Saturday, September 19, 2015

ESTABLISHMENT


ESTABLISHMENT


I never will, by any word or act, bow to the shrine of intolerance or admit a right of inquiry into the religious opinions of others.  – Thomas Jefferson

By J.M. Hamilton (Originally published 6-14-12)

A conservative at the NY Times, Mr. David Brooks, was complaining about the lack of respect accorded by the general population to the “establishment” this week, and I couldn’t help but find myself amused and relieved.  For here Mr. Brooks offered up a political counterpoint to an editorial written by Mr. Luigi Zingales (of Chicago School of Economics fame).  Both editorials, make perfect bookends to this week’s JMH editorial.  Mr. Brooks laments the lack of good “followers” in America today; and Mr. Zingales – a bit of a conservative in his own right, and certainly a libertarian with strong capitalist credentials, fears the corruption of the political and business establishment culminating, or metastasizing, into crony capitalism.  Mr. Zingales holds up Italy’s corrupted economy and government by way of comparison, and the path he asserts the U.S. is headed down, if we are not careful.

JMH, of course, has argued for some time that we are already there.  Witness the idolatry and blind deference U.S. Senate members accorded Mr. Dimon this week.

Now none of this is to say Mr. Brooks is not a great guy and a worthy polemicist… Shucks, about six years ago and for nearly all of my adult life – starting at the age of two- I would have agreed with nearly everything Mr. Brooks put down on paper.

But something happened in 2007 and 2008 that called into question my entire belief system, and apparently the belief systems of many U.S. Citizens (99%), or what Mr. Brook’s refers to as “followers,” who are having a exceptionally hard time buying what the “establishment” is now laying down as gospel.

What could have awoken the masses from their apathy and slumber, and motivated the “followers” to turn against their master, the establishment?   Was it, as Mr. Brooks asserts, that our own personal “vanity” has made Tea Partiers and disenfranchised libertarians and liberals jaded, or was it something else that turned us off on the ruling economic and political elite?

Was it the fact that for the last thirty years the establishment underwrote the greatest Keynesian raid heretofore known to man, whereby the one percent/establishment crushed democracy and redistributed wealth and expropriated political powers for themselves?

Perhaps it’s the intergenerational wealth larceny that has become today’s FED policy, again all in the interest of keeping the rescued Cartel/establishment afloat, at the expense of savers and retirees.

Or maybe it was the toxic assets that have been transferred from the Cartel’s/establishment’s balance sheet and onto the public sectors balance sheets at list price, only to be sold back, selectively, to the Cartel and shadow banking at a discount.

Was it the fact that the political establishment just could never say “no” to big business or the Chamber of Commerce, and allowed them under the rubric of free trade and capitalism to transfer jobs, tax base, and the U.S. manufacturing economy offshore?

Was it the fact that the establishment showed us the true meaning of socialism with endless bank bailouts – running into the tens of trillions- while hypocritically attempting to light a match to the social contract, and seeking significant reductions/privatization in Medicare, Medicaid, and social spending?

Was it the insider trading cases and the manifestation of a two-tiered stock market: one for the insiders/establishment, and the other for the followers.

Perhaps it’s the two tiered justice system: where white collar criminals/the establishment are rarely if ever convicted, and then there’s the justice system for the rest of us — the “followers” facing the criminal justice industrial complex and corporations profiting from the incarceration of individuals for victimless crimes (so that the U S has the highest incarceration rate among western democracies).  If we are to believe the numbers, the U.S. incarceration rate, per Wikipedia, is 39% higher than Russia’s and several hundred percent higher than China’s….. What’s wrong with this picture?

Or perhaps it’s our beloved supreme court, which like our Republican led congress, suffers from very low follower opinion polls; and why should followers be upset when this very same court tells us that corporations/establishment are people too, who may and will collectively purchase our government under a Citizens United decision.

Perhaps it’s the abuse the establishment has heaped upon our fighting men and women with endless wars, so that the U.S. soldier suicide rate now exceeds are monthly casualty rate.  But heh, those soldiers/followers volunteered for it, so that makes it all okay.

Just maybe as Mr. Zingales notes, from the freshwater school of economics no less, that the U.S. establishment has abandoned meritocracy, industriousness, and capitalism…. for cronyism, speculation/private equity schemes, and monopoly.

Maybe its the real unemployment and underemployment rate in this country, and for much of Europe, is in the high teens— or in some instances in the neighborhood of twenty percent or more; as noted in the Times this week many U.S. citizens have watched their net worth crumble to 1990 levels in the span of four years.

Thank you, Establishment!

Mr. Brooks went on to note: “To have good leaders you have to have good followers— able to recognize just authority, admire it, be grateful for it and emulate it.”

To which JMH responds, which part would you like us to emulate Mr. Brooks?

Democracy is a wonderful thing. It makes people feel empowered, no matter how distorted the representative reality from the ideal.  Take that away, or the ability to protest, or form new political parties, or rebel against the established order of things…. And we find ourselves living in another elitist dictatorship, or government by the establishment.  The very things are founding fathers fought against.

Americans of all stripes understand human failings in the economic and political establishment; what the followers cannot understand is blatant political corruption, economic theft leading to lost decades and lives, and the death of opportunity – strangled by the corporatist and monopolist.  Hence, the rise in America and Europe of extremist political parties, like Occupiers, the Tea Party, and in Europe — Socialist, Anarchist and Communist.

When the establishment abandons the 99%/followers, the followers look for solutions outside mainstream political parties.


P.S.

To his credit, Mr. Brooks wrote admiringly of Mr. Jefferson, whom he referred to – longingly – as a “graceful aristocratic democrat.”

Remarkably, Mr. Jefferson wrote the defining document of the American Revolution and provided the ultimate act of rebellion against the established British aristocracy, with the Declaration of Independence.  One wonders what our third U.S. president would have had to say about what the Wall Street Cartel/establishment has done with his Agrarian Dream, or additional thoughts Mr. Jefferson may have had on the establishment of his day?

We need not wonder, here are a few quotes from Mr. Jefferson on the establishment of his day:

“All tyranny needs to gain a foothold is for people to remain silent.”

“In every country and every age, the priest has been hostile to Liberty.”

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich upon the poor.”

His thoughts on globalism?  “Merchants have no country.  The mere spot that they stand on does not constitute so strong an attachment as that from which they draw their gains.”

“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

“Experience hath shewn, that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted into tyranny.”

“Friendship is but another name for an alliance with the follies and misfortunes of others.  Our own share of miseries is sufficient:  why enter then as volunteers into those of another.”

“I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of this country.”

“I believe banking institutions are more dangerous than standing armies.”

“A Bill of Rights is what the people are entitled to against any government, and what no just government should refuse, or rest in inference.”

Given our nation’s current predicament, I wonder if Mr. Jefferson would have been in favor of an economic bill of rights?

Copyright JM Hamilton Publishing 2015

Monday, September 7, 2015

Power to the Market!


Power to the Market!

“Because the free market system is so weak politically, the forms of capitalism that are experienced in many countries are very far from the ideal.  They are corrupted (diluted) versions, in which powerful interests prevent competition from playing its natural, healthy role….”
     Luigi Zingales – The University of Chicago Booth School of Business

“For Smith, the market moves toward monopoly; it is the job of the philosopher to define, and of the sovereign state to restore, free play.”
              Adam Gopnik – Market Man, The New Yorker

By J.M. Hamilton  (Originally published 8-11-12)

The Moral imperative of capitalism is its incredible ability, when fully functioning, to create goods and services on a spectacular scale.  And service a large number of people, the market, with quality goods and services.  Its ability to foster ancillary jobs and innovation are well known phenomenon.

It is the competitive feature of capitalism, and the government - when fully functioning - in its supportive role, that protects the market (the people) from the merchant's/proprietor's worst impulses, which are greed, the quest for unlimited market share and profits, and the elimination of competition.

The bastard child of competition and of capitalism, indeed what Mr. Adam Smith warned us against, is crony capitalism.  As crony capitalism is produced, fostered and sanctioned by the state, it is perhaps the most debilitating economic feature of our time that we have the means to control: crony capitalism ultimately leads to monopoly and an unprecedented concentration of wealth and power. Possibly more insidious than communism itself because it wraps itself in the cloak of free enterprise, crony capitalism is the "anti-capitalism," and as such, it leaves a debilitating stain upon the most productive economic system known to man.

More frightening still, because of the link between crony capitalism (monopoly) and true capitalism (competition on the supply side of the curve), capitalism is under attack like never before, so that record numbers of people are turning to the state for assistance.

Monopoly begets monopoly:  At a micro level, monopoly in one market, say big oil, inevitably leads to monopoly in other markets, say cellular service, as one market provider attempts to duplicate the profit taking success of another market governed by a monopoly or cartel; separately, because at any given time discretionary income for a nation is fixed, if a monopolistic supplier preys upon a market with inelastic demand, say energy or big oil, this results in diminished demand for other goods and services, as capped discretionary income is eroded by monopolistic profits/taxation.  This in turn leads suppliers of other competitive markets to seek out combination, as a means to shore up reduced earnings, sales and income.

Politicians under the dogma of laissez faire capitalism have allowed combination ad nauseum to the detriment of the worker, corporate top line growth, tax revenue, and most importantly the market.  Why? Simply put because monopolistic profits, lead to monopoly sized campaign contributions, and intellectual and political hegemony over the body politic.  Bottom line, monopolistic profits are the mother’s milk of American politics, like a fist inside a velvet glove or muppet.  Some of the largest GOP and DNC campaign contributors come from markets dominated by cartels, oligopoly, or monopoly.

Government, fiscal and monetary policy, can provide a short term fix to problems created by crony capitalism and monopoly; but they are not a long term substitute for structural reform (i.e. the breakup of these organizations)

Of course monopolistic profits and predatory pricing ultimately are anti-market, crush the welfare of the people, savage competitive markets and top line growth, and lead to the collapse of markets.  Witness the record profits made by big oil leading up to the 2007-2008 economic collapse.  Witness the individual investor flight out of the stock market, due to the flash crash, rigged stock markets, problematic IPOs, program trading, insider trading, and opaque markets, like dark pools.

"Anti-Capitalism" causes instability across the globe, observe the Egyptian military's vast control over broad swaths of the Egyptian economy, ditto Iran's Revolutionary Guard and its extensive ownership and control over that economy.  Ultimately, if enough markets are dominated by cartels and monopolies, the cabal at the top can collude to chart a nation's political future, and manipulate a macro economy via capital strike and finance.

By breaking up the concentration of wealth, power, and some of these monolithic institutions, we actually create more opportunity and a larger number of jobs, not just among the rank and file but also among management and the executive class.  Specifically in regards Wall Street banks - stock valuations demand it, the dearth of the return on equity demands it, and the market demands the break up of these banking institutions.

Diseconomies of scale, failed management, and egregious risk management insist upon it.

(Don't get me wrong, I am not writing against the scale and size of business, as long as big business operates, side by side, with competitors, and government provides effective "rules of the road" or regulation to protect said market and consumers from predatory behavior.)

As often as not, the excuse for these catastrophic combinations, provided by management, is that it is "in the interest of the stockholder;" however, when the break up value of these monstrosities is greater than the stock valuation by a wide margin-- seemingly and conveniently, the interests of management always trumps stockholder value.  Observe Wall Street’s reaction to Mr. Sandy Weill's embrace of the proposed return of Glass Steagall.

Just as politicians created the monopolies and cartels- it can aid the market (i.e. the American people) and the economy by breaking up these statist monstrosities, which often can only exists by state backstop and support.


Possible solutions to our economic crisis are simple:  support the interests of the market, or the demand side of the curve, and economic recovery will follow.  Here are a few simple thoughts and ideas:

1) Leverage the great American market!  Insist that if business sells in America - they produce the goods and services sold in this country with American labor.  If a business doesn’t hire American, that’s fine but than access to the American market would be cut off.  Since this rule would apply across the board to all domestic and foreign companies selling in the US, no one could complain that they were unfairly treated or at a competitive disadvantage.

2) Close all tax loopholes and dodges
, which would allow for a lower corporate tax rate--- since it would be a requirement that US labor be utilized for goods and services sold in the US, there would be no opportunity for tax and labor arbitrage for domestically produced goods and services.  If larger business begins paying taxes at a lower effective tax rate (in lieu of paying little or no taxes at all), the consumer could theoretically, enjoy a lower tax rate since they are no longer subsidizing businesses that have the skills and the means to engage in tax avoidance.  This too would help stimulate the economy by increasing consumer/market discretionary income (i.e. aggregate demand).

Eliminate the American tax for goods and services sold overseas by American companies, as long as they employ Americans for goods and services sold in the U.S., with one exception.  Some percentage of the cost of the US military industrial complex (MIC) should be carried by all foreign governments and multinationals based upon their respective contribution to global GDP and global international sales, respectively.  The US military protects and provides stability for global markets, and the beneficiaries of that protection should pay their fair share.  If this in turn relieves additional tax burden on the American consumer/market, it means more income and opportunity flowing into our economy, and less consumer/market money flowing into the MIC, via the government.

That's another half trillion dollars, or more, the US taxpayer (domestic businesses and individuals) would no longer be burdened with - that could flow directly into our economy, or be allocated to deficit reduction.

3.) Cap the election season, so that politicians may only run for office the three months proceeding the election, in lieu of the two year - continuous period presently allotted; and cap the amount of campaign contributions taken in per politician, so as to end the financial/contribution arms race that is core to the modern day election cycle.  By capping both the duration of the election cycle and campaign contributions, we put a huge dent in the power of cartels and monopolies to control political candidates.  In this manner elections become about ideas, and not who has the biggest wad of cash. 

4) Break up cartels and monopolies.

Power to the market! 

Copyright JM Hamilton Publishing 2015