Category Archives: Economics

The Myth of Growth

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An expression I’m fond of using is “no tree grows to the sky.” I don’t know where I picked it up, but like most of my pithy expressions, it appeals to be sense of the natural order. Everything begins, evolves, changes, adapts, but eventually ends. It strikes me that most of the periods of tumult were the result of people just assuming the trend lines would never change. Everything would stay the same forever.

The one area where this always jumps out to me is the cult of economics. If you scrape away the posing and posturing, this strange modern religion is built on the absolute belief that economies can and must grow forever. The “economy” has been turned into a thing with agency that punishes and rewards the people, based on their treatment of the economy.

Nowhere in modern economics do you find people talking about steady low growth or even static economies, other than as cautionary tales. In the word of modern economics, the economy of a country is the plant from Little Shop of Horrors. It must be fed so it can grow and nothing must be permitted to get in the way of feeding the thing. In the moral hierarchy of modern economics, everything comes second to the economy, even human life.

To some degree, this is what drives the open borders fanaticism among the ruling classes. The shamans of the cult of economics tell these simple minds in politics that the economy must grow or we all die. Further, they tell them that the only way to grow it is to grow the population. Since the locals refuse to have ten kids per woman, the only solution is to import millions of peasants from the fringes of civilization.

In fact, growing the economy is so important to the health of the people that it trumps the life of the people. Mark Dayton comes pretty close here to saying that opponents of mass immigration don’t deserve to live, that they can be fed to the economy like the murder victims are fed to the plant in the above musical. To Mark Dayton, his statement is noble because he is saying he is willing to sacrifice his kin to please the god of modern economics.

Harsh words and heartfelt sentiment were exchanged by community members and local officials on racial issues in Central Minnesota at the St. Cloud NAACP Community Conversation with Gov. Mark Dayton.

Hosted Tuesday at St. Cloud Public Library, about 100 people from diverse backgrounds gathered to ask questions of St. Cloud Mayor Dave Kleis, St. Cloud Police Chief Blair Anderson, State Rep. Jim Knoblach, Minnesota Human Rights Commissioner Kevin Lindsey, Council on Black Minnesotans Community Program Specialist Kolloh Nimley and St. Cloud AFYA Pharmacy co-owner Dr. Edris Kosar.

From the start of the event, Dayton bluntly stated his opinions on the racial tension in St. Cloud and across the state in regards to immigration.

“Look around you. This is Minnesota,” Dayton said. “Minnesota is not like it was 30, 50 years ago. … This is Minnesota and you have every right to be here. And anybody who cannot accept your right to be here, and this is Minnesota, should find another state.”

Dayton is defining citizenship here based on your acceptance of the New Religion. Much as libertarians think the unproductive should be turned into fertilizer, the man of the New Religion thinks the infidel is no longer his fellow citizen, maybe not even his fellow human being. The Bantu tribesman on the other side of the planet wishing to settle in your neighborhood means more to Mark Dayton than you, if you are not sufficiently enthusiastic for the new faith.

The bit of reality the shamans cannot contemplate is that the economy will not grow forever. Much of what is called growth is just currency manipulation. Another part is gaffing the numbers so the spreadsheets look pleasing. Automation, of course, is going to eliminate most work in the next generation. Growth as currently understood will come to an end by the middle of this century, no matter how many Bantus are imported to Minnesota.

The trouble is, everything in the West is based on the assumption that the economy will grow forever. That’s not irrational. For most of human history, scarcity has been the great challenge. The great minds were all put to the task of figuring out how society can allocate scare resources to support the maximum number of people. In a world with shortages of food, water, housing, shelter and safety, growing the supply of those stocks is paramount. It trumps everything.

That’s not the modern West. It’s barely the case in the savage areas. The population explosion in Africa is due to more food, medicine, shelter and security. We live in an age where poor people are obese because they sit around all day eating massive calories, taking massive amounts of intoxicants while watching television. Mexico is the most obese country on earth and they are allegedly waddling north in search of more stuff, like grazing animals.

A post-scarcity world should be a world of steady populations, with periods of modest growth and decline, based on fashion. It is a simple math problem. Instead, our rulers are convinced that we must have more and more people in order to feed the economy. Whether or not they really believe it is hotly debated on the Right, but clearly it is baked into their world view. The modern politician talks about nothing other than economics and economic growth.

I think it goes deeper than just a current fad. Everything is based on growth, real or imagined. Our institutions and culture are based on growth. We deliberately debase the value of labor through currency manipulation, for example, in order to encourage productivity and economic activity. The explosion of debt is so the welfare state can keep growing. Those massive credit markets everyone now fears is to keep the economy growing.

Generations of ruling classes have been trained on the core belief of never ending growth. Remove Audrey II from the modern discussion and what do we have? The error made on the Right is to assume this obsession with economics is in order to avoid answering that question. It may simply be that they fear discussing culture because it may upset the gods of growth and then there will be hell to pay.

To the Gas Chambers!

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Most men grow out of libertarianism, if they were ever so foolish, by their mid-20’s. It is at that age when you have enough experience in the world to see the foolishness of it. It takes longer for the young Progressive male to wake up because of the cultural reinforcements all around us. We live in lands controlled by the Cult of Modern Liberalism. To be something other than a Progressive tests the mind on a daily basis.

I’m fond of pointing out that liberalism and libertarianism are two sides of the same coin. People find that assertion bizarre, but both are utopian and both start with a hatred of humanity. That is the heart of materialism, after all. Materialism places efficency at the top of the moral hierarchy and people somewhere further down. The main difference between the faiths is the the liberal hates all men equally, while the libertarian simply detests the unfit.

This is on full display in this column by Kevin Williamson. The style is familiar where the curdled hatred of humanity is couched in an ad hoc critique of the bogeymen that haunt the dreams of reactionaries and libertarians alike. There’s also the standard layer of free market frosting about the glories of free trade and the free movement of people. It’s the part we’re supposed to notice, rather than the sadistic misanthropy at the core of the article.

Phillips, Inc., in the end decided it had no need for Phillips, Texas, and the town was scrubbed right off the map. The local homeowners owned their houses but not the land they sat on, which belonged to the company. (These sorts of arrangements were, and are, more common than you’d think, as in the case of the many Californians in the Coachella Valley who own their houses but lease their land from the Agua Caliente band of Cahuilla Indians.) Many of the residents of Phillips were uneager to be evicted from their homes, and they sued the company with the help of the famously theatrical Texas trial lawyer Racehorse Haynes, who informed the good people of Phillips: “They might whup us fair and square, but they better bring lunch.” Lunch was served, and Phillips is just gone.
It was the right thing to do. Some towns are better off dead.

That’s always been the truth at the heart of libertarianism, as well as the various implementations of Rousseau’s monstrous ideas. Libertarians have always imagined themselves as trapped with a bunch of fat lazy takers. Lacking the courage to confront the slackers themselves, they seek a system that will do the dirty work for them. Liberals have this same view. They see themselves as the saints of a fallen world and their system will take care of all those sinners.

Way back in the olden thymes, Whittaker Chambers unriddled this connection in his review of Ayn Rand.

Systems of philosophic materialism, so long as they merely circle outside this world’s atmosphere, matter little to most of us. The trouble is that they keep coming down to earth. It is when a system of materialist ideas presumes to give positive answers to real problems of our real life that mischief starts. In a age like ours, in which a highly complex technological society is everywhere in a high state of instability, such answers however philosophic, translate quickly into political realities. And in the degree to which problems of complexity and instability are most bewildering to masses of men, a temptation sets in to let some species of Big Brother solve and supervise them.

The liberal and the libertarian look at the messy arrangements of mankind and wish to clean the slate and start anew, because to work through the current arrangements is dirty and time consuming. One does not seek to alter the current arrangements out of a love or respect for the current arrangements. All utopians first aim to destroy and that is done best with a passion, which can only arise from contempt.

That’s what bleeds from Kevin Williamson’s writing. He looks at the “losers” in America with contempt. Some towns are better off dead. My guess is he thought that was a cheeky line, as he tends to the adolescent, but maybe he did think much about it. As Chambers noticed, libertarians are not full of introspection.

Nor has the author, apparently, brooded on the degree to which, in a wicked world, a materialism of the Right and a materialism of the Left, first surprisingly resemble, then in action tend to blend each with each, because, while differing at the top in avowed purposed, and possibly in conflict there, at bottom they are much the same thing. The embarrassing similarities between Hitler’s National Socialism and Stalin’s brand of Communism are familiar. For the world, as seen in materialist view from the Left. The question becomes chiefly: who is to run that world in whose interests, or perhaps, at best, who can run it more efficiently?

That last line sounds remarkably like Lenin’s adage, “who, whom?”

Rambling about the Maths of Debt

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The other day, Kevin Williamson posted this about balancing the Federal Budget. It is the typical snarling, snide polemic he is known for recently. Maybe he accidentally drank out of his ink bottle or took a blow to the head, but his work has been of this type for a while. This recent piece is mostly another deranged rant about Donald Trump. The bulk of his column is crap, but this got my attention.

At the moment, our national fiscal situation is considerably less bad than it was during the Obama-Pelosi-Reid era of one-party Democratic rule; the 2010 and 2011 federal deficits were 8.7 and 8.5 percent of GDP, respectively, but the 2014 deficit was only 2.8 percent of GDP. Federal spending went from 24.4 percent of GDP in 2009 to 20.3 percent in 2014, thanks in no small part to budget sequestration, the one national policy in which Washington’s Democrats and Washington’s Republicans are united in loathing. The 2017 deficit is projected to be 2.3 percent of GDP.

That puts us within striking distance of having a balanced budget (albeit one that is balanced at a spending point that is too high for my own taste) or at least the reduction of budget deficits to trivial levels. All that is needed to get there is a little sober reform on the taxing front and a little sober reform on the spending front, with the hardest piece being reform of our entitlement programs, which in the long run will be the major drivers of deficits. I like the idea of radical tax reform, scrapping the tax code, abolishing the IRS, and starting over, and then privatizing Social Security and abolishing Medicare and Medicaid to boot. But you don’t actually have to do that to balance the budget.

That struck me as implausible so I did some mathing. The first thing we need to know is how much debt the Feds are piling on each year. In fact, that’s probably the only thing worth knowing as that is the tax on the future we may or may not be able to sustain. Greece stopped being a country, after all, because it could not service its debt, not because it spent too much or taxed too little. When you can no longer service your debt, you’re done as a country.

According to the Treasury, the amount of total debt held by the public has gone up 23.9% since the heroic budget deal Williamson is fond of touting. That’s better than the previous four years when debt rose by 37%, but there was also the big giant recession where tax receipts dropped. On the other hand, it is still well above the average over the last 35 years, so no one should be celebrating this modest reduction.

The larger point he is making is that with some small tweaks, the federal budget can be balanced. Well, over the last 35 years the annual increase in Federal debt has been 8.3%. In 1980 the debt was $907,701,000,000 and it is now $17,824,071,380,733, as of the end of the 2014 fiscal year. That’s a staggering amount of debt that happened during the two biggest economic booms in the nation’s history. Put another way, in the best of times we have run up debt at record levels.

For another way to look at it, here is the inflation adjusted debt since the 60’s:

fredgraph

There’s no way a sober person can look at the number and come away thinking we are a few tweaks away from solving the debt problem. If that were true, the graph above would not exist. Instead the line would bounce along in that 30% range as it had for so long. Something changed in the 1980’s and as a result debt as been on a steady run upward ever since, regardless of the party in charge and the amount of tweaking.

That raises another interesting question. If debt as a percentage of GDP is spiraling upward and neither party seems to have a way to stop it, what is driving the debt spiral? The most obvious place to look is the spending side as taxes have not changed a whole bunch in my lifetime. They lower rates, but remove deductions. Then they raise rates, but add back in a bunch of deductions. As Reason Magazine noted a few years ago, tax collection remains fairly constant over time.

Here’s one of my favorite charts. It is the per capita inflation adjusted spending. Using 1980 as the starting point, the size of the Federal government has doubled, even adjusting for inflation.

When you look at per capita, inflation adjusted GDP growth, you see something curious. The average growth rate has been 1.86% since 1980, which is interesting for a number of reasons, but what’s relevant here is that it explains the chart above. The cost, per capita, of government may have doubled in 35 years, but so has per capita, inflation adjusted GDP. The cost of the Federal government has simply kept pace with rise of incomes. The relative cost of government has not changed much.

So, what is driving the debt spiral?

The answer is the the debt spiral is self-perpetuating in a zero interest rate world. Imagine you have a personal income of $100,000 per year after taxes and expenses of $105,000 per year. You borrow $5,000 to cover the deficit. Every year your earnings go up 5%, but your expenses go up 5% as well. In 20 years, that annual deficit is $12,500, which sounds pretty good. Your annual deficit percentage has not changed, but your total debt is now $165,000!

Of course, it gets much worse because debt has interest. Even the government pays something in interest today. Using the above example and the historic norm of 7%, the total debt would balloon to over $200,000 in that 20 years and the debt payments would eat up a big chunk of the budget. Long before you got the 100% debt range, your little country would have been forced to cut back and pay down debt.

What’s happened in the free money era since the 1980’s is the cost of borrowing, in the view of politicians, has disappeared. In the age of market based borrowing rates, the bond markets forced the government to choose between competing options. Do you spend more on defense or more on roads? Do you make pension promises for ten years out or does the impact on borrowing make that untenable, because it cuts into current spending on other constituents?

That has not been the case for a generation. Instead of choosing between competing interests, pols just borrow to pacify both interests. The Republicans borrow to cut taxes for their patrons and the Democrats borrow to give goodies to their patrons. Elections, therefore, have no consequences as the parties never threaten each others interest. The voters are simply deciding who gets to spend time at the debt trough.

Of course, there’s a limit to how much debt a government can run up even in a zero interest world. If central banks begin to let rates rise, then the day of reckoning comes much sooner, which is why they can never let rates rise, at least not on purpose. That returns me to the original topic. The only “tweak” that can fix the debt problem is actually a radical change and that comes but one way.

The Crushing Reality of Mathematics

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A fun book to read, if you have a thick skin, is called The Big Questions by a libertarian crackpot named Steve Landsburg. Somewhere in the book he makes the excellent point that mathematics is universal and immutable. At the dawn of time, two plus two equaled four for all values of two. It’s never changed and will never change, even if the universe collapses into an infinitely dense mass.

If you are looking for a nice shorthand definition of reality, mathematics is a good choice. Consequently, a good definition of “crisis” is when beliefs violently realign with mathematics. The Greek crisis is about the number of Euros they owe to creditors is bigger than the number of Euros they have in their accounts.

To paraphrase Philip K. Dick, math is that which, when you stop believing in it, doesn’t go away. Like reality, people can only take so much math, so we spend a lot of time pretending it is negotiable. The most obvious example is the American pension system. Every week we see stories like this one about how cities and towns are being crushed by pension debts.

There are three bits of math to consider here. One is the fact that you can only tax people so much before they revolt. They may revolt by tax avoidance, or they may hang their politicians, but there’s a point where they will not pay any more in taxes. That means every government has a cap on what it can collect from its subjects.

The second bit of math is that people expect certain minimum things from their rulers. Towns have to keep the streets clean, catch criminals, runs schools, etc. National governments have to defend the borders, run the courts, police the economy, attack the muzzies and so on. These things cost money and that amount is always more than the people think they should pay, but it is just below the maximum they will pay.

The final bit of math is the hardest and that has to do with debt. Pension systems are a type of debt. If I hire you and as a part of your compensation, I promise to pay you a monthly stipend after you turn 65, that’s a debt. That debt must be backed by collateral. In a pension system that collateral is the cash contributed by members and the employer, plus whatever interest that cash earns.

Pols have been jacking up the benefits for decades as a way to buy support from unions. This is just another way of saying they have been borrowing massive amounts to buy votes. To hide this reality, these pension systems claim their investments will return 7.5% or more, which they promise will cover their liabilities.

The trouble is the math says otherwise. If your pension system has $100 million in liabilities and those liabilities are growing by 7.5% per year, your returns have to be 7.5% to keep pace, as long as your assets are $100 million.  In many cases, these pensions have assets between 60-70 percent of liabilities. That means 10-12% returns are required and most of these funds are seeing returns of 2-3%.

The only way to make up for this gap, which is getting worse every year, is to divert money for operating expense like street cleaning, to pay pension debts. That and raise taxes, but in most of America we are at the maximum people will pay. The result is the people pay more and more for less and less government. At some point, mathematical reality crushes these municipalities and the states.

Most estimates put the math problem at about $4 trillion, but we have to assume that is the best case scenario. Greece is an excellent example of how math avoidance leads to compounding mistakes, thus making the math worse. Ten years ago, Greece could have unwound their debt with an orderly exit from the Euro. Now they just wait for the revolution.

There’s no reason to think the same thing will not happen in the state pension systems. Some states can cut benefits and others have quietly transferred the liabilities to cities and towns, which can use bankruptcy to cut their debts. California, on the other hand, is looking at a Greek-style economic meltdown in the next decade.

None of these things happen in a vacuum. California owes its former workers money it will not pay. Those employees owe money they cannot play. Of course, California bonds sit on the balance sheet of banks who pledge them as collateral. The math of the pension crisis says it is going to wipe out more than the savings of a few retired bus drivers. The math says we’re all doomed.

Currency Wars

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I have a pet theory that a good way to understand history is to examine the currency arrangements. Historians will address the rampant debasement of the currency by the Romans in the third century, for example, but they never try to explain events through the lens of currency. I think you can argue that the history of money is the history of man in the sense that the arc of civilization is the mastery of money by the people in charge.

Two good examples are Charlemagne and Offa of Mercia. They were contemporaries and both reformed the coinage and mastered seigniorage. Forever after them, a key goal of the ambitious ruler was to control the coinage and use it as part of his arsenal against his adversaries. Closer to home, the history of the world post World War II is all about the dollar and its role as the reserve currency of the world.

Anyway, it looks like James Rickards was right a few years ago when he said the world is descending into a another currency war. That’s a great book, by the way. The Wall Street Journal reports that China is debasing its currency and sending shock waves through the emerging markets.

China’s devaluation of its currency jolted global markets Tuesday, hitting stocks and commodities and boosting government bonds.

The Dow Jones Industrial Average fell 1.2% to 17402.84, erasing most of the previous session’s gains. The S&P 500 fell 1% to 2084.07. The pan-European Stoxx Europe 600 index closed 1.6% lower.

Oil and metals prices also fell sharply, while demand for haven assets pushed down bond yields in the U.S. and Europe, as investors worried that Beijing’s move signaled concerns over growth in the world’s second-largest economy.

The moves came after the People’s Bank of China on Tuesday pushed down the yuan’s trading range against the dollar, setting its daily fixing rate 1.9% lower. Investors reacted to the move by pushing the yuan down almost 2% from that level.

Financial markets saw it as a sign that Chinese authorities believe it is necessary to act to boost flagging growth, said Ewen Cameron Watt, chief investment strategist at BlackRock’s Inc.’s Investment Institute.

They call currency devaluation “beggar thy neighbor” for a reason. China, in an effort to boost exports, will start printing money, thus lowering its value against the dollar and other currencies. That will make Chinese products more competitive in US and European markets. This may be fine for the US and Europe as it means cheap goods and people like cheap goods for a while.

The trouble is everyone else will have no choice but to follow suit and debase their currency. It can easily become a race to the bottom. International management through central banks is probably enough to keep things from getting out of hand, but there are unknown unknowns. The biggest is the off the books carry trade market that is possibly over $9 Trillion USD now.

The entirety of this market is leverage. You borrow money to invest it in another currency. Presumably, settlement of both ends of the transaction leaves a profit, but big moves in the currency rates means huge losses. Those losses are covered by liquidating other assets to cover the loss. This can set off a cascading effect blowing up whole markets in days, even with the loss prevention systems governments have in place. The most obvious example is The Asian Financial Crisis of ’97.

Life is not a math problem and so economic problems become political problems. Brazil, which is already struggling, cannot withstand a currency war. This is not a country with a stable political and cultural foundation. The current president is already under fire so a deepening economic crisis will probably lead to political turmoil or worse. Military coup is the traditional way of doing things in Brazil so you never can rule that out as a possibility.

Currency wars never end well. The currency war that started in the 1920’s ended with depression and world war. The disorganized flight from the Bretton Woods system eventually led to the current system of towering world debt that may be about to tip over. The only way for the West to maintain their massive custodial states is through unlimited credit emissions. A full on currency war probably brings that to an end.

 

The Cost Shifting Economy

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Car dealers train their salesmen to focus the customer on the car payment and not the sticker price. There’s a number of reasons for it. One is that people will take a larger car payment that they want if they like the car. The difference between a $500 payment and a $550 payment is easy to justify when you’re in love. That’s a few thousand dollars more in car, but it only feels like fifty bucks.

The other reason is the dealer can bundle everything up so that the customer cannot negotiate each item one at a time. The last thing a dealer wants is to debate the trade-in, the interest rate, the dealer options and so on. A good salesman can sneak in some high profit items to the dealer, while hitting the customers peak tolerance for a car payment.

The mobile phone market has always worked on this principle. My first mobile phone was from a place in Boston that basically leased you a phone and charged you each month for minutes. They quickly figured out that was a loser and just included the minutes. That was late 80’s and it has been that way ever since. You “buy” the phone, but you’re really just making a down payment. The rest is financed through your monthly bill.

That’s about to change and it is another example of the cracks showing up in the cost-shifting economy.

Verizon Wireless today announced a new set of wireless data plans, and none of them are available with contracts or phone subsidies.

It’s not clear from Verizon’s announcement whether it’s going to completely stop offering contracts and device subsidies to new customers after these plans become available on August 13. Since the announcement doesn’t say anything about killing existing plans, it’s possible that the company could still offer traditional two-year contracts, but without promoting them. We’ve asked Verizon about this and will provide an update if we get one.Going forward, Verizon will encourage customers to either buy phones outright or pay for the entire device in installments. This differs from the model in which you get a discount of several hundred dollars off the price of a new phone but have to sign a two-year contract that can’t be broken without paying early termination fees. When customers own their phones outright, it’s a lot easier to switch carriers to get a better deal.

The mobile carriers have been subsidizing the phone purchase by financing it through the bill. That’s how the broke waitress can afford a $650 iPhone. Apple was shifting the cost of their phone to the carrier. The carrier, in turn, found a way to game the customer by tucking the costs in the monthly bill. They also put some interest in there too.

That worked fine in a growing market, but the market is saturated. They’ve run out of greater fools. Now the carriers are chasing price and that means the subsidies go away. The number of people will be willing to pony up $650 for an iPhone is probably much less than the number willing to pay $200. This will have the inevitable result of collapsing the margins of the phone makers as they have to chase price.

For a long time now the US economy has been based on the belief that growth is forever. When every business in a market is based on forever growth, when the market stops growing, it collapses and takes everyone with it. The housing bubble is a classic example, but large swaths of the tech economy have worked the same way. We’re running out of new people to pay for the old people now. The results are inevitable.

Our Fascist Age

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One the stranger things about the Nazis was their opposition to chain and department stores. Anti-capitalist elements of the party pushed through special taxes on department stores and organized boycotts against the larger retail stores. It was not just Jewish business which came in for these assaults. Large industrial concerns were also attacked by elements in the party who wanted a return to the guild system of their imaginary past.

The Nazis had a lot of nutty ideas about all sorts of things, but they figured out that letting the populists run wild would result in economic chaos so they eventually adopted the ideas of other fascists, namely corporatism. The Nazis were never an intellectually rigorous bunch so it is no surprise that they were not very coherent when it came to economics, but they eventually fell into corporatism, which had been kicking around Europe since the 19th century.

The interesting thing is the Nazis had a romantic view of small business that was integral to their worldview. Yet, once they embraced corporatism, they turned on small business quickly. In 1936 they closed 36,000 small businesses and in 1937 they closed another 63,000. The reason was simply that they thought there were too many small businesses and that complicated their larger economic plans. In other words, the corporate state transcended everything, even ideology.

It’s something to keep in mind as America embraces the corporate state, combining it with the technological state. This interesting piece in 538 a while back provides some useful numbers to understand how this is unfolding.

Talk to anyone in Silicon Valley these days, and it’s hard to go more than two minutes without hearing about “disruption.” Uber is disrupting the taxi business. Airbnb is disrupting the hotel business. Apple’s iTunes disrupted the music industry, but now risks being disrupted by Spotify. Listen long enough, and it’s hard not to conclude that existing companies, no matter how big and powerful, are all but doomed, marking time until their inevitable overthrow by hoodie-wearing innovators.

In fact, the opposite is true. By a wide range of measures, the advantages of incumbency in corporate America have never been greater. “The business sector of the United States,” economists Ian Hathaway and Robert Litan wrote in a recent Brookings Institution paper, “appears to be getting ‘old and fat.’”1

Hathaway and Litan say the trend is worrisome, and other economists who have studied the issue agree. Entrepreneurship is a critical source of jobs in the economy. Perhaps even more importantly, it is a major driver of productivity growth. New companies, after all, often arise from an idea about how to do something better, whether it’s making cars or brewing coffee. Many of those ideas fail to pan out, but the ones that work can change entire industries — can be, in other words, “disruptive.”2

But recent research suggests that established businesses have less and less to fear from would-be disruptors. This is partly because, as I noted this spring, fewer Americans are launching businesses. In the late 1970s, according to data from the Census Bureau, 15 percent of all U.S. businesses were startups, meaning they had been founded in the past year. In 2011, the latest data available, the so-called startup rate had fallen to 8 percent. Measured in terms of employment, the drop has been even steeper.

But the issue isn’t just that there are fewer startups. It’s also that fewer of them are succeeding. In 2011, more than 27 percent of new companies went out of business in their first year, up from about 20 percent two decades earlier.3 Even companies that do make it to their first birthday are failing at higher rates than in the past, though that trend is more recent and hasn’t been as steady. The only groups of companies that haven’t seen their failure rate rise meaningfully, Hathaway and Litan found, were ones that had been in business more than 15 years.

Part of what’s happening is driven by ultra-low interest rates. Big companies can raise enormous amounts of cheap capital. That lowers risk so big business can be hyper aggressive with pricing to wipe out small competitors. It also means they can buy up small competitors. When money costs 10 points you have to buy companies at below market. When money costs two points you can buy above market.

There’s also the matter of access. Not far from where I live WalMart opened a giant store near a busy retail area. The state widened the road, put in some lights and added an extra lane for traffic entering the store parking area. A few clicks down the road a local business has been fighting zoning battles for a year trying to expand into the vacant lot next door. So far it has taken him more time to fight the zoning board than it took Walmart to built their store.

WalMart has an army of lawyers and lobbyists. They can grease all the palms that need to be greased and do so with a sophistication the local guy cannot match. The local guy pays more in taxes than WalMart, but he can’t offer no show jobs and other perks pols can hand out to their people. In the corporate state, the small business man is a nuisance, not an asset.

Something new to our time is the technological revolution. In Nazi Germany and Soviet Russia, surveillance meant following people around and wiretapping their apartments. Today, the government has their corporate partners archive your e-mail, cell phone calls and internet habits. One can’t help but wonder if the erratic behavior of GOP legislators and judges of late has something to do with what the White House knows about their personal lives.

The sad irony of modern America is the technological revolution was kicked off at the same time the culture began to reminisce about the “greatest generation” and how they whipped the Nazis. Just as that generation is fading away, we are adopting the economics of the people they defeated in the war. Even more ironic is the fact that if you believe the things that generation believed, you are called a Nazi.

Interest Rate Trap

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This was on Drudge the other day. For it seems like forever, I have been reading stories about how the central banks are holding rates at near zero, but may be ready to raise rates at some point, but not now. I suspect most people have stopped paying attention because it just seems like the same story recycled once a quarter.

The Federal Reserve is keeping interest rates near zero and is waiting for further improvement in the labor market and inflation measures before allowing any increases, according to the latest Federal Open Market Committee (FOMC) statement.

The Committee says it will evaluate the progress of the economy, focusing on its twin goals of maximum employment and 2 percent inflation, in determining how long to maintain the current low target range for the federal funds rate.

The Committee says it will raise rates when it is “reasonably confident” that these two criteria have been met.

Fed Chair Janet Yellen signaled that the Fed may raise rates later this year when she discussed the Fed’s semiannual report to Congress on July 15.

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy,” said Yellen in her testimony. “Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end.”

The Fed has held the federal funds rate near zero since December 2008.

Let that sink in for a second. We are going on seven years since the Fed lowered rates to what people thought was the floor of the possible. Now, we know central banks can and will lower rates below zero, but the US has yet to go down that road. Still, near zero for the better part of a decade is not without its consequences.

Tim Kane, an economist at the Hoover Institution, is one of these critics.

“The Fed funds rate has not been raised in nine years, and interest rates this low create an illusion that the escalating national debt is (and will remain) easy to bear,” states Kane. “With interest rates kept too low for too long, the Federal Reserve can turn a boom into a bubble.”

That’s not the half of it. Corporate and sovereign debt is now fully structured around near zero rates. Most of this debt is rolled over when it matures so a rising interest rate environment means suddenly rising interest payments. That’s what happened to Greece. Rates jumped and the operating deficit increased. That was met with more borrowing, which drove rates higher. Eventually, they could no longer borrow at rates they could pay.

In America, pension funds, which used to rely on the steady returns of bonds to remain solvent are now invested in all sorts of synthetic instruments based on equities, housing and speculation. Those pension funds are wildly underfunded and the returns are below market on their current investments. Rising rates will drive down the value of equities putting pension funds in deeper trouble. The word “catastrophe” gets throw around a lot in the pension world for a reason.

Rates will return to their natural level eventually. The question is whether it will be an orderly recession that comes with raising rates or whether it will be a chaotic depression as central banks lose control of monetary policy. Those are not great choices and they are political choices. The Fed is a political institution, which is why they keep delaying the pain. In politics, tomorrow is the best time to take the pain and tomorrow never comes.

This is a pretty good example of something Joseph Tainter described in The Collapse of Complex Societies. When the Fed first started cutting rates, they got a big return, in terms of the impact on the economy. As they kept lowering rates, the return got smaller, thus forcing them to chase the desired results by lowering rates further. As rates approached zero, returns reached zero. It appears to be a classic example of diminishing marginal returns.

At first blush it sounds like a simple thing to let rates return to normal, but that is not a cost free endeavor. At the same time, maintaining artificially low rates also has a cost. The spiraling sovereign debt is a pretty good example of the cost that comes from distorted debt markets. Some economist argue that the ultra low rates are actually hindering economic growth as evidenced by the anemic recovery.

The Fed understands this, but it is a political entity and the choices are all politically difficult. Slowly raise rates and you risk recession, which brings the political class down on the Fed. Leaving rates low means the cost of unwinding the low-rate regime keeps climbing. Worse yet, some new crisis will have to be addressed with cutting rates further, exacerbating the long term problems that come from ultra low rates.

The Romans never figured out how to make an orderly retreat from empire. They exhausted themselves financially and culturally trying to keep the empire together, eventually leading to collapse. America is not about to be invaded by Visigoths. Collapse is unlikely, but a very painful and disruptive reordering is on the horizon. The question is how painful and orderly.

Everyone Subsidizes Everything

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In America, the cable television business is a great example of modern economics and a warning about what’s coming down the road. This story on the cable business has a line that caught my attention.

Big news came out last week that might have gotten lost in the shuffle of the slowest sports week of the year — according to the Wall Street Journal the number of cable subscribers is beginning to contract in a more rapid fashion. In particular, ESPN has lost 7.2 million subscribers in the past four years, over three million since last year. That could have a seismic impact in sports media since if the cable bundle is one large bubble — as some have been suggesting for years — then the sports universe may be in for a cruel tumble. I’ll explain why that could be, but first let’s spend some time with a refresher on the cable and satellite industry.

You pay for every single channel you receive on your cable or satellite package. Most people don’t realize this because the cable bill is one large number, but if you break your bill down every single channel has a monthly cost. Here are the 15 most expensive national sports networks along with what they cost a month and the number of homes they’re in. (Numbers courtesy of SNL Kagan).

1. ESPN $6.61 x 94.5 million homes = $7.5 billion
2. NFL Network $1.31 x 73.6 million homes = $1.16 billion
3. FS1 .99 x 91.2 million homes = $1.08 billion
4. ESPN2 .83 x 94.5 million homes = $941.2 million
5. SEC Network .66 x 69.1 million homes = $547.3 million
6. Golf Channel .35 x 79.4 million homes = $332.2 million
7. NBC Sports Network .30 x 83.1 million homes = $299 million
8. Big Ten Network .39 x 62 million homes = $290.2 million
9. MLB Network .26 x 71.3 million homes = $222.5 million
10. FS2 .28 x 64 million homes = $215 million
11. NBA TV .29 x 57.2 million homes = $199 million
12. ESPNU .22 x 74.9 million homes = $198 million
13. CBS Sports Network .26 x 61 million homes = $190.3 million
14. NHL Network .32 x 37.4 million homes = $143.6 million
15. Pac 12 Network .39 x 12.3 million homes = $57.6 million

While you probably receive in excess of 100 channels, most of us watch only 16 or 17 channels in a given month. If you’re a single girl without kids, you probably don’t watch Sprout and if you’re a single guy you probably don’t watch Lifetime, but you pay for every channel you receive. In practice this leads to much better television, because channels can go after small audiences with powerful and compelling programming that might not otherwise be financially feasible. For instance, hardly anyone watches “Mad Men,” in the grand scheme of ratings. It’s a very smart, slow-paced, intellectual program that appeals to a relatively small audience. On average less than four million people watch each episode of “Mad Men.” That leaves over 90 million people who receive the channel and the show but don’t watch. Yet these non-viewers subsidize “Mad Men,” by paying for AMC. Since most of us receive over 100 stations yet watch only 16 or 17, we all pay for in excess of 80 stations that we don’t watch. One positive result of the cable bundle has been a tremendous amount of money rolling into television programming and the flourishing of great shows that wouldn’t necessarily work if ten million or more people had to watch. That’s why I’ve written before that I support the idea of cable television bundles, everyone subsidizes everything meaning that the quality of programming is stellar across the television landscape. We may not all like the same shows, but all of us have never had better options. We’ve been in the midst of the golden age of television.

Right there is the core belief at the heart of modern economics. It is the belief that if we spread the costs far enough, they disappear. It is at the heart of public policy, government finance and the modern technology economy. Uber, to pick on a favorite target, relies on tens of millions of non-users to pay a few pennies extra in their phone bill so Uber users get a bargain.

Of course, the idea of socializing costs sounds good in the abstract because the amounts seem small, but the cable experience is showing how it ends and it is not pretty. For most Americans, cable TV was $20-$40 per month at the start of the cable age and you got a dozen channels. That was in the 80’s and 90’s as municipalities made deals with cable companies to wire up their communities.

Content makers figured out that adding their channel to the system only worked if they could get on the core package. Otherwise they had to rely on ads and that meant attracting viewers. The new channel owners would bargain hard to get on basic or maybe the next tier up. Every few years they would work to increase the carriage fees and improve their spot on the package, thus guaranteeing themselves a month fee, even if no one was watching.

As is always the case, a dollar here and a dollar there adds up. The average TV bill now is $125 per month. The result is a rash of cord cutting. With a broadband connection and bit of ingenuity, you can get most recorded content free or nearly so. Some people have simply stopped watching TV. Content makers, sensing a sea change, are now offering their stuff on-line without a cable subscription.

When you base the revenue model on everyone subsidizing everything, the incentives all point in the wrong direction. Sticking with the cable example, the content makers stop looking at viewers as customers. Their customer is the cable operator. At the same time, the actual customers start looking for ways around being taxed for content they don’t view. The result is an unstable model that eventually collapses.

That’s the reason modern western economies are stagnating. The model of socializing costs and privatizing profits – everyone subsidizing everything – works great for the top, but it is sand in the gears of the economy in general. At some point the gears grind to a halt and the whole thing collapses. There’s simply no way to spread the costs so thin that they actually disappear.

Death by Peonage

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The greatest threat to the people in charge has always been the property holder. Before human settlement, the strongest or oldest were the tribal leaders. Once humans began to settle into an agricultural life, it got a lot harder to boss people around. In the tribal days, exile was the way to keep people in line. If the tribe got too big, then they just split into two tribes so the malcontents could go off on their own, thus preserving the authority of the chief.

Once people started to settle into agricultural life, exile was not so easy. The chief could be angry, but as long as you could feed yourself and your family, you had no reason to leave, and he had only one way to make you leave. That was to take your property. The trouble with that is he had to have hired men willing to kill and that meant the boss had to have a surplus of property to hire them.

It’s not an accident that for most of our time as settled creatures controlling the land was of paramount importance to the rulers. The Romans, upon the defeat of Carthage and Corinth, used the proceeds to throw the small farmers off their land, by use of slave labor. In short order Rome went from a Republic of free men to an empire run by powerful land holders.

In medieval times, feudalism put control of land in the hands of the crown and by extension, the nobles, who held these lands in exchange for service to the crown. In turn, vassals and peasants worked the land for the nobles. It was not until the rise of global trade that one could challenge the power of the king without taking his lands.

Trade created capital that was mobile and therefore hard to steal. Stealing a man’s land is just a matter of killing his soldiers and forcing him off the land. When a man’s wealth is distributed all over and is highly portable, stealing his capital is not so easy. This required more complex schemes and more complex defenses.

The other day in my Greek post I pointed out that sovereign debt is mostly a way to rob the property holders of countries. No one really thinks about it like that as the people in charge prefer, we think of it in other ways. They like to talk about government investment in the safety net, as if it were a real physical net underneath all of us, magically held up by fairies and magic dust.

That’s the sales pitch. Most sensible people like the folks reading this blog see past it and understand that it is just a way to pay for an ever expanding government. As we’re fond of saying on the Dissident Right, no tree grows to the sky. Eventually the government can borrow no more because no one will lend. That’s not just a Greek problem. The public debt of the West is at level unimaginable just a generation ago.

That’s where the credit currency comes into the mix. By artificially lowering the cost of borrowing, governments are allowed to shift more debt onto their taxpayers. Eventually, the debts must be paid thus creating the transfer of property through the state to friends of the state. Public debt is just organized looting of the middle-class.

This is a little more obvious when we look at it in small scale. That is the assault on small business by the financial sector. When talking about the banksters and their cronies in politics, everyone just assumes they spend their time on complex deals involving leverage, derivatives, and special favors in the tax code.

Much of that is true, but unlimited cheap credit has had another terrible consequence that is a microcosm of what we are seeing with Greece. That is, insiders using zero cost debt to undermine the middle-class business owners. While Warren Buffet uses the tax code to raid mid-sized business, venture capital often uses cheap money to sack small business.

Let me use an example. I have known a local businessman for twenty years. I’m not sure how much of the details of his dealings I am free to reveal so I will be deliberately vague on some points. His business was a family business started by his father and another man in the 50’s. They distributed niche products in the Mid-Atlantic.

My acquaintance was never going to get rich running the business, but it afforded him a nice middle-class life. He was also able to hire a few a key people and pay them well, along with a staff of entry level people. Some of his employees had been in the business since he could walk. In other words, it was a typical middle-class small business.

About ten years ago his suppliers began to consolidate. One after another was bought up by some global player. He went from have a dozen suppliers vying for his business to just three. At the time, he thought it may be better for him as it was much simpler to do business with three suppliers.

Then one supplier bought one of his competitors and made them the exclusive distributor. All of a sudden, a sizable chunk of the market was walled off to him because he could not carry the products certain customers preferred. At this point he knew he was in trouble, but the options were limited. Profits started to get trimmed and he prepared for a reduced lifestyle in order to keep the business running.

Keep in mind that all of the consolidation was made possible by abnormally low interest rates. When money cost ten points, buying a competitor meant having a big chunk of cash in the deal. When money is three points most M&A deals can be done with no cash whatsoever.

A few years ago, some VC boys bought his biggest competitor. They brought in new technology, and they made a deal with one of the big suppliers. Because it was all debt driven, they could drop prices putting even more pressure on the remaining independents. Quickly they went about offering buyouts to the little guys. My acquaintance sold out for what he could get.

This is a common theme in wholesale distribution around the country. The little guys are hoovered up by big players using borrowed money. Is it better for consumers? Maybe, but prices are not dropping so it is not a good deal from that regard. It’s not better for employees as small business hiring has never been lower.

The skillful use of debt has always been the hallmark of shrewd businessmen. That’s not what’s going on here anymore than the use of slaves by wealthy Roman landowners was a skillful use of labor. My acquaintance could not go to his bank and get the same deals as the VC boys raiding his industry. They had special access to cheap money and informational asymmetry let them exploit the tax law in ways the little guy could never match.

I pointed out the other day that it is easy to blame the Greek people and write them off as dead beats. It’s easy to blame the small businessman who goes bust. That way we can pretend it is still an even playing field and everyone is playing by the rules. That’s not what’s happening in America, Greece or anywhere else in the West.

Artificially low borrowing rates are warping reality and blocking the normal signals within society citizens use to make decisions. It’s also rearranging the social order in ways that are incompatible with liberal democracy. My acquaintance who lost his business is no different than the farmer thrown off his land. He loses his stake in the current order and goes from being a citizen to being a subject.

I need to wrap this up as it is already too long, but in another age, men on horseback flying the flag of their lord would raid towns and villages, hauling off what they could. The only recourse of the village was to submit to a lord promising protection. They got to choose their master.

Today, global finance is the tool to break the spine of the middle, making them dependent on the ruling elite. The systematic looting of Western economies through central banks is sucking the life out of the citizens. The Greeks are finally fighting back, but until they start hanging the people responsible, the tide will never turn.