; showering massive campaign contributions upon politicians, so that that the pols look out for cartel interests, as opposed to the commonweal; and by engaging in regulatory capture.

By way of example, America has all but achieved energy independence, and yet, Big Oil has begun a massive lobbying campaign to allow the industry to ship energy independence and America’s LNG, refined gas, and petrol products offshore to more lucrative markets (this of course, will also serve to keep prices up here at home).  Instead of developing life savings drugs with its monopolistic profits, Big Pharma continues stock buy backs, mergers and acquisitions, and lobbying congress so as to preclude the government from negotiating competitive rates for Medicare prescriptions.  As for banks, well if you have read my blog over the last three years, or unless you have been frozen in a cryogenic state, the list of predatory behavior is both obvious and seemingly endless; and bank behavior has single-handedly started a global political movement.

So what can be done to protect America, and American business, from cartels and monopolies?

1)  A windfall profits tax would suck some of the lifeblood out of these institutions, and stop the flow of capital in the direction of these various leviathans; but it’s really not a market oriented solution, and only serves to strengthen the state and public dependence upon the state. As such, it is an inefficient remedy. The leviathans after all, would remain, and live again to fight for the tax's abolition.

2) We could regulate these entities, and cap the profits they can make, almost like a utility…. getting warmer here.  Not a bad solution, except the regulators, as often as not, end up going to work for the very industries they are supposed to be responsible for, the so-called “revolving door” in action.

3)  Government, in some instances, could compete quite effectively against the private sector.  For example, since the Fed is giving the banks a massive handout right now by purchasing mortgage backed securities, to the tune of $40 billion per month, and the majority of America mortgages end up with the GSE’s, Freddie and Fannie (both publicly owned), why not cut out the middleman, the banking cartel altogether?  As far as this writer can see, the banks primary purpose in today’s mortgage market is to generate fees (profits and rewards) for themselves, and pass underwriting responsibility (risk) onto public institutions and the taxpayer.  Hence, the banks guarantee the “sure thing,” profits for the plutocracy and bailouts for the public.

4)  Probably the best solution – the more market oriented approach – is to break these institutions up into many and varied smaller companies, so that they can compete against one another.  Smaller institutions would provide a private sector cure for much of the “uncertainty” created by today’s monopolies and cartels.  Moreover, the breakup of these monopolies and cartels would, in many instances, address many, if not all, of the ills described above, and certainly hinder rent seeking behavior, decrease government welfare to corporate entities, and the subversion of our democracy.

Long suffering stockholders, faced with under-performing stocks and valuations at less than the break up value of these institutions, also stand to gain, big time!

The arguments against enacting any of the changes to rein in the cartels are almost exclusively myopic and sophistic; and probably the best argument they can offer is that these institutions throw off “sure things,” dividends, to state retirement and union pension funds, contribute to philanthropy, and of course, hire workers.  That these very same institutions are often experts on tax avoidance, and often prefer to ship jobs offshore, as a form of tax and labor arbitrage, never enters the cartel controlled narrative.  The argument that these institutions have to be this big in order to compete or better service today’s multi-nationals is specious.

No, if we look at the cost-benefit analysis of the break up of these institutions, business wins and the American people win with deconstructed markets, for all the aforementioned reasons.

The only people who lose by the break up of monopolies and cartels are those who like to bet on sure things; but don’t shed a crocodile tear for Gordon Gekko, there’s always that old stand by, and the surest of bets, insider trading.  The tradeoff is clear:  cartels and monopolistic profits for an elite few; or the break up of these institutions for a healthier national economy and jobs market.  You decide, and then vote accordingly.

P.S.

Business leaders and CEOs have been more vocal as of late, in regards government and fiscal budgetary matters; this is only natural and is to be commended and encouraged.  However, it would be better still if these same executives would be less reticent about cartels and monopolies.  The next time the banking cartel implodes and takes down the global economy, there is going to be a strong political impetus to nationalize the cartel, at least in the short run if not longer term.  Therefore, from a libertarian or even the GOP’s perspective, it maybe in the business communities best interest to nudge their Wall Street brethren towards deconsolidation; an ounce of prevention now (breaking up the cartel), maybe worth more than a pound of cure (government takeover), when the inevitable financial crisis occurs, again.

These cartels give capitalism a bad name, and the shortages they leave in jobs, opportunity, and products and services…. Are all too eagerly filled by the government.  Democratic power abhors an economic vacuum, as we saw in the last election.  

 Copyright JM Hamilton Publishing 2012