Category Archives: Economics

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.

The Greek Revolution

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The Greeks vote on something this weekend, but no one really knows whether it matters. The news indicates that the deal offered Greece is no longer on the table so the plebiscite on it would be moot. There’s also the fact that Greece appears to be in full blown financial collapse. The scenes on television remind me of the Argentine financial collapse of ’98. In fact, the comparisons are so close that the Argentinians of that era are advising the Greeks now.

Here’s an interesting documentary on the Argentine crisis.

The fascinating thing about this last phase of the now seven year crisis is that the enormity of Greek debt is finally being revealed. The IMF has released their analysis of Greek debt and there’s simply no way anyone can think the Greeks will ever pay their debts. It is a mathematical impossibility. Further, they will never be able to make their interest payments.

Greece has a €50 billion cash deficit through 2018, which means even under the bailout plan that was offered, Greece would be accumulating debt faster than it would be retiring debt. In theory, something magical could happen so that the economy would boom, but the debt burden makes that unlikely.

That means the people in charge of Europe have been lying to their public all this time. Default was an inevitability. That will then be followed by a restructuring of debt and debt forgiveness. Lying is no surprise as it was always assumed that the EU was buying time to transfer these debts from the private holders to the taxpayers.

The deliberate and seemingly pointless immiserating of Greece is what one would expect from a loan shark. It’s not the money, it’s the principle. The EU was supposed to make one big happy family of former countries. The trouble is one of the family members is a bit of a screw-up so the paterfamilias is teaching a lesson. It’s not so much for the one taking the beating, but for the rest. “Don’t be like Greece or we’ll break you like we broke them.”

That sounds good, but it remains to be seen if they will actually break Greece. The first hit is the worst hit and Greece is taking the first hit right now. By the time they vote, a fair number of Greeks will be ready to see it through. The next hit lands to the body of the EU financial system. No one knows what happens when the fallout from Greece starts washing up in the rest of Europe.

It’s easy to dismiss Greece as a dead beat country full of oily grifters. In theory, the Greek people have only themselves to blame for electing crooks and liars. That’s an argument against democracy, but the people never voted for bankruptcy. They were misled by their leaders, who got hooked on the heroin of global finance. They supported joining the Euro because they were told it would avoid these problems.

The problem at the core of global finance is that there’s no market mechanism to restrain public debt. The whole point of a floating currency regime is to disguise public debt in order to avoid making tough choices about the welfare state. It’s not an accident that since the Louvre Accords the size and scope of government has skyrocketed throughout the West.

In other words, a currency system based on credit has worked at hiding the cost of government. In fact, it has been so good at it no one noticed that Greece was running up debt at an alarming rate. In the old system, Greece would have been facing double digit borrowing rates long before they reached this point.

Sovereign debt is mostly a way to rob the property holders of countries. When the state borrows, there has to be someone on the other side of the transaction. If they borrow from their people then they are taking property with a promise to pay at a latter date. If they borrow from abroad, then they are promising their tax payers will pay at a later date.

The only people with the ability to pay sovereign debt are the tax payers.

In the old currency arrangements, this was understood. Lenders knew this. If you lent gold to the neighboring king, you did so knowing you may have to invade his lands to get it back. That made lenders more prudent, which made the crown more prudent. Credit currency makes it appear that default is impossible so no one considers the cost of collection.

Successive Greek governments have promised the property of Greek tax payers as collateral. The Greeks on the dole are demanding their checks and making a fuss about it on TV. The real revolt is the from the people with money. The Greek taxpayers are refusing to pay up. Unless the EU is ready to roll in the tanks, the debts will have to be forgiven.

Techno-Feudalism

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Since the dawn of human settlement, being rich has been a process, not an end point. In order to accumulate capital, you need to figure out a way to organize people in such a way that their extra becomes your extra. Ideally, you leave a little for them so they think helping you grow rich is to their benefit. But, 1,000 years of feudalism proves it is not a requirement. With the right system, you can grow rich and powerful at the expense of others.

That’s the other part of the process though. To keep the peasants, slaves, servants, workers and associates from revolting, you either invest some of your extra back into them or you invest it in men with weapons who will keep the order. Recently the former has been the preferred method, but the only proven way to keep order is the latter. That’s why gun laws are enforced by men with guns.

This is not how most Americans look at economics. I’m sure a few reading this are thinking I have been reading too much Marx. But, that’s the thing. Marx was not wrong about everything. He made some excellent observations. His recommended solutions were insane, but many of his observations were spot on and hold up well even today.

Marx observed that capitalism, as he defined it, destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth. We see this today with Uber. The old order of state run cab companies is under assault from the new order of distributed contractors linked by a public information network paid for by people who don’t use it.

Joseph Schumpeter argued that this process was not pure destruction as Marxist claimed, but a reordering that eventually added value to the old stock of capital. The automobile did not entirely obliterate the horse and buggy industry. The carriage makers moved to the car business. The property employed in keeping and raising horses did not go away. It was re-purposed for car maintenance. While some value was lost from the end of horse travel, much of it was retained and a whole new layer of value was added onto it.

Both men were working from the perspective of rapid material progress. Events seem like they favor Schumpeter as opposed to Marx as we have seen whole industries grow up in one generation, displacing an old industry from our parents’ generation. The example I love using is the fax machine. In my lifetime, I saw it created, dominate and then replaced with something different. My parents could not imagine it and the kids today have never heard of it.

When I see stories like this one, I wonder if rapid material progress has reached an end or at least a lull. This looks like techno-feudalism to me. Amazon is trying to arrange things such that they can get writers to work for the benefit of Amazon, rather than their own benefit. Amazon gets the benefit of being the world’s largest bookstore, without incurring any risk. Get halfway through some book and decide you don’t like it? No problem. The author will refund you the difference! Amazon looks like a hero and the writer is looking for food in neighborhood dumpsters.

Amazon is not the only billionaire operation running these scams. Apple is trying to screw performers out of royalties. They backed off this time, but you can see where they are headed with this. These new “rental” services are about locking up the pipeline between the creator and the customer. Once they gain that edge, they will stop paying royalties. The next step will be that small acts get nothing but the benefit of “advertising” themselves on Apple or Amazon. It’s classic rentier behavior.

These are two recent examples, but the entire financial system is nothing but feudalism these days. Banks charge people for savings accounts. That forces everyone to put their savings into equities where smart people charge fees on investment funds. This arrangement means that when the economy is strong, everyone gets richer, but the rich get very rich. When the economy falls, everyone gets poorer, except for the rich, they keep getting richer. It is heads they win tails you lose.

The reason for wondering if these are symptoms of systemic stagnation is that when the pie is expanding, the rich guys are rushing to get the lion’s share of the new pie. When the pie is not growing, they look to expand their share of the pie at the expense of the weak. The new business from expansion is always the most profitable. Cannibalizing the existing market is low margin. When big players like Apple and Amazon are slumming this way, it suggests they have nowhere else to turn for profit.

It’s what appears to be at the heart of the massive new trade bill that just passed. The point of it is not to expand the US market, letting a rising tide lift all boats. No one believes that anymore. This bill is about making it easier for global players to loot the American middle class. William the Conqueror imposed feudalism in the English speaking world after the Battle of Hastings. Silicon Valley and Wall Street are imposing it on America a millennium later.

Uber Screwed

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At various times here I have ranted and raved about Uber and other “sharing economy” companies. My contention is that they are just clever ways to dodge existing laws and regulations in order to undercut exiting providers. It’s not a new technology or a new way to provide a service. It’s technology used to evade the law. It looks like the law is slowly coming around to that position.

It would appear that the California Labor Commission has ruled that at least one Uber driver is an employee.

As it stands now, Uber employs its drivers as third-party contractors, operating as a logistics company that provides access to customer demand and directions, transactions, etc. for the drivers. Uber has argued repeatedly in various courts that it is not a transportation or taxi company, but rather a software platform that matches customer demand with supply.

This ruling changes all that, turning Uber into a transportation startup instead of a logistics software company. That puts the company in a position to face a number of legal obstacles, as well as rising costs of employing those drivers directly and offering them benefits, etc.

As BI points out, one of Uber’s main costs is its full-time employees that work out of Uber corporate offices. If Uber drivers are deemed employees, the business model shifts drastically.

Uber is not the first company to try this trick. Most states have laws to address the use of “part-time” and “contract” employees. That’s because companies tried to shift their employment costs onto their employees by classifying full-time employees as contractors or temporary. In most states, an employee counts as an employee as soon as they reach a certain number of hours.

Years ago I was involved with a union campaign in Massachusetts. The company used part-time drivers and got into trouble when they let the part-time drivers work full-time hours. They were working 40-50 hours per week, but classed as seasonal temps. Sensing an opening, the Teamsters tried to organize them promising better wages and benefits.

Anyway, there’s no mystery to any of this. Operating a car service has well known costs. The car, its maintenance, gas and taxes are not costs that can be mitigated with a phone app. Similarly, licensing and regulatory fees are set by the state. There’s never been a lot of room to cut costs or increase efficiency. It is a basic business made more expensive by government.

The only way Uber and Lyft can be offering a better cheaper service is to avoid the government imposed costs or transferring some of their costs onto others. It turns out they are doing both of those things. On the one hand they dump their fleet costs on their drivers. On the other hand they dodge local regulations and licensing. Add back all of those costs and Uber is just another taxi company.

The interesting thing about this line of attack on Uber is the potential liabilities. Once the states start calling those Uber drivers employees, they can go to the local labor boards and get back wages, benefits and possibly damages. At the very minimum, Uber will be hiring a big shot law firm charging big shot law firm rates. Those costs will show up in the price of the product.

As I’ve said in the past, I’m not against Uber or Lyft. I’m against the idiots claiming they are creating “disruptive technology.” That offends me. Uber and Lyft are not building a better mousetrap so much as they are just exempting themselves from the laws the rest of us must follow. We have a lot of stupid laws governing banks, but I’m still against bank robbery. Most taxi laws are probably stupid too, but that does not mean Uber is a great way to mitigate those laws.

 

What’s a Conservative?

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The other day, James asked about this line from one of my posts:

“On the other hand, people like me no longer describe ourselves as conservative because we are at odds with everything the modern conservative supports.”

His questions was:

“Two questions: 1. what specifically are the things the modern conservative supports? 2. In what respect are you at odds with each of these things?”

Large books have been written on the subject and I could easily write a small book on what I find objectionable with what we currently define as “conservative.” Since I don’t have the time to write a book at the moment, I’ll nibble away at it here. This post by one of Tyler Cowen’s grad students is a good place to start.

The latest from Louisiana is that taxes are going up, but in a strange way that won’t be called a tax increase:

One of the most critical parts of the budget plan, and the part that attracted most of the debate, would raise no revenue and lighten no one’s tax burdens. But because of a complicated arrangement of tax credits, this plan could, by some interpretations, allow Mr. Jindal, a Republican, to say that despite millions coming in from cigarette tax hikes and tax break rollbacks, the state had technically not raised net new tax revenue.

Read the whole article, it is even weirder than that sounds.  Combine that with the recent fiasco in Kansas, where the strongly Republican state government will be reversing earlier tax cuts.

It seems to me that, whether we like it or not, fiscal conservatism has been stymied at the state level.  No, that’s not true for Illinois, New York, or California, but it does seem to be true for many other states, especially those governed by Republicans.  (And yes, state pension obligations still do need to be reigned in and made subject to proper accounting.)  More concretely, trying to cut taxes at the state level doesn’t seem like a useful or productive way forward.

I’m old enough to remember when the people saying they were “fiscal conservatives” were almost always in the Democrat party. That phrase was a lot like “path to citizenship” or “secure the border” is today. It meant something different than the literal meaning. The Congressman I worked for was a fiscally conservative Democrat and that meant he was a deficit hawk.

My congressman was no one’s idea of a conservative back then. He was fine with New Deal style government programs, as long as they were paid for through taxes. Like all other fiscal conservatives in both parties, he preferred broad based taxes to pay for government. Today, exactly no one in politics is a deficit hawk. Borrowing is a given and no one cares how much or from whom the government borrows money.

The innovation Reagan brought to the debate was the idea of cutting taxes in order to force spending cuts. That’s what it meant to be a conservative. They agreed with the deficit hawks about not borrowing so cutting taxes naturally meant a restraint on spending. If you slow the growth of government to some level below inflation and population growth, the relative size and scope of the state shrinks.

In other words, conservative meant small, financially responsible government. That meant the aversion to borrowing of the deficit hawks and the desire to shrink government. The novelty of using tax policy to force spending restraint was a means to an end, not an end in itself.

There were objections to this on the Right. The old-school conservatives preferred to fight the spending fight on its own terms. They contended that the inevitable deficits from tax cuts would not force spending cuts, but normalize chronic borrowing. The fact that they were proven correct has been lost to the mists of time.

There was also another “conservative” principle in the use of tax cuts and that was simplification. The Progressive view on taxes was as another tool to shape behavior. The myriad of loopholes, shelters and breaks was a way to force behavior that otherwise would not occur, without the carrot of tax breaks. Conservatives always rejected that and pushed for simple tax systems.

Today, what passes for a conservative holds views no conservative would recognize forty years ago. For starters, demanding trivial reduction in taxes as some sort of great goal is just silly. The tax cuts of Bush, for example, had no impact on the lives of 90% of Americans. If twenty bucks a week is making a difference, you’re not paying taxes anyway. For most families, the Bush tax cuts were a rounding error.

Worse yet, today’s “fiscal conservatives’ are in favor of all sorts of social engineering through the tax code. The credits and breaks demanded by conservatives could fill a warehouse. The Reform Conservatives are calling for a proliferation of breaks and credits making tax lawyers rich and further entangling the state in the lives of citizens.

Tinkering with tax rates and expanding the complexity and scope of the tax code is what defines the term “fiscal conservative” today, along with an embrace of reckless borrowing to finance a metastasizing welfare state. I’m old enough to remember when moderate Democrats would mock that as woolly-headed liberalism.

That’s one example of where I am at odds with the modern conservative. Taxes are honest when they are frictionless. They should have as little impact on behavior as possible. They should be clear and in plain site. Hidden taxes are a crime against the free citizen. Taxes should also be universal. Citizens pay taxes.

The tax level is whatever is required to finance government. If the people want a lot of government, then they pay a lot of taxes. If they want lower taxes, then they have to cut spending. The core principle of conservatism is that public policy is about trade-offs. Borrowing conceals these trade-offs and deceives the public, just like hidden taxes and special tax breaks, thus making deficits at odds with a free society.

Altered Reality

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If you want to know a society, study their money. I no longer remember who told me that, but I always circle back to it when noodling through the issues of our day. We think of money as the bits of paper in our wallets, but money is simply a store of value that is easily transferred. For most of us, money is electronic bits of data these days. Almost all of my transactions are done electronically.

We live in the information age and that means information has become a form of currency. It always has been, but it has not always been very portable. Fifty years ago the guy who knew something big about a publicly traded company could trade that with a small circle of people, mostly in person. Today he can sell it to the world in seconds. Just as sound societies have sound money, sane, well run societies have sound information.

In the Cold War, the Soviets routinely told lies to their people. They did this to devalue information, to make it useless. If the people cannot trust their currency, they don’t use it. If they can’t trust information changing hands, they won’t act on it. We don’t think of information as currency, but it is probably our chief currency today. Most of our labor is put to the task of creating information.

It’s why I’m surprised governments have not become much tougher on this sort of stuff we see going on with public companies.

Those record profits that companies are reporting may not be all they’re cracked up to be.

As the stock market climbs ever higher, professional investors are warning that companies are presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they’re doing better than they really are.

What’s worse, the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they’re largely passing along the rosy numbers in reports recommending stocks to investors.

“Companies are tilting the results,” says fund manager Tom Brown of Second Curve Capital, “and the analysts are buying it.”

An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years.

At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

The stock market is vitally important to modern societies. In fact, it is the tent pole holding everything up now. It used to be said that Main Street is not Wall Street, but no one says that anymore. Everything counts on the equity markets, often in ways no one understands. The mortgage bubble is a great example. Even the pros did not fully understand what was happening. As soon as it faltered, however, everyone knew it had to be fixed no matter the cost.

That may be why the Feds are turning a blind eye to this. When they can no longer keep the plates spinning, maybe they put someone in jail for faking their numbers. As long as the lying works to keep the markets levitating, there’s no reason to clamp down on this stuff. Like it or not, the business of America is to keep the plates spinning.

Of course, the Feds could very well be faking their numbers too. Every month they tell us that unemployment is low, but that record numbers are not working. The BLS does this thing where they report numbers that seem good compared to last month, but then adjust those numbers down so that the next month’s figures look good in comparison. It’s a maddening game of whack-a-mole.

Regardless of the motivations, it is increasingly difficult to accept the official data at face value. Is inflation really averaging 1.9% since the crash? Is the unemployment rate really just 5.5%? Has the economy really been growing by 2% a year since the crash? I have no idea and I don’t know many people who would take those numbers at face value and most of the people I know are Progressives, who worship the state.

I think that’s what is at the heart of these record low public trust figures. It is assumed that the low trust ratings reflect dissatisfaction with public policy. Maybe it simply reflects the fact no one can trust the information we’re supposed to rely on as a society. Everything is a con where disinformation is peddled to the public so some sharp insider can profit. We are becoming a low trust society buried in bullshit data.